OTIS WORLDWIDE CORPORATION We are the world's largest elevator and escalator manufacturing, installation and service company. Our company is organized into two segments - New Equipment and Service. Through our New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators, as well as escalators and moving walkways for residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers, general contractors, governments, architects and specialized consultants who develop and/or design buildings for residential, commercial, retail or mixed-use activity. We sell our New Equipment directly to customers, as well as through agents and distributors. Through our Service segment, we perform maintenance and repair services for both our own products and those of other manufacturers and provide modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services to address equipment and component wear and tear and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed. We serve our customers through a global network of approximately 69,000 employees. These include sales personnel, field technicians with separate skills in performing installation and service, as well as engineers driving our continued product development and innovation. We function under a centralized operating model whereby a single global strategy is set around New Equipment and Service because we seek to grow our maintenance portfolio, in part, through the conversion of new elevator and escalator installations into service contracts. Accordingly, we benefit from an integrated global strategy, which sets priorities and establishes accountability across the full product lifecycle. The current status of significant factors affecting our business environment in 2020 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10 . Separation fromUnited Technologies Corporation OnApril 3, 2020 , the Separation was completed through the Distribution of 100% of the outstanding common stock ofOtis to holders of UTC common stock who held shares of UTC common stock as of the close of business on the record date ofMarch 19, 2020. UTC distributed 433,079,455 shares ofOtis ' common stock, par value$0.01 per share in the Distribution, which was effective at12:01 a.m. Eastern Time , onApril 3, 2020 . As a result of the Distribution, UTC shareowners of record received 0.5 shares ofOtis ' common stock for every share of UTC common stock. As a result of the Distribution,Otis became an independent, publicly traded company and its common stock is listed under the symbol "OTIS" on the NYSE. The Condensed Combined Financial Statements included in this Form 10-Q have been prepared from UTC's historical accounting records and are presented on a stand-alone basis as if the Business' operations had been conducted independently from UTC. Our Condensed Combined Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . In anticipation of the Separation during the quarter endedMarch 31, 2020 and subsequent to the Separation, we have and expect to continue to incur one-time Separation costs consisting primarily of employee-related costs such as recruitment and relocation expenses, costs to establish certain stand-alone functions and information technology systems, professional services fees and other transaction-related costs. Additionally, we will incur increased costs as a result of becoming an independent, publicly traded company, primarily from establishing or expanding the corporate support for our businesses, including information technology, human resources, treasury, tax, internal audit, risk management, stock-based compensation programs, accounting and financial reporting, investor relations, governance, legal, procurement and other services. We believe our cash flows from operations will be sufficient to fund these additional corporate expenses. We entered into a transition services agreement with UTC and Carrier onApril 2, 2020 , in connection with the Separation pursuant to which UTC provides us with certain services and we provide certain services to UTC for a limited time to help ensure an orderly transition following the Separation. The services we receive include, but are not limited to, information technology services, technical and engineering support, application support for operations, legal, payroll, finance, tax and 27 --------------------------------------------------------------------------------
accounting, general administrative services and other support services. For additional discussion, see "Certain Relationships and Related Party Transactions," in the Form 10 .
As costs for these services historically were included in the Business' operating results through expense allocations from UTC, we do not expect the costs associated with the transition services agreement to be materially different and, therefore, we do not expect such costs to materially affect our results of operations or cash flows after becoming a stand-alone company. In connection with the Separation, we entered into a tax matters agreement with UTC and Carrier onApril 2, 2020 , that governs the parties' respective rights, responsibilities and obligations with respect to tax matters (including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other tax matters). Subject to certain exceptions set forth in the tax matters agreement, the Business generally will be responsible for federal, state and foreign taxes imposed on a separate return basis on the Business (or any of its subsidiaries) with respect to taxable periods (or portions thereof) that ended on or prior to the date of the Distribution. The tax matters agreement provides special rules that allocate responsibility for tax liabilities arising from a failure of the Separation transactions to qualify for tax-free treatment based on the reasons for such failure. The tax matters agreement also imposes restrictions on each ofOtis and Carrier during the two-year period following the Distribution that are intended to prevent certain transactions from failing to qualify as transactions that are generally tax-free. OnDecember 22, 2017 , the Tax Cuts and Jobs Act was enacted which significantly changedU.S. tax law. This new legislation imposed a one-time toll charge, paid in installments over an 8-year period, on deemed repatriated earnings of foreign subsidiaries as ofDecember 31, 2017 . Under the terms of the tax matters agreement,Otis will indemnify UTC for a percentage of the toll charge installment payments due afterApril 3, 2020 . As a result, a portion of the future income tax obligations corresponding to the toll charge will be reclassified as a contractual indemnity obligation within Other long-term liabilities on the Condensed Combined Balance Sheet. For additional discussion, see "Certain Relationships and Related Party Transactions," in the Form 10 . In connection with the Separation, we entered into an employee matters agreement and intellectual property agreement with UTC and Carrier onApril 2, 2020 . These agreements are not expected to have a material impact on the financial results ofOtis . For additional discussion see "Certain Relationships andRelated Party Transactions" in the Form 10 .
Impact of COVID-19 on our Business
A novel strain of coronavirus ("COVID-19") surfaced in Wuhan, China in December
2019 , and has since spread throughout the rest of the world, resulting in
widespread travel restrictions and extended shutdowns of non-essential
businesses. We continue to provide critical maintenance and repair services,
however this pandemic has impacted our business, and is expected to continue to
impact our business, as limitations remain in force globally.
The results of our operations and overall financial performance were impacted
during the quarter ended March 31, 2020 , with varied impacts across all regions.
The broader implications of COVID-19 on our results of operations, including net
sales and overall financial performance remain uncertain, however we anticipate
it will negatively impact our business during the quarter ended June 30, 2020
and the remainder of 2020, potentially as a result of:
•Customer liquidity constraints
•Temporary closure or reduced capacity of our factory operations
•New equipment job site closures
•Cancellations or delays of customer orders
•Challenges in accessing units to provide maintenance and repair services
•Customer demand impacting our maintenance and repair business
We currently do not expect any significant impact to our capital and financial
resources, including our overall liquidity position based on our available cash
and cash equivalents and our access to credit facilities and the capital
markets. We are focused on navigating these challenges presented by COVID-19 by
preserving our liquidity and managing our cash flow through taking the necessary
measures to meet our short-term liquidity needs. Such actions could include, but
are not limited to, reducing our discretionary spending, reducing payroll costs
and restructuring.
See the Liquidity and Financial Condition section for further detail.
28
--------------------------------------------------------------------------------We also do not anticipate any material impairments to our goodwill, intangible asset and long-lived asset balances.
See Part I, Item 1A,"Risk Factors" below for further discussion.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our Condensed Combined Financial Statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The accounting policies that involve the
most significant estimates, assumptions and management judgments used in
preparation of the Condensed Combined Financial Statements, or are the most
sensitive to change due to outside factors, are discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Estimates" included in the Form
10 . Except as disclosed in Note 6 and Note 18 to our Condensed Combined
Financial Statements in this Form 10-Q, pertaining to adoption of new accounting
pronouncements, there have been no material changes in these policies.
RESULTS OF OPERATIONS
Net Sales
Quarter Ended March 31,
(dollars in millions) 2020 2019
Net sales $ 2,966 $ 3,101 Percentage change year-over-year (4.4) %
The factors contributing to the total percentage change year-over-year in total
Net sales for the quarter ended
Quarter Ended March 31, 2020
Organic volume (2.1) %
Foreign currency translation (1.8) %
Acquisitions and divestitures, net (0.5) %
Total % change (4.4) %
The Organic volume decrease of (2.1)% for the quarter ended March 31, 2020 was
driven by a decrease in organic sales of (9.8)% in the New Equipment segment,
partially offset by organic sales growth of 3.3% in the Service segment.
See "Segment Review" below for a discussion of Net sales by segment. Cost of Products and Services Sold
Quarter Ended March 31 ,
(dollars in millions) 2020 2019
Total cost of products and services sold$ 2,069 $
2,200
Percentage change year-over-year (6.0) %
The factors contributing to the percentage change year-over-year for the quarter
ended
Quarter Ended March 31, 2020
Organic volume (3.3) %
Foreign currency translation (1.9) %
Acquisitions and divestitures, net (0.4) %
Restructuring (0.4) %
Total % change (6.0) %
The organic decrease in total cost of products and services sold for the quarter
ended March 31, 2020 was primarily driven by the organic sales decrease noted
above.
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Gross Margin
Quarter Ended March 31,
(dollars in millions) 2020 2019
Gross margin $ 897 $ 901
Gross margin percentage 30.2 % 29.1 %
Gross margin increased 110 basis points for the quarter ended March 31, 2020
when compared to the same period for 2019, primarily driven by improvement in
the New Equipment margin rate and overall segment mix.
See the Segment Review below for discussion of operating results by segment.
Research and Development
Quarter Ended March 31,
(dollars in millions) 2020 2019
Research and development $ 38 $ 39
Percentage of net sales 1.3 % 1.3 %
Research and development spending remained relatively consistent for the quarter
ended March 31, 2020 compared to the same period in 2019. We continue to focus
on our commitment to Internet of Things technology developing the next
generation of connected elevators and escalators.
Selling, General and Administrative
Quarter Ended March 31,
(dollars in millions) 2020
2019
Selling, general and administrative expenses$ 465 $ 441 Percentage of net sales 15.7 % 14.2 % Selling, general and administrative expenses increased$24 million or 5.4% for the quarter endedMarch 31, 2020 when compared to the same period in 2019. Lower employment costs were more than offset by Separation costs incurred of$32 million and additional standalone public company costs of$22 million . Selling, general and administrative costs increased as a percentage of Net sales during the quarter endedMarch 31, 2020 , primarily driven by the increase in Separation costs and lower sales in 2020. We are continuously evaluating our cost structure and have implemented restructuring actions as a method of keeping our cost structure competitive. For further discussion, see "Restructuring Costs" below and Note 13 in the Notes to the Condensed Combined Financial Statements. Restructuring Costs Quarter Ended March 31, (dollars in millions) 2020 2019 Restructuring costs$ 6 $ 25 We initiate restructuring actions as a method to keep our cost structure competitive. Charges generally arise from severance related to workforce reductions, and to a lesser degree, facility exit and lease termination costs associated with the consolidation of field and manufacturing operations. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions. Total Restructuring costs were$6 million for the quarter endedMarch 31, 2020 and included$4 million of costs related to 2020 actions and$2 million of costs related to 2019 actions. 2020 Actions. During the quarter endedMarch 31, 2020 , we recorded net pre-tax restructuring charges of$4 million relating to ongoing cost reduction actions initiated in 2020. We are targeting to complete in 2020 and 2021 the majority of the remaining workforce cost reduction actions initiated in 2020. Approximately 92% of the total expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the quarter endedMarch 31, 2020 , we had cash outflows of approximately$1 million related to the 2020 actions. We expect recurring pre-tax 30 --------------------------------------------------------------------------------
savings in continuing operations to increase to approximately
2019 Actions. During the quarters endedMarch 31, 2020 and 2019, we recorded net pre-tax restructuring charges of$2 million and$19 million , respectively, for actions initiated in 2019. We are targeting to complete in 2020 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2019. Approximately 96% of the total pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During the quarter endedMarch 31, 2020 , we had cash outflows of approximately$6 million related to the 2019 actions. We expect to incur additional restructuring charges of$16 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period after initiating the actions to approximately$49 million annually, of which approximately$10 million was realized during the quarter endedMarch 31, 2020 .
In addition, we recorded net pre-tax restructuring costs totaling
Other (Expense) Income, Net
Quarter Ended March 31,
(dollars in millions) 2020 2019
Other (expense) income, net $ (65) $ (6)
Other (expense) income, net primarily includes the impact of changes in the fair
value and settlement of embedded and foreign exchange derivatives, gains or
losses on sale of businesses and fixed assets, earnings from equity method
investments, fair value changes on equity securities, impairments and certain
other operating items. The year-over-year increase in Other (expense) income,
net of $(59) million for the quarter ended March 31, 2020 when compared to the
same period in 2019 is primarily driven by a fixed asset impairment of
approximately $(55) million and related license costs of approximately $(12)
million , offset by favorable mark-to-market adjustments on foreign currency
derivatives when compared to the same period in 2019.
Interest Expense, Net
Quarter Ended March 31,
(dollars in millions) 2020 2019
Interest expense, net $ 5 $ 1
Interest expense, net primarily relates to interest on newly issued external
debt, offset partially by interest income primarily related to interest earned
on cash balances, short-term investments and related party activity between Otis
and UTC.
The increase in Interest expense, net in the quarter ended March 31, 2020 in
comparison to the same period in 2019 was primarily driven by interest expense
of approximately $13 million on the newly issued $5.3 billion of unsecured,
unsubordinated notes on February 27, 2020 and the $1.0 billion drawn on the Term
Loan on March 27, 2020 , offset primarily by higher income earned on short-term
investments for the quarter ended March 31, 2020 .
The average interest rate on the newly acquired debt as of
For additional discussion of borrowings, see Note 9 to the Condensed Combined
Financial Statements.
Income Taxes
Quarter Ended March 31,
2020 2019
Effective tax rate 38.2 % 29.4 %
The increase in the effective tax rate for the quarter ended March 31, 2020 is
primarily the result of the tax impact on one-time Separation costs and a fixed
asset impairment loss, discussed above.
As part of the Separation process, the Business determined that as a stand-alone
company, the Business no longer intends to reinvest certain undistributed
earnings of its international subsidiaries that have been previously taxed in
the U.S. , which are different from the historical assertion of UTC. For the
remainder of the Business' undistributed international earnings, the
31
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Business will continue to permanently reinvest these earnings unless it is tax
effective to repatriate. As a result of the change in assertion, the Business
recognized a one-time tax benefit of $9 million in the quarter resulting from an
overall reduction in the liability previously recorded by UTC.
The Business will continue to review and incorporate as necessary
We anticipate some variability in the tax rate quarter to quarter from potential discrete items.
For additional discussion of income taxes and the effective income tax rate, see Note 12 to the Condensed Combined Financial Statements. Noncontrolling Interest in Subsidiaries' Earnings
Quarter Ended March 31,
(dollars in millions) 2020 2019
Noncontrolling interest in subsidiaries' earnings $ 37 $ 27
Noncontrolling interest in subsidiaries' earnings increased for the quarter
ended March 31, 2020 in comparison to the same period in 2019 was primarily due
to an increase in net income from subsidiaries with noncontrolling interests.
There was no other significant activity for the quarter ended March 31, 2020 .
Net Income Attributable to
Quarter Ended March 31,
(dollars in millions, except per share amounts) 2020 2019
Net income attributable to Otis Worldwide Corporation $ 165 $ 273
Basic and diluted earnings per share from operations $ 0.38 $ 0.63
Net income attributable to Otis Worldwide Corporation for the quarter ended
March 31, 2020 includes restructuring charges, net of a tax benefit, of $4
million ($6 million pre-tax), as well charges relating to significant
non-operational and/or nonrecurring items, net of a tax benefit, of
approximately $93 million ($115 million pre-tax) which include the costs related
to the separation from UTC and a fixed asset impairment loss. These significant
non-operational and/or nonrecurring items, and the resulting higher effective
tax rate, were the primary contributors to lower Net income attributable to Otis
Worldwide Corporation for the quarter ended March 31, 2020 when compared to the
same period in 2019. The effects of the above resulted in an impact of $0.22 on
the basic and diluted earnings per share for the quarter ended March 31, 2020 .
Net income attributable to Otis Worldwide Corporation for the quarter ended
March 31, 2019 includes restructuring charges, net of a tax benefit, of $18
million ($25 million pre-tax). The effects of restructuring charges resulted in
an impact of $0.04 on the basic and diluted earnings per share for the quarter
ended March 31, 2019 .
Segment Review
Summary performance for each of the operating segments for the quarters ended
March 31, 2020 and 2019 was as follows:
Net Sales Operating Profit Operating Profit Margin
(dollars in millions) 2020 2019 2020 2019 2020 2019
New Equipment $ 1,123 $ 1,271 $ 64 $ 59 5.7 % 4.6 %
Service 1,843 1,830 400 386 21.7 % 21.1 %
Total segment $ 2,966 $ 3,101 $ 464 $ 445 15.6 % 14.4 %
General corporate expenses
and other - - (135) (30) - -
Total $ 2,966 $ 3,101 $ 329 $ 415 11.1 % 13.4 %
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New Equipment
The New Equipment segment designs, manufactures, sells and installs a wide range of passenger and freight elevators, as well as escalators and moving walkways in residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers, general contractors, architects, governments and specialized consultants who develop and/or design buildings for residential, commercial, retail or mixed-use activity. We sell directly to customers as well as through agents and distributors.
Summary performance for the New Equipment segment for the quarters ended
(dollars in millions) 2020 2019 Change Change Net sales$ 1,123 $ 1,271 $ (148) (11.6) % Cost of sales 914 1,060 (146) (13.8) %$ 209 $ 211 $ (2) (0.9) % Operating expenses and other 145 152 (7) (4.6) % Operating profit$ 64 $ 59 $ 5 8.5 % New Equipment segment Quarter EndedMarch 31, 2020 compared with Quarter EndedMarch 31, 2019 Net Sales Cost of Sales Operating Profit Organic/Operational (9.8) % (11.8) % 3.4 % Foreign currency translation (1.8) % (1.8) % (3.4) % Restructuring cost - % (0.2) % 8.5 % Total % change (11.6) % (13.8) % 8.5 % Net sales
The organic sales decrease of (9.8)% was driven by organic sales declines in all
regions, with a double digit decline in
Operating profit
New Equipment operational profit increased 3.4% as lower volume (31.7)% was more
than offset by favorable rate of 30.5% primarily due to material productivity
and lower commodity costs of 3.1%. In addition, favorable selling, general and
administrative expenses contributed to the improvement in operating profit.
Service
The Service segment performs maintenance and repair services for both our
products and those of other manufacturers and provides modernization services to
upgrade elevators and escalators. Maintenance services include inspections to
ensure code compliance, preventive maintenance offerings and other customized
maintenance offerings tailored to meet customer needs, as well as repair
services that address equipment and component wear and tear, and breakdowns.
Modernization services enhance equipment operation and improve building
functionality. Modernization offerings can range from relatively simple upgrades
of interior finishes and aesthetics, to complex upgrades of larger components
and sub-systems. Our typical Service customers include building owners, facility
managers, housing associations and government agencies that operate buildings
where elevators and escalators are installed.
33
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Summary performance for the Service segment for the quarters ended
(dollars in millions) 2020 2019 Change Change Net sales$ 1,843 $ 1,830 $ 13 0.7 % Cost of sales 1,155 1,140 15 1.3 %$ 688 $ 690 $ (2) (0.3) % Operating expenses and other 288 304 (16) (5.3) % Operating profit$ 400 $ 386 $ 14 3.6 % Service segment Quarter EndedMarch 31, 2020 compared with Quarter EndedMarch 31, 2019 Net Sales Cost of Sales Operating Profit Organic/Operational 3.3 % 4.6 % 2.3 % Foreign currency translation (1.9) % (1.9) % (2.1) % Acquisitions/Divestitures, net (0.7) % (0.9) % (0.2) % Restructuring cost - % (0.5) % 3.6 % Total % change 0.7 % 1.3 % 3.6 % Net sales
The organic sales increase of 3.3% primarily consists of organic sales growth in maintenance and repair of 2.5% and modernization 6.8%.
Maintenance and repair net sales were flat year over year and was comprised of a 2.5% organic sales increase, offset by foreign currency headwinds (1.9)% and decreases related to net acquisitions and divestitures (0.4)%. Modernization net sales increased 3.1% for the quarter which is made up of a 6.8% increase in organic sales, offset by decreases in foreign currency (1.5)% and from net acquisitions and divestitures (2.2)%.
Operating profit
Service operational profit increased 2.3% driven by higher volume 4.1%, favorable price/mix and productivity 4.7%; partially offset by labor inflation (4.1)% and under absorption of labor in certain parts of the world. General corporate expenses and other
Quarter Ended March 31,
(dollars in millions) 2020 2019
General corporate expenses and other $ (135) General corporate expenses and other primarily reflects certain corporate overhead costs, Separation-related costs, standalone public company costs and a one-time fixed asset impairment. The increase in general corporate expenses and other during the quarter endedMarch 31, 2020 compared to the same period in 2019, is primarily driven by a fixed asset impairment of approximately$55 million and related license costs of approximately$12 million , Separation related costs of$32 million and standalone public company costs, partially offset by lower employment costs. 34 -------------------------------------------------------------------------------- LIQUIDITY AND FINANCIAL CONDITION December 31, (dollars in millions) March 31, 2020 2019 Cash and cash equivalents$ 1,207 $ 1,446 Total debt 6,325 39 Net debt (total debt less cash and cash equivalents) 5,118 (1,407) Total equity (4,284) 2,231 Total capitalization (total debt plus total equity) 2,041 2,270
Net capitalization (total debt plus total equity less cash and cash equivalents)
834 824
Total debt to total capitalization 310 % 2 %
Net debt to net capitalization 614 % (171) %
Otis has historically participated in UTC's centralized treasury management,
including centralized cash pooling and overall financing arrangements. However,
historically, we have generated operating cash flow sufficient to fund our
working capital, capital expenditures and financing requirements.
At March 31, 2020 , we had cash and cash equivalents of $1.2 billion , of which
approximately 99% was held by the Business' foreign subsidiaries. After March
31, 2020 and before the Separation, the Business received $190 million of
domestic cash contributions from UTC in connection with the Separation. We
manage our worldwide cash requirements by reviewing available funds among the
many subsidiaries through which we conduct our business and the cost
effectiveness with which those funds can be accessed. On occasion, we are
required to maintain cash deposits with certain banks with respect to
contractual obligations related to acquisitions or divestitures or other legal
obligations. As of March 31, 2020 and December 31, 2019 , the amount of such
restricted cash was approximately $13 million .
From time to time we may need to access the capital markets to obtain financing.
We may incur indebtedness or issue equity as needed. Although we believe that
the arrangements in place at the time of the Separation will permit us to
finance our operations on acceptable terms and conditions, our access to, and
the availability of, financing on acceptable terms and conditions in the future
will be impacted by many factors, including (1) our credit ratings or absence of
a credit rating, (2) the liquidity of the overall capital markets and (3) the
current state of the economy. There can be no assurance that we will continue to
have access to the capital markets on terms acceptable to us.
During the quarter ended
-
-
-
-
The following is a summary of the debt issuances for the quarter endedMarch 31, 2020 : (dollars in millions) Aggregate Principal Issuance Date Description of Notes Balance 03-27-2020 LIBOR plus 112.5 bps Term Loan due 2023 $ 1,000 02-27-2020 LIBOR plus 45 bps floating rate notes due 2023 500 02-27-2020 2.056% notes due 2025 1,300 02-27-2020 2.293% notes due 2027 500 02-27-2020 2.565% notes due 2030 1,500 02-27-2020 3.112% notes due 2040 750 02-27-2020 3.362% notes due 2050 750 35
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The net proceeds from the above issuances totaling
For additional discussion of borrowings, see Note 9 to the Condensed Combined Financial Statements.
As part of the Separation process,Otis determined that as a stand-alone company, the Business no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in theU.S , which is different from the historical assertion of UTC. For the remainder of the Business' undistributed international earnings,Otis will continue to permanently reinvest these earnings unless it is tax effective to repatriate. As a result of the change in assertion,Otis recognized a one-time tax benefit of$9 million in the quarter resulting from an overall reduction in the liability previously recorded by UTC. Following the Separation, we expect to fund our ongoing operating, investing and financing requirements mainly through cash flows from operations, available liquidity through cash on hand and available bank lines of credit and access to capital markets. As ofApril 3, 2020 , our Board of Directors authorized a share repurchase program for up to$1 billion of our common stock. Under this program, shares may be purchased on the open market, in privately negotiated transactions, or under accelerated share repurchase ("ASR") programs under plans complying with rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We currently do not expect any share repurchases under the program in 2020 as we focus on deleveraging. Cash Flow - Operating Activities Quarter EndedMarch 31 , (dollars in millions) 2020
2019
Net cash flows provided by operating activities$ 159
Cash generated from operating activities in the quarter endedMarch 31, 2020 was$138 million lower than the same period in 2019, primarily due to increased cash outflows for current assets and current liabilities in the quarter endedMarch 31, 2020 of$101 million compared to the quarter endedMarch 31, 2019 . In addition, the Business incurred$32 million of one-time Separation costs and public company standalone costs of approximately$22 million for the quarter endedMarch 31, 2020 that contributed to the decrease. In the quarter endedMarch 31, 2020 , cash outflows from current assets and current liabilities were$184 million . Accounts payable and accrued liabilities decreased$289 million due to the timing of payments to suppliers and employees, Accounts receivable increased$116 million due to the timing of billings, Other assets, current increased$85 million primarily due to tax prepayments in certain tax jurisdictions, and Inventories, net increased$49 million due to higher production inventory and purchases of inventory in advance of potential supply chain disruptions due to COVID-19. These were partially offset by the net change in Contract assets, current and Contract liabilities, current of$355 million , which were driven by the timing of billings on contracts and contract completions. In the quarter endedMarch 31, 2019 , cash outflows from current assets and current liabilities were$83 million . Accounts payable and accrued liabilities decreased$309 million due to the timing of payments to suppliers and employees and Accounts receivable increased$56 million due to increased billing volume. These were partially offset by the net change in Contract assets, current and Contract liabilities, current of$268 million , which were driven by the timing of billings on contracts and contract completions. The remaining offset of$14 million was due to activity in Other assets, current and Inventories, net. Cash Flow - Investing Activities Quarter Ended March
31,
(dollars in millions) 2020
2019
Net cash flows used in investing activities$ (92)
Cash flows used in investing activities for the quarter endedMarch 31, 2020 and 2019 primarily reflect capital expenditures, investments in businesses and securities and proceeds received on sale of fixed assets. Cash flows used in investing activities in the quarter endedMarch 31, 2020 compared to the same period in 2019 increased$74 million primarily due to a$51 million increase in investments made in equity securities,$26 million lower Other investing activities, net due to 36 --------------------------------------------------------------------------------
lower short-term investing activity and a
Cash Flow - Financing Activities
Quarter Ended March 31,
(dollars in millions) 2020
2019
Net cash flows used in financing activities$ (256) $
(312)
Financing activities primarily include issuance of long-term debt, increases (decreases) in short-term borrowings, dividends paid to noncontrolling interests and transfers to and from UTC, consisting of, among other things, cash transfers, distributions, cash investments and changes in receivables and payables betweenOtis and UTC. See Note 5 to the Condensed Combined Financial Statements for further discussion on transactions with UTC. Net cash used in financing activities decreased$56 million in the quarter endedMarch 31, 2020 compared to the same period in 2019 primarily due to the issuance of long-term notes of$5.3 billion and the draw of$1.0 billion from its term loan, partially offset by a$6.2 billion increase in net transfers to UTC primarily driven by the distribution of the net proceeds of these borrowings to UTC. See Note 9 to the Condensed Combined Financial Statements for further discussion on borrowings. 37 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements and Contractual Obligations
A summary of the additional significant obligations that the Business has
entered into during the quarter ended
Payments Due by Period
(dollars in millions) Total 2020 2021 2022 2023 2024 Thereafter
Long-term debt $ 6,305 $ - $ 2 $ 1 $ 1,501 $ 1 $ 4,800 The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Off-Balance Sheet Arrangements and
Contractual Obligations" provided a table summarizing our contractual
obligations and commercial commitments at the end of 2019 that would require the
use of funds. As of
Our long-term debt portfolio primarily consists of fixed-rate instruments. For
any variable rate debt, interest rate changes in the London Interbank Offered
Rate ("LIBOR") will impact future earnings and cash flows. From time to time, we
may hedge floating rates using interest rate swaps. The hedges are designated as
fair value hedges and the gains and losses on the swaps are reported in interest
expense, reflecting that portion of interest expense at a variable rate. We
issue commercial paper, which exposes us to changes in interest rates.
Currently, we do not hold any derivative contracts that hedge our interest
exposures, but may consider such strategies in the future.
There has been no significant change in our exposure to market risk during the
quarter ended March 31, 2020 . For discussion of our exposure to market risk,
refer to the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk and Risk Management" in the
Form 10 .
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation
under the supervision and with the participation of our management, including
the President and Chief Executive Officer ("CEO"), the Vice President and Chief
Financial Officer ("CFO") and the Vice President and Chief Accounting Officer
("CAO"), of the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2020 . There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based upon our evaluation, our CEO, our CFO and our CAO have
concluded that, as of March 31, 2020 , our disclosure controls and procedures
were effective to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the applicable rules and forms, and that it is accumulated and communicated
to our management, including our CEO, our CFO and our CAO, as appropriate, to
allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting during
the quarter ended March 31, 2020 , that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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Cautionary Note Concerning Factors That May Affect Future Results
This Form 10-Q contains statements which, to the extent they are not statements
of historical or present fact, constitute "forward-looking statements" under the
securities laws. From time to time, oral or written forward-looking statements
may also be included in other information released to the public. These
forward-looking statements are intended to provide management's current
expectations or plans for Otis ' future operating and financial performance,
based on assumptions currently believed to be valid. Forward-looking statements
can be identified by the use of words such as "believe," "expect,"
"expectations," "plans," "strategy," "prospects," "estimate," "project,"
"target," "anticipate," "will," "should," "see," "guidance," "outlook,"
"confident" and other words of similar meaning in connection with a discussion
of future operating or financial performance or the Separation. Forward-looking
statements may include, among other things, statements relating to future sales,
earnings, cash flow, results of operations, uses of cash, dividends, share
repurchases, tax rates and other measures of financial performance or potential
future plans, strategies or transactions of Otis following the Separation,
including the estimated costs associated with the Separation and other
statements that are not historical facts. All forward-looking statements involve
risks, uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
For those statements, Otis claims the protection of the safe harbor for
forward-looking statements contained in the U.S. Private Securities Litigation
Reform Act of 1995. Such risks, uncertainties and other factors include, without
limitation:
•the effect of economic conditions in the industries and markets in which Otis
and its businesses operate in the U.S. and globally and any changes therein,
including financial market conditions, fluctuations in commodity prices,
interest rates and foreign currency exchange rates, levels of end market demand
in construction, the impact of weather conditions, pandemic health issues
(including COVID-19 and its effects, among other things, on global supply,
demand, and distribution disruptions as the coronavirus outbreak continues and
results in an increasingly prolonged period of travel, commercial and/or other
similar restrictions and limitations), natural disasters and the financial
condition of Otis ' customers and suppliers;
•challenges in the development, production, delivery, support, performance and
realization of the anticipated benefits of advanced technologies and new
products and services;
•future levels of indebtedness, including indebtedness incurred in connection
with the Separation, and capital spending and research and development spending;
•future availability of credit and factors that may affect such availability,
including credit market conditions and Otis ' capital structure;
•the timing and scope of future repurchases of Otis ' common stock, which may be
suspended at any time due to various factors, including market conditions and
the level of other investing activities and uses of cash;
•delays and disruption in delivery of materials and services from suppliers;
•cost reduction efforts and restructuring costs and savings and other
consequences thereof;
•new business and investment opportunities;
•the anticipated benefits of moving away from diversification and balance of
operations across product lines, regions and industries;
•the outcome of legal proceedings, investigations and other contingencies;
•pension plan assumptions and future contributions;
•the impact of the negotiation of collective bargaining agreements and labor
disputes;
•the effect of changes in political conditions in the U.S. and other countries
in which Otis and its businesses operate, including the effect of changes in
U.S. trade policies or the United Kingdom's withdrawal from the European Union ,
on general market conditions, global trade policies and currency exchange rates
in the near term and beyond;
•the effect of changes in tax, environmental, regulatory (including among other
things import/export) and other laws and regulations in the U.S. and other
countries in which Otis and its businesses operate;
•the ability of Otis to retain and hire key personnel;
•the scope, nature, impact or timing of acquisition and divestiture activity,
including among other things integration of acquired businesses into existing
businesses and realization of synergies and opportunities for growth and
innovation and incurrence of related costs;
•the expected benefits of the Separation;
•a determination by the Internal Revenue Service and other tax authorities that
the distribution or certain related transactions should be treated as taxable
transactions;
•risks associated with indebtedness incurred as a result of financing
transactions undertaken in connection with the Separation;
•the risk that dis-synergy costs, costs of restructuring transactions and other
costs incurred in connection with the Separation will exceed Otis ' estimates;
and
•the impact of the Separation on Otis ' businesses and Otis ' resources, systems,
procedures and controls, diversion of management's attention and the impact on
relationships with customers, suppliers, employees and other business
counterparties.
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In addition, this Form 10-Q includes important information as to risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
See the "Notes to Condensed Combined Financial Statements" under the headings
"Note 1: Basis of Presentation" and "Note 16: Contingent Liabilities," the
section titled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the headings "Business Overview," "Critical
Accounting Estimates," "Results of Operations," and "Liquidity and Financial
Condition," and the sections titled "Legal Proceedings" and "Risk Factors" in
this Form 10-Q and in our Form 10 . Additional important information as to
these factors is included in our Form 10 in "Item 1. Business", "Item 1A.
Risk Factors", "Item 2. Financial Information" and "Item 8. Legal Proceedings"
and in our Form S-3 Registration Statement (Registration No. 333-237550) under
the heading "Risk Factors". The forward-looking statements speak only as of the
date of this report or, in the case of any document incorporated by reference,
the date of that document. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by applicable law. Additional
information as to factors that may cause actual results to differ materially
from those expressed or implied in the forward-looking statements is disclosed
from time to time in our other filings with the SEC .
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