OTIS WORLDWIDE CORPORATION BUSINESS OVERVIEW
We are the world's leading 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 and general contractors 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 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 2021 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-K .
Separation from United Technologies Corporation
As previously disclosed, onApril 3, 2020 ,Otis became an independent, publicly-traded company and its Common Stock is listed under the symbol "OTIS" on theNew York Stock Exchange ("NYSE") as a result of the separation ("the Separation") of each ofOtis and Carrier Global Corporation ("Carrier") from United Technologies Corporation, subsequently renamed Raytheon Technologies Corporation ("UTC" or "RTX", as applicable). Prior to the Separation, our historical financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of our former parent, UTC. For the period subsequent toApril 3, 2020 , our financial statements are presented on a consolidated basis as the Company became a standalone public company. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . We entered into a transition services agreement ("TSA") and tax matters agreement ("TMA") with our former parent, UTC, and Carrier onApril 2, 2020 . We received and continue to receive services for information technology, technical and engineering support, application support for operations, general administrative services and other support services under theTSA . TheTSA and the related trailing exit costs are expected to wind-down during the second half of 2021. For additional discussion, see Note 5 "Related Parties" to the Condensed Consolidated Financial Statements. 32
-------------------------------------------------------------------------------- Table of Contents Impact of COVID-19 on our Company The results of our operations and overall financial performance were impacted due to the COVID-19 pandemic during the quarters and six months endedJune 30, 2021 and 2020. COVID-19 has had and could continue to have a negative impact on our business in the future, including impacts to overall financial performance during the remainder of 2021, as a result of the following, among other things:
•Customer demand impacting our new equipment, maintenance and repair, and modernization businesses
•Cancellations or delays of customer orders
•Customer liquidity constraints and related credit reserves
•Supplier capacity constraints, delays and related costs
We currently do not expect any significant impact to our capital and financial resources from the COVID-19 pandemic, including to 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 continuing to preserve our liquidity and managing our cash flow by taking the necessary measures to meet our short-term liquidity needs.
See the Liquidity and Financial Condition section in this Form 10-Q for further detail and Item 1A. Risk Factors in our Form 10-K for additional risks related to COVID-19.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our Condensed Consolidated 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 Consolidated 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 our Form
10-K . Except as disclosed in Note 20 to our Condensed Consolidated 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 June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Net sales $ 3,701 $ 3,029 $ 7,109 $ 5,995
Percentage change year-over-year 22.2 % 18.6 %
The factors contributing to the total percentage change year-over-year in total
Net sales for the quarter and six months ended June 30, 2021 are as follows:
Quarter Ended Six Months Ended
June 30, 2021 June 30, 2021
Organic volume 15.4 % 12.9 %
Foreign currency translation 6.5 % 5.5 %
Acquisitions and divestitures, net 0.3 % 0.2 %
Total % change 22.2 % 18.6 %
The Organic volume increase of 15.4% for the quarter ended
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The Organic volume increase of 12.9% for the six months ended June 30, 2021 was
driven by increases in organic sales of 25.3% in New Equipment and 4.5% in
Service.
See "Segment Review" section for a discussion of Net sales by segment.
Cost of Products and Services Sold
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Total cost of products and services sold $ 2,626 $ 2,138 $ 5,015 $ 4,207
Percentage change year-over-year 22.8 % 19.2 %
The factors contributing to the percentage change year-over-year for the quarter
and six months ended June 30, 2021 in total cost of products and services sold
are as follows:
Quarter Ended Six Months Ended
June 30, 2021 June 30, 2021
Organic volume 15.6 % 13.1 %
Foreign currency translation 6.9 % 5.8 %
Acquisitions and divestitures, net 0.3 % 0.2 %
Restructuring - % 0.1 %
Total % change 22.8 % 19.2 %
The organic increase in total cost of products and services sold for the quarter
and six months ended June 30, 2021 was primarily driven by the organic sales
increases noted above and overall segment mix between New Equipment and Service.
Gross Margin
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Gross margin $ 1,075 $ 891 $ 2,094 $ 1,788
Gross margin percentage 29.0 % 29.4 % 29.5 % 29.8 %
Gross margin decreased 40 and 30 basis points for the quarter and six months
ended June 30, 2021 , respectively, when compared to the same periods for 2020,
as improvement in gross margins in New Equipment and Service was more than
offset by overall segment mix.
See the "Segment Review" section for discussion of operating results by segment.
Research and Development
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Research and development $ 39 $ 37 $ 74 $ 75
Percentage of Net sales 1.1 % 1.2 % 1.0 % 1.3 %
Research and development was relatively flat for the quarter and six months
ended June 30, 2021 , when compared to the same periods for 2020. We continue to
fund our strategic investment projects, including investments in Internet of
Things technologies.
Research and development expense as a percentage of net sales decreased for the
quarter and six months ended June 30, 2021 , when compared to the same periods in
2020, primarily as a result of the increase in net sales in the current year.
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Selling, General and Administrative
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Selling, general and administrative $ 484 $ 441 $ 966 $ 906
Percentage of Net sales 13.1 % 14.6 % 13.6 % 15.1 %
Selling, general and administrative expenses increased approximately
•Higher employment and information technology costs, including incremental standalone public company costs, and the absence of cost containment actions taken during 2020 in response to COVID-19, partially offset by
•Lower non-recurring Separation-related costs and the absence of corporate
allocations from UTC of
•Selling, general and administrative expenses also reflected the impact from unfavorable foreign exchange of$21 million and$37 million for the quarter and six months endedJune 30, 2021 , respectively, compared to the same periods in 2020.
The quarter ended
Selling, general and administrative expenses as a percentage of Net sales decreased 150 basis points for the quarter and six months endedJune 30, 2021 , respectively, compared to the same periods in 2020, primarily driven by higher net sales. 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 14 in the Notes to the Condensed Consolidated Financial Statements. Restructuring Costs Six Months Ended June 30, (dollars in millions) 2021 2020 Restructuring costs $ 26$ 26 We initiate restructuring actions 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$26 million for the six months endedJune 30, 2021 and included$16 million of costs related to 2021 actions and$10 million of costs related to 2020 actions. All of the 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 six months endedJune 30, 2021 , we had cash outflows of approximately$28 million related to the restructuring actions and remaining cash payments of$50 million are expected, including$13 million of additional restructuring expenses to complete the actions and$37 million of restructuring accruals as ofJune 30, 2021 . We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including$26 million for the 2021 actions and$58 million for the 2020 actions, of which approximately$15 million was realized during the six months endedJune 30, 2021 .
For additional discussion of restructuring, see Note 14 to the Condensed Consolidated Financial Statements.
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Other Income (Expense), Net
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Other income (expense), net $ 9 Other income (expense), 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, non-recurring Separation-related expenses and certain other operating items. The increase in Other income (expense), net of$6 million for the quarter endedJune 30, 2021 , when compared to the same period in 2020, is primarily due to the impact of changes in fair value and settlement of embedded and foreign exchange derivatives. The increase in Other income (expense), net of$78 million for the six months endedJune 30, 2021 , when compared to the same period in 2020, is primarily due to a fixed asset impairment of$(55) million and related licensing costs of$(12) million recognized during the quarter endedMarch 31, 2020 as well as the impact of changes in fair value and settlement of embedded derivatives and foreign exchange derivatives.
Interest Expense (Income), Net
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Interest expense (income), net $ 27 $ 41 $ 59 $ 46
Interest expense (income), net primarily relates to interest expense on our
external debt, offset by interest income earned on cash balances, short-term
investments and, in the prior year, related party activity between Otis and our
former parent, UTC, in the prior year.
The decrease in Interest expense (income), net of $(14) million in the quarter
ended June 30, 2021 , compared to the same period in 2020, was primarily driven
by lower interest expense as a result of the debt refinancing and debt
repayments during 2021 and 2020.
The increase in Interest expense (income), net of $13 million for the six months
ended June 30, 2021 , compared to the same period in 2020, was primarily driven
by a full six months impact of interest expense on the external debt associated
with the Separation, which was not outstanding for the full six months ended
June 30, 2020 , offset by the favorable activity noted above.
The average interest rate on our external debt for the quarter and six months
ended June 30, 2021 is 2.3% and 2.4%, respectively and for the same periods in
2020 is 2.5%.
For additional discussion of borrowings, see Note 9 to the Condensed Consolidated Financial Statements.
Income Taxes
Quarter Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Effective tax rate 28.8 % 29.1 % 27.4 % 33.4 %
The decrease in the effective tax rate for the quarter ended June 30, 2021 is
primarily due to a tax benefit related to the incorporation of TCJA tax
regulations that were enacted in the third quarter of 2020, partially offset by
an income tax settlement related to the Separation. In addition, the decrease in
the effective tax rate for the six months ended June 30, 2021 is also due to the
absence of the tax cost relating to Separation-related expenses and a fixed
asset impairment incurred in the first quarter of 2020, as well as a reduction
in the deferred tax liability related to repatriation of foreign earnings as a
result of changes to the Company's planned debt repayments and changes in
estimates related to Otis ' pre-Separation tax attributes
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recorded in the quarter ended March 31, 2021 .
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 13 to the Condensed Consolidated Financial Statements.
Noncontrolling Interest in Subsidiaries' Earnings
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
Noncontrolling interest in subsidiaries' earnings $ 53
$ 41 $ 97$ 78
Noncontrolling interest in subsidiaries' earnings increased for the quarter
ended
Net Income Attributable to Common Shareholders
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions, except per share amounts) 2021 2020 2021 2020
Net income attributable to common shareholders
$ 0.76
Net income attributable to common shareholders increased for the quarter and six months endedJune 30, 2021 , compared to the same periods in 2020, primarily due to the following:
•Higher operating profit partially offset by higher noncontrolling interest in subsidiaries' earnings;
•The benefit of a lower effective tax rate; and
•The benefit of lower interest expense for the quarter endedJune 30, 2021 , and partially offset by higher interest expense for the six months endedJune 30, 2021 .
Net income attributable to common shareholders for the quarter and six months
ended
•Restructuring charges, net of taxes, of
•Non-recurring Separation-related expenses (benefit), net of taxes, of
approximately
•Non-recurring tax expenses of
•The restructuring charges and non-recurring items described in the three
immediately preceding bullets resulted in an impact of
Net income attributable to common shareholders for the quarter and six months
ended
•Restructuring charges, net of taxes, of
•With respect to the quarter endedJune 30, 2020 , non-recurring Separation-related expenses, net of taxes, of approximately$5 million ($21 million pre-tax), which includes the non-recurring Separation-related costs and a non-recurring tax benefit of$13 million related to the Separation, and with respect to the six months endedJune 30, 2020 ,$98 million ($136 million pre-tax) which include the non-recurring Separation costs and a fixed asset impairment, respectively; 37 -------------------------------------------------------------------------------- Table of Contents •The restructuring charges and non-recurring items described in the two immediately preceding bullets resulted in an impact of$0.04 and$0.27 , respectively, on diluted earnings per share. Segment Review Summary performance for our operating segments for the quarters endedJune 30, 2021 and 2020 was as follows: Net Sales Operating Profit Operating Profit Margin (dollars in millions) 2021 2020 2021 2020 2021 2020 New Equipment$ 1,727 $ 1,294 $ 147 $ 79 8.5 % 6.1 % Service 1,974 1,735 441 381 22.3 % 22.0 % Total segment 3,701 3,029 588 460 15.9 % 15.2 % General corporate expenses and other - - (27) (44) - - Total$ 3,701 $ 3,029 $ 561 $ 416 15.2 % 13.7 %
Summary performance for our operating segments for the six months ended
Net Sales Operating Profit Operating Profit Margin
(dollars in millions) 2021 2020 2021 2020 2021 2020
New Equipment $ 3,185 $ 2,417 $ 251 $ 143 7.9 % 5.9 %
Service 3,924 3,578 871 781 22.2 % 21.8 %
Total segment 7,109 5,995 1,122 924 15.8 % 15.4 %
General corporate expenses and
other - - (52) (179) - -
Total $ 7,109 $ 5,995 $ 1,070 $ 745 15.1 % 12.4 %
Beginning in this Quarterly Report on Form 10-Q, we are changing how we present
and discuss operating profit in our Segment Review of the Management's
Discussion and Analysis. Previously, we presented and discussed the percentage
change in segment operating profit between periods using organic/operational
profit, which excluded the impact of foreign currency translation, acquisitions
and divestitures and restructuring costs. We are now presenting and discussing
the change in the total dollar amount of segment operating profit and the
percentage change in operating profit margin between periods. There is no change
in the amounts of operating profit that we have previously disclosed. We will
continue to use the same key metrics to explain the changes in our operating
performance that we previously used. For example, as discussed below, the
drivers of the changes in the second quarter relative to the prior year quarter
are volume, rate drivers, selling general and administrative expense, foreign
exchange and restructuring which are consistent with what we have disclosed in
the past where applicable. In addition, we will discuss the impact of foreign
currency translation, acquisitions and divestitures and restructuring to the
extent they are meaningful to understanding our performance. We believe this
changed approach aligns better with how we measure our performance.
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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, government
agencies and general contractors who develop and/or design buildings for
residential, infrastructure, commercial, retail or mixed-use activity. We sell
directly to customers as well as through agents and distributors.
Summary performance for New Equipment for the quarters and six months ended
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 Change Change 2021 2020 Change Change
Net sales $ 1,727 $ 1,294 $ 433 33.5 % $ 3,185 $ 2,417 $ 768 31.8 %
Cost of sales 1,418 1,072 346 32.3 % 2,605 1,986 619 31.2 %
309 222 87 39.2 % 580 431 149 34.6 %
Operating expenses 162 143 19 13.3 % 329 288 41 14.2 %
Operating profit $ 147 $ 79 $ 68 86.1 % $ 251 $ 143 $ 108 75.5 %
Operating profit margin 8.5 % 6.1 % 7.9 % 5.9 %
Summary analysis of the New Equipment Net sales change for the quarter and six
months ended June 30, 2021 compared with the quarter and six months ended June
30, 2020 was as follows:
Quarter Ended Six Months Ended
Components of Net sales change: June 30, 2021 June 30, 2021
Organic 25.4 % 25.3 %
Foreign currency translation 7.9 % 6.3 %
Acquisitions/Divestitures, net 0.2 % 0.2 %
Total % change 33.5 % 31.8 %
Quarter Ended June 30, 2021
Net sales
The organic sales increase of 25.4% was driven by double digit growth in
Operating profit
New Equipment operating profit increased$68 million , primarily due to higher volume of$70 million , with an operating margin increase of 240 basis points. Favorable material and field installation productivity were mostly offset by commodity headwinds and unfavorable price and mix. Foreign currency tailwinds of$10 million and lower restructuring costs of$5 million largely offset higher selling, general and administrative costs of$20 million .
Six Months Ended
Net sales
The organic sales increase of 25.3% was driven by double digit growth in
Operating profit
New Equipment operating profit increased$108 million , primarily due to higher volume of$120 million , with an operating margin increase of 200 basis points. Favorable material and field installation productivity were mostly offset by commodity headwinds and unfavorable price and mix. Foreign currency tailwinds of$15 million , were more than offset by 39 -------------------------------------------------------------------------------- Table of Contents higher selling, general and administrative costs of$25 million .
Service
The Service segment performs maintenance and repair services for both our products, and those of other manufacturers, and provides modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services that address equipment and component wear and tear, and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics, to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed. Summary performance for Service for the quarters and six months endedJune 30, 2021 and 2020 was as follows: Quarter Ended June 30, Six Months Ended June 30, (dollars in millions) 2021 2020 Change Change 2021 2020 Change Change Net sales$ 1,974 $ 1,735 $ 239 13.8 %$ 3,924 $ 3,578 $ 346 9.7 % Cost of sales 1,208 1,066 142 13.3 % 2,410 2,221 189 8.5 % 766 669 97 14.5 % 1,514 1,357 157 11.6 % Operating expenses 325 288 37 12.8 % 643 576 67 11.6 % Operating profit$ 441 $ 381 $ 60 15.7 %$ 871 $ 781 $ 90 11.5 % Operating profit margin 22.3 % 22.0 % 22.2 % 21.8 %
Summary analysis of Service Net sales change for the quarter and six months
ended
Quarter Ended Six Months Ended
Components of Net sales change: June 30, 2021 June 30, 2021
Organic 7.8 % 4.5 %
Foreign currency translation 5.7 % 4.9 %
Acquisitions/Divestitures, net 0.3 % 0.3 %
Total % change 13.8 % 9.7 %
Quarter Ended June 30, 2021
Net sales
The organic sales increase of 7.8% is due to sales increases in maintenance and repair of 7.5% and modernization of 9.3%.
Maintenance and repair net sales increased 13.6% as a result of an organic sales increase of 7.5%, partially due to the ongoing recovery from COVID-19, foreign currency tailwinds of 5.7% and the impact from net acquisitions and divestitures of 0.4%.
Modernization net sales increased 14.4% as a result of organic sales increase of 9.3%, partially due to the ongoing recovery from COVID-19, foreign currency tailwinds of 4.8% and the impact from net acquisitions and divestitures of 0.3%.
Operating profit
Service operating profit increased$60 million , primarily due to higher volume of$50 million , with an operating margin increase of 30 basis points. Favorable pricing and lower bad debt were partially offset by headwinds from prior year cost containment and field actions in response to COVID-19. Foreign exchange tailwinds of$25 million and lower restructuring costs of$5 million , were offset by higher selling general and administrative costs of$30 million . 40 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2021
Net sales
The organic sales increase of 4.5% is due to sales increases in maintenance and repair of 4.4% and modernization of 4.7%.
Maintenance and repair net sales increased 9.8% as a result of an organic sales increase of 4.4%, partially due to the ongoing recovery from COVID-19, foreign currency tailwinds of 5.1% and the impact from net acquisitions and divestitures of 0.3%.
Modernization net sales increased 9.1% as a result of organic sales increase of 4.7%, partially due to the ongoing recovery from COVID-19, foreign currency tailwinds of 4.2% and the impact from net acquisitions and divestitures of 0.2%.
Operating profit
Service operating profit increased$90 million , primarily due to higher volume of$60 million , with an operating margin increase of 40 basis points. Favorable pricing and lower bad debt were partially offset by headwinds from prior year cost containment and field actions in response to COVID-19. Foreign exchange tailwinds of$44 million , were more than offset by higher selling general and administrative costs of$50 million .
General Corporate Expenses and Other
Quarter Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
General corporate expenses and other $ (27) $
(44) $ (52)
General corporate expenses and other for the quarter ended
The decrease in General corporate expenses and other of$(127) million for the six months endedJune 30, 2021 , when compared to the same period in 2020, is primarily due to the absence of a fixed asset impairment of$(55) million and related licensing costs of$(12) million recognized during the quarter endedMarch 31, 2020 and lower non-recurring Separation costs and prior year UTC allocations of$(60) million when compared to the same period in 2020. 41
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LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions) June 30, 2021 December 31, 2020
Cash and cash equivalents $ 1,923 $ 1,782
Total debt 5,800 5,963
Net debt (total debt less cash and cash equivalents) 3,877 4,181
Total equity (3,317) (3,284)
Total capitalization (total debt plus total equity) 2,483 2,679
Net capitalization (total debt plus total equity less cash and cash equivalents)
560 897
Total debt to total capitalization 234 % 223 %
Net debt to net capitalization 692 % 466 %
At June 30, 2021 , we had cash and cash equivalents of approximately $1.9
billion , of which approximately 86% was held by the Company's foreign
subsidiaries. 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 and divestitures or other legal
obligations. As of June 30, 2021 and December 31, 2020 , the amount of such
restricted cash was approximately $21 million and $15 million , respectively.
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 as of June 30, 2021 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
could 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, including the impact of COVID-19. There can be no
assurance that we will continue to have access to the capital markets on terms
acceptable to us.
The following is a summary of the debt issuances for the six months ended
(dollars in millions)
Aggregate Principal
Issuance Date Description of Debt Balance
March 11, 2021 Japanese Yen Notes (¥21,500 million principal value) $ 199
The proceeds from the issuance of the Japanese Yen Notes were used to repay a
portion of our outstanding Euro denominated commercial paper. For additional
discussion of borrowings, see Note 9 to the Condensed Consolidated Financial
Statements.
Following the enactment of the TCJA, and after reassessing as part of the
Separation, the Company determined that it no longer intends to reinvest certain
undistributed earnings of our international subsidiaries that have been
previously taxed in the U.S. For the remainder of the Company's undistributed
international earnings, unless tax effective to repatriate, we will continue to
permanently reinvest these earnings.
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.
On April 27, 2020 , our Board of Directors authorized a share repurchase program
for up to $1.0 billion of Common Stock, of which approximately $506 million has
been utilized as of June 30, 2021 . Under this program, shares may be purchased
on the open market, in privately negotiated transactions, under accelerated
share repurchase programs or under plans complying with rules 10b5-1 and 10b-18
under the Securities Exchange Act of 1934, as amended. During the six months
ended June 30, 2021 the Company repurchased 7.3 million shares of Common Stock
for approximately $506 million .
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Cash Flow - Operating Activities
Six Months Ended June 30,
(dollars in millions) 2021 2020
Net cash flows provided by operating activities $
1,118
Cash generated from operating activities in the six months endedJune 30, 2021 was$295 million higher than the same period in 2020, primarily due to higher net income of$264 million and increased cash inflows related to current assets and current liabilities activity of$162 million , as described below. These were partially offset by$59 million lower non-cash adjustments from Net income, including the fixed asset impairment of$55 million in the six months endedJune 30, 2020 , and$74 million lower Other operating activities, net, primarily due to long-term accruals and other activity in the six months endedJune 30, 2020 .
Six Months Ended
The six months endedJune 30, 2021 cash inflows related to current assets and current liabilities operating activity were$310 million . These cash inflows were primarily driven by:
•Contract assets, current and Contract liabilities, current, net change of
•Accounts payable, which increased by
The cash inflows were partially offset by cash outflows related to:
•Accounts receivable, net, which increased
•Inventories, net, which increased
Additionally, Other current assets decreased by$55 million due to prepaid income tax refunds and indemnification payments received pursuant to the TMA in order to pay foreign tax obligations. Accrued liabilities decreased$23 million primarily due to the payment of$23 million in foreign tax obligations pursuant to the TMA described above and income tax liabilities in certain jurisdictions. The receipt and payment of indemnification assets and foreign tax obligations resulted in minimal cash flow for the six months endedJune 30, 2021 . See Note 5 to the Condensed Consolidated Financial Statements for further discussion on transactions with our former parent, UTC.
Six Months Ended
The six months endedJune 30, 2020 cash inflows related to current assets and current liabilities operating activity were$148 million . These cash inflows were primarily driven by:
•Contract assets, current and Contract liabilities, current, net change of
•Accounts payable, which increased
The cash inflows were partially offset by cash outflows related to:
•Inventories, net, which increased
•Accounts receivable, net, which increased
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Additionally, Other current assets increased $67 million , primarily due to tax
prepayments in certain tax jurisdictions and Accrued liabilities increased $62
million , primarily due to the timing of payments for income tax liabilities in
certain tax jurisdictions.
Cash Flow - Investing Activities
Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, and settlement of derivative contracts.
Six Months Ended
Six Months Ended June 30,
(dollars in millions) 2021 2020 Change
Investing Activities:
Capital expenditures $ (84)
(51) (16) (35)
Investments in equity securities (18) (51) 33
Proceeds from sale of equity securities 58 - 58
Receipts (payments) on settlements of derivative
contracts 17 (7) 24
Other investing activities, net 11 7 4
Net cash flows used in investing activities $ (67) Cash flows used in investing activities in the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 decreased$75 million , including the following drivers:
•$58 million of proceeds from the sale of equity securities in the six months
ended
•$33 million in lower investments in equity securities resulting from higher
investments made in the six months ended
•$35 million of higher payments for investments in businesses and intangible
assets in the six months ended
Additionally, as discussed in Note 15 to the Condensed Consolidated Financial Statements, we enter into derivative instruments for risk management purposes. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We use derivative instruments, including forward contracts and options to manage certain foreign currency exposures. The settlement of these derivative instruments resulted in a net cash receipts of$17 million and payments of$7 million during the six months endedJune 30, 2021 and 2020, respectively.Germany Fire As previously disclosed, during 2020 there was a fire at the Company's manufacturing facility inGermany . During the six months endedJune 30, 2021 , the Company settled the related property damage claim with the insurance company and received final payment of$16 million , as reflected in Other investing activities, net in the Condensed Consolidated Statements of Cash Flows. The Company continues to be in discussions with the insurance company on the business interruption insurance claim. We do not anticipate any material impact to our operations or financial results in the future from this event.
For additional discussion, see "Business Overview" in section "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report, incorporated by reference in our 2020 Form 10-K .
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Cash Flow - Financing Activities
Financing activities primarily include increases or decreases in short-term
borrowings, issuance or repayment of long-term debt, dividends paid to common
shareholders, repurchases of Common Stock and dividends paid to noncontrolling
interests. The prior year activity includes transfers to and from our former
parent, UTC, prior to the Separation, consisting of, among other things, cash
transfers, distributions, cash investments and changes in receivables and
payables. See Note 5 to the Condensed Consolidated Financial Statements for
further discussion.
Six Months Ended June 30,
(dollars in millions) 2021 2020 Change
Financing Activities:
Increase (decrease) in short-term borrowings, net $
(345)
Proceeds from issuance of long-term debt 199 6,300 (6,101) Payment of long-term debt issuance costs (2) (43) 41 Net transfers to UTC - (6,330) 6,330 Dividends paid on Common Stock (189) (87) (102) Repurchases of Common Stock (506) - (506) Dividends paid to noncontrolling interest (55) (43) (12) Other financing activities, net (18) 22 (40) Net cash flows used in financing activities $
(916)
Net cash used in financing activities increased$736 million in the six months endedJune 30, 2021 compared to the same period in 2020 primarily due to the following:
•Repurchase of Common Stock of
•Net repayments on borrowings of
•Net repayments of short-term borrowings of
•Net proceeds from the issuance of long-term debt of
•Net transfers to UTC related to the Separation of
For additional discussion of borrowings activity, see Note 9 to the Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements and Contractual Obligations
The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements and Contractual Obligations" in our 2020 Annual Report, incorporated by reference in our 2020 Form 10-K, discloses our off-balance sheet arrangements and contractual obligations. As ofJune 30, 2021 , there have been no material changes to these off-balance sheet arrangements and contractual obligations, outside the ordinary course of business except for those disclosed in the "Note 9, Borrowings and Lines of Credit" within Item 1 of this Form 10-Q. 45
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