Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report, filed as Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For information concerning market risk sensitive instruments, see discussion under the heading "Market Risk and Risk Management" in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report, and under the headings "Foreign Exchange Exposures" and "Derivatives and Hedging Activity" in "Note 2: Summary of Accounting Policies," as well as "Note 17: Financial Instruments" to the Consolidated Financial Statements in our 2020 Annual Report, filed as Exhibit 13 to this Form 10-K.
Item 8. Financial Statements and Supplementary Data
The 2020 and 2019 Consolidated Balance Sheets, and other consolidated financial statements for the years ended 2020, 2019 and 2018, together with the report thereon of PricewaterhouseCoopers LLP dated February 5, 2021 in our 2020 Annual Report are incorporated herein by reference. The 2020 and 2019 unaudited Selected Quarterly Financial Data appearing in our 2020 Annual Report is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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Item 9A. Controls and Procedures
As required by Rule 13a-15(e) 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 Executive 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 December 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 December 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.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the U.S. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Our management has concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2020. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears in our 2020 Annual Report.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 with respect to directors, the Audit Committee of the Board of Directors and audit committee financial experts is incorporated herein by reference to the section of our Proxy Statement for the 2021 Annual Meeting of Shareholders titled "Corporate governance" (under the subheadings "Proposal 1: Election of directors", "Our board nominees", and "Our leadership and board structure" (including under the subheading "Board committees")).
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Information about our Executive Officers
The following persons are executive officers of Otis Worldwide Corporation:
Name Position Other Business Experience Since 1/1/2016 Age as of 2/5/2021
All of the officers serve at the pleasure of the Board of Directors of Otis Worldwide Corporation.
* As previously disclosed, Ms. Havanec provided the Company with notice of her intent to leave the Company on February 5, 2021.
Information concerning Section 16(a) compliance is incorporated herein by reference to the section of our Proxy Statement for the 2021 Annual Meeting of Shareholders titled "Other important information" under the subheading "Delinquent section 16(a) reports." We have adopted a code of ethics, the Otis Absolutes, that applies to all our directors, officers, employees and representatives. This code is publicly available on our website at http://www.otis.com/How-We-Work/Ethics-And-Compliance/Pages/Default.aspx. Amendments to the code of ethics and any grant of a waiver from a provision of the code requiring disclosure under applicable SEC rules will be disclosed on our website. Our Corporate Governance Guidelines and
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the charters of our Board of Directors’ Audit Committee, Compensation Committee and Nominations and Governance Committee are available on our website at http://www.otis.com/Who-We-Are/Corporate-Governance/Pages/default.aspx. These materials may also be requested in print free of charge by writing to our Investor Relations Department at Otis Worldwide Corporation, One Carrier Place, Investor Relations, Farmington, CT 06032.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to the sections of our Proxy Statement for the 2021 Annual Meeting of Shareholders titled "Executive compensation," "Compensation of directors" and "Report of the compensation committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section of our Proxy Statement for the 2021 Annual Meeting of Shareholders titled "Other important information" under the subheading "Share ownership" (“Beneficial stock ownership of directors and executive officers" and certain beneficial owners”).
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 concerning Common Stock issuable under Otis’ equity compensation plans.
Equity compensation plans not approved by shareholders - - -
(1) Consists of the following issuable shares of Common Stock awarded under the Otis Worldwide Corporation 2020 Long-Term Incentive Plan ("LTIP"): (i) shares of Common Stock issuable upon the exercise of outstanding non-qualified stock options; (ii) shares of Common Stock issuable upon the exercise of outstanding Stock Appreciation Rights ("SARs"); (iii) shares of Common Stock issuable pursuant to outstanding restricted stock unit and performance share unit awards, assuming performance at the target level (up to an additional 9,391 shares of Common Stock could be issued if performance goals are achieved above target); and (iv) shares of Common Stock issuable upon the settlement of outstanding deferred stock units and restricted stock units under the Otis Worldwide Corporation Board of Directors Stock Unit Plan. Under the LTIP, each SAR is exercisable for a number of shares of Common Stock having a value equal to the increase in the market price of a share of such stock from the date the SAR was granted. For purposes of determining the total number of shares to be issued in respect of outstanding SARs, we have used the New York Stock Exchange ("NYSE") closing price for a share of Common Stock on December 31, 2020 of $67.55. The weighted-average exercise price shown in the column above takes into account only the shares identified in clauses (i) and (ii).
(2) Represents the maximum number of shares of Common Stock available to be awarded under the LTIP as of December 31, 2020.Performance share units and restricted stock units ("Full Share Awards") will result in a reduction in the number of shares of Common Stock available for delivery under the LTIP in an amount equal to twice the number of shares to which the award corresponds under the terms of the LTIP.Stock options and SARs do not constitute Full Share Awards and will result in a reduction in the number of shares of Common Stock available for delivery under the 2020 LTIP on a one-for-one basis.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is incorporated herein by reference to the sections of our Proxy Statement for the 2021 Annual Meeting of Shareholders titled "Corporate governance" under the subheading "Our board nominees" (including under the subheading "Director independence") and "Other important information" (under the subheading "Transactions with related persons").
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Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference to the section of our Proxy Statement for the 2021 Annual Meeting of Shareholders titled "Appoint an independent auditor for 2021," including the information provided in that section with regard to "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees."
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PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) Financial Statements, Financial Statement Schedules and Exhibits
1.Financial Statements (incorporated herein by reference to the 2020 Annual Report):
Page Number in Annual Report
Report of Independent Registered Public Accounting Firm 21
Consolidated Balance Sheets as of December 31, 2020 and 2019 25
Notes to Consolidated Financial Statements 28
Selected Quarterly Financial Data (Unaudited) 66
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
2.Financial Statement Schedule for the three years ended December 31, 2020:
Page Number in Form 10-K
SCHEDULE II — Valuation and Qualifying Accounts II
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
3.Exhibits:
The following list of exhibits includes exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings.
ExhibitNumber Exhibit Description
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ExhibitNumber Exhibit Description
4.4 Description of Securities*
31
Table of Contents
ExhibitNumber Exhibit Description
32
Table of Contents
ExhibitNumber Exhibit Description
21 Subsidiaries of the Registrant.*
23 Consent of PricewaterhouseCoopers LLP.*
32 Section 1350 Certifications.*
101.SCH XBRL Taxonomy Extension Schema Document.*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.*
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Notes to Exhibits List:
* Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three years ended December 31, 2020, (ii) Consolidated Statements of Comprehensive Income for the three years ended December 31, 2020, (iii) Consolidated Balance Sheets as of December 31, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the three years ended December 31, 2020, (v) Consolidated Statements of Changes in Equity for the three years ended December 31, 2020, (vi) Notes to Consolidated Financial Statements, and (vii) Financial Schedule of Valuation and Qualifying Accounts.
Item 16. Form 10-K Summary
None.
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OTIS WORLDWIDE CORPORATION(Registrant)
Dated: February 5, 2021 by: /s/ RAHUL GHAI
Rahul Ghai
Executive Vice President and Chief Financial Officer
Dated: February 5, 2021 by: /s/ MICHAEL P. RYAN
Michael P. Ryan
Vice President and Chief Accounting Officer
35
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Judith F. Marks
Rahul Ghai
/s/ MICHAEL P. RYAN Vice President and Chief Accounting Officer February 5, 2021
Michael P. Ryan
/s/ JEFFREY H. BLACK* Director
Jeffrey H. Black
/s/ KATHY HOPINKAH HANNAN* Director
Kathy Hopinkah Hannan
/s/ SHAILESH G. JEJURIKAR* Director
Shailesh G. Jejurikar
/s/ CHRISTOPHER J. KEARNEY* Director
Christopher J. Kearney
/s/ HAROLD W. MCGRAW III* Director
Harold W. McGraw III
/s/ MARGARET M.V. PRESTON* Director
Margaret M.V. Preston
/s/ SHELLEY STEWART, JR.* Director
Shelley Stewart, Jr.
/s/ JOHN H. WALKER* Director
John H. Walker
*By: /s/ NORA E. LAFRENIERE
Executive Vice President & Chief General Counsel, as Attorney-in-fact
36
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Board of Directors and Shareholders of Otis Worldwide Corporation
Our audits of the consolidated financial statements referred to in our report dated February 5, 2021 appearing in the 2020 Annual Report to Shareholders of Otis Worldwide Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 5, 2021
I
OTIS WORLDWIDE CORPORATION
SCHEDULE II - Valuation and Qualifying Accounts
Three years ended December 31, 2020
(Dollars in millions)
Allowance for Doubtful Accounts and Expected Credit Losses:
Provision charged to income 10
Doubtful accounts written off (6)
Provision charged to income 26
Doubtful accounts written off (19)
Other (8)
Impact of credit standard adoption 28
Current period provision for expected credit losses 40
Write-offs charged against the allowance for expected credit losses (20)
Future Income Tax Benefits - Valuation Allowance
Additions charged to income tax expense 15
Reductions credited to income tax expense (5)
Other adjustments (1)
Additions charged to income tax expense 28
Reductions credited to income tax expense —
Other adjustments (2)
Additions charged to income tax expense 63
Reductions credited to income tax expense (13)
Other adjustments, including Separation activity 137
II
Exhibit 13
Excerpt from Otis' 2020 Annual Report to Shareholders for the Year Ended December 31, 2020
Five-Year Summary
For The Year
Cash dividends per common share 0.60 — — — —
At December 31,
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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 we pursue a global strategy 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.
For additional discussion, refer to the "Business Overview" section in our Form 10-K.
Separation from United Technologies Corporation
On April 3, 2020, the Separation of each of Otis and Carrier Global Corporation ("Carrier") from United Technologies Corporation, subsequently renamed Raytheon Technologies Corporation ("UTC" or "RTX", as applicable), into separate independent publicly-traded companies was completed through the distribution of 100% of the outstanding common stock of each of Otis and Carrier to holders of UTC common stock as of the close of business on the record date of March 19, 2020. UTC distributed 433,079,455 shares of Otis' common stock, par value $0.01 per share ("Common Stock") in the Distribution, which was effective at 12:01 a.m. Eastern Time, on April 3, 2020. As a result of the Distribution, UTC shareholders of record received 0.5 shares of 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 New York Stock Exchange ("NYSE").
Prior to the Separation on April 3, 2020, our historical financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of UTC. For the period subsequent to April 3, 2020, our financial statements are presented on a consolidated basis as the Company became a standalone public company. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
As a result of the Separation during the year ended December 31, 2020 and our becoming an independent, publicly-traded company, we have incurred non-recurring Separation-related costs and ongoing costs consisting primarily of employee-related costs, costs to establish certain standalone functions and information technology systems, professional services fees, equity award conversions, tax-related items, transaction-related costs and other services. We believe our cash flows from operations will continue to be sufficient to fund any incremental corporate expenses.
2
We entered into a transition services agreement ("TSA") with our former parent UTC and Carrier on April 2, 2020, in connection with the Separation pursuant to which RTX provides us with certain services and we provide certain services to RTX for a limited time to help ensure an orderly transition following the Separation. 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. Prior to the Separation, costs for these services were allocated from UTC and included in the Company's historical operating expenses and cash flow. For additional discussion, see Note 5 "Related Parties" to the Consolidated Financial Statements.
In connection with the Separation, we entered into a tax matters agreement ("TMA") with our former parent UTC and Carrier on April 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 TMA, the Company generally is responsible for federal, state and foreign taxes imposed on a separate return basis on the Company (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 TMA provides special rules that allocate responsibility for tax liabilities arising from a failure of the Separation and certain related transactions to qualify for tax-free treatment based on the reasons for such failure. The TMA also imposes restrictions on each of Otis 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.
On December 22, 2017, the TCJA was enacted which significantly changed U.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 of December 31, 2017. Under the terms of the TMA, Otis is required to indemnify RTX for a percentage of the toll charge installment payments (and any adjustments to any prior toll charge installment payments) due after April 3, 2020. As a result, a portion of the future income tax obligations corresponding to the toll charge has been reclassified as a contractual indemnity obligation within Other long-term liabilities on the Consolidated Balance Sheet. For additional discussion, see Note 15 "Income Taxes" to the Consolidated Financial Statements.
In connection with the Separation, we entered into an Employee Matters Agreement ("EMA") and Intellectual Property Agreement with UTC and Carrier on April 2, 2020. These agreements are not expected to have a material impact on the financial results of Otis.
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 year ended December 31, 2020. COVID-19 could have a negative impact to our business, including net sales and overall financial performance in 2021, as a result of the following:
•Customer liquidity constraints and related credit reserves
•Temporary closure or reduced capacity of our factory operations and those of our suppliers
•Limited 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 new equipment, maintenance and repair, and modernization businesses
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, from the COVID-19 pandemic. We are focused on navigating these challenges presented by COVID-19 by continuing to preserve our liquidity and manage our cash flow by taking the necessary measures to meet our short-term liquidity needs. Our cost containment actions have included, and could include in the future, but are not limited to, reducing our discretionary spending, reducing payroll costs and restructuring.
See the Liquidity and Financial Condition section for further detail.
3
We have not experienced during the year-ended December 31, 2020 any material impairments to our goodwill, intangible asset and long-lived asset balances as a result of the COVID-19 pandemic and do not currently anticipate any as a result of the COVID-19 pandemic in the future.
Germany Fire
In the quarter ended June 30, 2020 there was a fire at the Company’s manufacturing facility in Germany. As a result of the fire, the Company initially recognized immaterial losses related to the write-down of related fixed assets and facilities and incurred immaterial impacts to operating income due to business interruption during the year ended December 31, 2020. The Company has submitted an insurance claim related to the fire for both property damage and business interruption insurance.
Based on the developments of the insurance claim, the Company has recorded a gain on an expected insurance recovery relating to property damage of approximately $17 million, that is recorded in Other (expense) income, net on the Consolidated Statement of Operations for the year ended December 31, 2020. The Company is continuing to work with insurers to determine the final amounts recoverable for both impacted assets and business interruption. We do not anticipate any additional material impact to our operations in the future from this event.
See Part I, Item 1A,"Risk Factors" in the Form 10-K for further discussion.
RESULTS OF OPERATIONS
Net Sales
Percentage change year-over-year (2.8) % 1.6 % 4.8 %
The factors contributing to the total percentage change year-over-year in total Net sales are as follows:
Organic volume (2.1) % 4.7 %
Foreign currency translation (0.4) % (3.1) %
Acquisitions and divestitures, net (0.2) % (0.1) %
Total % change (2.8) % 1.6 %
The Organic volume decrease of (2.1)% for 2020 was driven by decreases in organic sales of (4.0)% in the New Equipment segment and (0.7)% in the Service segment.
The Organic volume increase of 4.7% for 2019 was driven by increases in organic sales of 4.2% in the New Equipment segment and 5.1% in the Service segment.
See "Segment Review" below for a discussion of Net sales by segment.
4
Cost of Products and Services Sold
Percentage change year-over-year (3.4) % 1.1 % 6.6 %
The factors contributing to the percentage change year-over-year in total cost of products and services sold are as follows:
Organic volume (2.7) % 4.6 %
Foreign currency translation (0.5) % (3.3) %
Acquisitions and divestitures, net (0.2) % (0.1) %
Restructuring — % (0.1) %
Total % change (3.4) % 1.1 %
The organic volume decrease in total cost of products and services sold in 2020 was driven by the organic sales decrease noted above, productivity and cost containment actions.
The organic volume increase in cost of products and services sold in 2019 was primarily driven by the organic sales increase above.
Gross Margin
Gross margin increased 40 basis points in 2020 when compared to 2019, primarily driven by an increase in the Service margin rate and overall segment mix, partially offset by a decrease in the New Equipment margin rate.
Gross margin increased 30 basis points in 2019 when compared to 2018, primarily driven by an increase in the Service margin rate, partially offset by a decrease in the New Equipment margin rate.
See the Segment Review below for discussion of operating results by segment.
Research and Development
Percentage of Net sales 1.2 % 1.2 % 1.4 %
Research and development spending decreased approximately $11 million, or (6.7)%, in 2020 compared to 2019 primarily as a result of cost containment actions taken in the current year. Research and development expenses remained relatively consistent as a percentage of Net sales. We continue to fund our strategic investment projects and focus on our commitment to Internet of Things technology developing the next generation of connected elevators and escalators.
Research and development in 2019 reflects the benefit of organizational optimization and lower cost allocations from UTC in 2019 compared to 2018.
5
Selling, General and Administrative
Selling, general and administrative expenses increased approximately $114 million, or 6.3%, in 2020, with lower employment costs and lower discretionary spending, including cost containment actions taken in response to COVID-19, and the absence of corporate allocations from UTC, being more than offset by non-recurring Separation-related costs and incremental standalone public company costs. Selling, general and administrative expenses increased as a percentage of Net sales in 2020, primarily driven by the increase in non-recurring Separation-related costs, incremental standalone public company costs and lower Net sales.
Selling, general and administrative expenses increased approximately $75 million, or 4.3%, in 2019. Excluding the favorable impact of foreign exchange fluctuations (3%), the increase is primarily driven by costs in preparation of our Separation from UTC and higher employment and digital technology costs. See Note 5, "Related Parties" for further discussion on costs related to the Separation.
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 16, "Restructuring Costs" to the Consolidated Financial Statements.
Restructuring Costs
Restructuring costs $ 77 $ 54 $ 69
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, especially in light of the economic impact of COVID-19, and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions. Total 2020 restructuring costs include $71 million of costs related to 2020 actions and $6 million of costs related to 2019.
2020 Actions. During 2020, we recorded net pre-tax restructuring charges of $71 million relating to cost reduction actions initiated in 2020. We are targeting to complete in 2021 the majority of the remaining workforce cost reduction actions initiated in 2020. Approximately 97% 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 2020, we had cash outflows of approximately $29 million related to the 2020 actions. We expect to incur additional restructuring charges of $15 million to complete these actions. We expect recurring pre-tax savings in continuing operations to increase to approximately $57 million annually over the two-year period subsequent to initiating the actions.
2019 Actions. During 2020 and 2019, we recorded net pre-tax restructuring charges of $6 million and $45 million, respectively, for actions initiated in 2019. Approximately 100% 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 2020, we had cash outflows of approximately $15 million related to the 2019 actions. We expect to incur additional restructuring charges of $3 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period after initiating the actions to be approximately $45 million annually, of which approximately $35 million was realized during 2020, net of the current year charges.
In addition, we recorded net pre-tax restructuring costs totaling $0 and $9 million in 2020 and 2019, respectively, for restructuring actions initiated in 2018 and prior years. For additional discussion of restructuring, see Note 16, "Restructuring Costs" in the Consolidated Financial Statements.
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Other Income (Expense), Net
Other income (expense), net $ (64) $ (39) $ 25
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, gains on expected insurance recoveries and certain other infrequent operating income and expense items.
The year-over-year increase in Other income (expense), net in 2020 when compared to 2019 is driven by current year fixed asset impairments of approximately $(71) million and associated license costs of approximately $(14) million and non-recurring Separation-related expenses. These were partially offset by favorable mark-to-market adjustments on foreign currency derivatives of approximately $46 million when compared to the prior year, the absence of the loss on the sale of a business of approximately $19 million included in the 2019 results and a non-recurring gain of approximately $17 million related to an expected insurance recovery recognized for property damage as a result of the fire in our manufacturing facility in Germany in the current year.
The year-over-year change in Other income (expense), net in 2019 when compared to 2018 is primarily due to an increase in unfavorable mark-to-market adjustments on foreign currency derivatives, non-recurring charges in 2019 related to our Separation from UTC and lower gains on sales of certain fixed assets.
See Note 5, "Related Parties" to the Consolidated Financial Statements for further discussion on costs related to the Separation.
Interest Expense (Income), Net
Interest expense (income), net $ 122 $ (14) $ (14)
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 related party activity between Otis and UTC in the prior years.
The increase in Interest expense (income), net in 2020 compared to 2019 was primarily driven by interest expense of $124 million on our external debt for the year ended December 31, 2020 and debt issuance cost amortization of $5 million. These expenses were offset by interest income on short-term investments. The average interest rate on our external long-term debt for 2020is 2.3%.
Interest expense (income), net remained flat in 2019 in comparison to 2018.
For additional discussion of borrowings, see Note 10, "Borrowings and Lines of Credit" to the Consolidated Financial Statements.
Income Taxes
The 2020 effective tax rate is higher than the statutory U.S. rate primarily due to higher international tax rates as compared to the lower U.S. federal statutory rate and foreign earnings subject to U.S. tax under the provisions of the TCJA.
The 2020 effective tax rate compared to the 2019 effective tax rate reflects a tax benefit of $10 million related to our change in assertion of no longer intending to reinvest certain undistributed earnings made during the year as compared to the liability previously recorded by UTC, a decrease as a result of tax regulations related to the TCJA that were enacted during the
7
year, as well as a recognition of a Separation-related foreign tax loss. These were partially offset by incremental withholding taxes in 2020.
The 2019 effective tax rate is higher than the statutory U.S. rate primarily due to higher international tax rates as compared to the lower U.S. federal statutory rate, and the full phase-in of the TCJA.
The 2019 effective tax rate compared to the 2018 effective tax rate reflects a decrease in the cost of U.S. and foreign tax on international activities primarily attributable to the absence of the net tax charge of $143 million as a result of UTC’s change of assertion of no longer intending to reinvest certain undistributed earnings of its international subsidiaries, offset by the full phase-in of the TCJA.
The 2018 effective tax rate is higher than the statutory U.S. rate as it reflects a net tax charge of $143 million as a result of UTC’s change of assertion of no longer intending to reinvest certain undistributed earnings of its international subsidiaries.
For additional discussion of income taxes and the effective income tax rate, see Note 15, "Income Taxes" to the Consolidated Financial Statements.
Noncontrolling Interest in Subsidiaries' Earnings
Noncontrolling interest in subsidiaries' earnings $ 150 $ 151 $ 161
Noncontrolling interest in subsidiaries' earnings remained consistent in 2020 in comparison to 2019.
Net income attributable to noncontrolling interest decreased in 2019 when compared with 2018 primarily due to a decrease in the net income of certain subsidiaries with noncontrolling interest.
Ownership interest in the underlying entities has remained generally consistent year-over-year.
Net Income Attributable to Common Shareholders
(dollars in millions, except per share amounts) 2020 2019 2018
Net income attributable to common shareholders $ 906 $ 1,116 $ 1,049
Diluted earnings per share from operations $ 2.08 $ 2.58 $ 2.42
Net income attributable to common shareholders for the year ended December 31, 2020 includes restructuring charges, net of taxes, of $58 million ($77 million pre-tax), as well as charges relating to significant non-operational and/or non-recurring items, net of taxes, of approximately $132 million ($203 million pre-tax) which include non-recurring Separation-related costs, fixed asset impairments, non-recurring Separation-related tax benefits and the impact of non-recurring tax items. These significant non-operational and/or non-recurring items, along with incremental standalone public company costs were the primary contributors to lower Net income attributable to common shareholders for the year ended December 31, 2020 when compared to the same period in 2019. The effects of the restructuring and the non-operational and non-recurring items above resulted in an impact of $0.44 on diluted earnings per share for the year ended December 31, 2020.
Net income attributable to common shareholders for the year ended December 31, 2019 includes restructuring charges, net of tax benefit, of $39 million ($54 million pre-tax) as well as charges relating to significant non-operational and/or non-recurring items, net of taxes, of approximately $51 million ($69 million pre-tax), which primarily consist of employee-related costs, costs to establish certain standalone functions, information technology systems, professional services fees and other transaction-related costs for our transition to being a standalone public company, in addition to non-recurring losses on disposals of businesses.
Net income attributable to common shareholders for the year ended December 31, 2018 includes restructuring charges, net of tax benefit, of $53 million ($69 million pre-tax) as well as a net charge for certain non-operational and/or non-recurring items, primarily driven by a tax charge of $143 million that will become due when previously reinvested earnings of certain international subsidiaries are remitted.
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Segment Review
Net Sales Operating Profit Operating Profit Margin
General corporate expenses and other — — — (290) (182) (71) — — —
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 and general contractors 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.
Total Increase (Decrease)Year-Over-Year for:
Foreign currency translation (0.8) % (0.7) % (2.3) % (3.4) % (3.6) % (4.3) %
Acquisitions/Divestitures, net — % — % — % — % — % — %
Restructuring cost — % 0.1 % (2.8) % — % — % 1.5 %
Other (0.1) % — % (1.3) % 0.1 % — % 1.0 %
2020 Compared with 2019
The organic sales decrease of (4.0)% was primarily driven by organic sales declines in all regions primarily due to impacts of the COVID-19 pandemic.
New Equipment operational profit decreased (12.7)%, as strong material productivity 15.8% and cost containment actions, were more than offset by the impact of lower volume (8.9)% and unfavorable rate drivers (25.1)% due to under-absorption, field inefficiencies, price and mix and higher bad debt expense. New Equipment operating profit was also impacted by foreign currency headwinds, higher restructuring costs and incremental public company standalone costs.
2019 Compared with 2018
The organic sales increase of 4.2% primarily reflects growth in Asia.
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New Equipment operational profit increased 2.6% driven by higher volume 6.8% and lower research and development expenses 3.1%, partially offset by higher selling, general and administrative expenses (7.1)%.
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.
Total Increase (Decrease)Year-Over-Year for:
Foreign currency translation (0.1) % (0.1) % 0.2 % (3.0) % (3.0) % (3.4) %
Acquisitions/Divestitures, net (0.3) % (0.6) % (0.1) % — % (0.2) % (0.1) %
Restructuring cost — % (0.1) % (0.7) % — % — % 0.6 %
2020 Compared with 2019
Service sales declined (1.1)% with an organic sales decline of (0.7)% and the remaining decrease due to foreign currency headwinds and the net impact from acquisitions and divestitures. The organic sales decrease (0.7)% primarily consists of organic sales decrease in maintenance and repair of (0.9)%, with organic sales for modernization remaining flat.
Maintenance and repair net sales decreased (1.2)% year over year and was comprised of a (0.9)% organic sales decrease, foreign currency headwinds of (0.1)% and decreases related to net acquisitions and divestitures of (0.2)%.
Modernization net sales decreased (0.9)% year over year and was comprised of a 0.1% organic sales increase, foreign currency tailwinds of 0.1%, more than offset by decreases related to net acquisitions and divestitures (1.1)%.
Service operational profit increased 0.9% with the benefit of favorable productivity 4.2%, pricing and mix 2.3%, and cost containment actions, more than offsetting the combined impact of price concessions and lower volume (3.4)% and higher bad debt expense. Service operating profit was also favorably impacted by foreign currency, offset by higher restructuring costs and incremental public company standalone costs.
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2019 Compared with 2018
The organic sales increase of 5.1% primarily consists of organic increases in maintenance and repair 4.9% and modernization 6.2%.
Maintenance and repair net sales increased 1.7% year over year and was comprised of a 4.9% organic sales increase, offset by foreign currency headwinds of (3.2)%.
Modernization net sales increased 3.6% year over year and was comprised of a 6.2% organic sales increase, offset by foreign currency headwinds of (2.2)% and decreases related to acquisitions and divestitures, net of (0.4)%.
Service operational profit increased 8.3%, driven by higher volume 7.8% and favorable price and mix 6.0%, partially offset by higher selling, general and administrative expenses (4.1)%.
General Corporate Expenses and Other
General corporate expenses and other (290) (182) (71)
General corporate expenses and other increased approximately $108 million in 2020 compared to the same period in 2019, primarily driven by current year fixed asset impairments of $71 million and associated license costs of approximately $14 million, non-recurring Separation-related costs of $119 million in the current year and incremental standalone public company costs. These were partially offset by favorable mark-to-market adjustments on foreign currency derivatives of $46 million when compared to the prior period, the absence of losses on the sale of a business of $19 million that occurred during 2019 and a non-recurring gain of approximately $17 million related to an expected insurance recovery for property damage as a result of the fire in our manufacturing facility in Germany recognized in the current year.
General corporate expenses and other increased approximately $111 million in 2019 compared to the same period in 2018, primarily driven by non-recurring Separation costs and the changes in Other (expense) income, net previously discussed above.
LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents $ 1,782 $ 1,446
Net debt (total debt less cash and cash equivalents) 4,181 (1,407)
Total capitalization (total debt plus total equity) 2,679 2,270
Total debt to total capitalization 223 % 2 %
Net debt to net capitalization 466 % (171) %
At December 31, 2020, we had cash and cash equivalents of approximately $1.8 billion, of which approximately 88% 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 December 31, 2020 and 2019, the amount of such restricted cash was approximately $19 million and $13 million, respectively.
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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 December 31, 2020 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 in 2020:
(dollars in millions)
Issuance Date Description of Debt Aggregate Principal Balance
The following is a summary of the debt repayments in 2020:
(dollars in millions)
Payment Date Description of Debt Total Principal Payments
In 2020 we repaid the $1.0 billion term loan in full, using cash from operations and proceeds from the issuance of Euro denominated and US Dollar denominated commercial paper.
The net proceeds from the above February and March debt issuances totaling $6.3 billion were used to distribute cash to UTC as part of the Separation in 2020.
For additional discussion of borrowings, see Note 10, "Borrowings and Lines of Credit" to the 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 the capital markets.
On April 27, 2020, our Board of Directors authorized a share repurchase program for up to $1.0 billion of Common Stock. 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. We expect to commence share repurchases under the program in 2021.
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Cash Flow - Operating Activities
Net cash flows provided by operating activities $ 1,480 $ 1,469 $ 1,550
2020 Compared with 2019
Cash generated from operating activities in 2020 was $11 million higher than 2019, primarily due to increased cash inflows related to current assets and current liabilities activity of $109 million, as described below. There were also increased Other operating activities of $106 million compared to the same period in 2019, primarily due to increased long-term accruals. These were partially offset by lower net income of $211 million, which includes the impact of interest expense on debt, incremental standalone public company costs and non-recurring Separation-related costs in 2020.
2020 Changes in Working Capital
The 2020 cash inflows related to current assets and current liabilities operating activity were $77 million. These cash inflows were primarily driven by:
•Contract assets, current and Contract liabilities, current, net change of $282 million, driven by the timing of billings on contracts compared to the progression on current contracts; and
•Accounts payable, which increased by $20 million primarily due to the timing of payments to suppliers.
The cash inflows were partially offset by cash outflows related to:
•Inventories, net, which increased $76 million, due to the impact of higher production inventory levels related to the timing of deliveries to construction sites; and
•Accounts receivable, net, which increased $163 million due to slower collections and increased customer financing activity.
Additionally, Other current assets decreased by $28 million due to the receipt of indemnification pursuant to the TMA in order to pay foreign tax obligations, partially offset by tax prepayments in certain tax jurisdictions, while Accrued liabilities decreased $14 million largely due to the payment of foreign tax obligations pursuant to the TMA described above and income tax liabilities in certain tax jurisdictions, partially offset by accruals for interest in excess of interest payments. The receipt and payment of indemnification assets and foreign tax obligations resulted in no net cash flow for 2020. See Note 5, "Related Parties" to the Consolidated Financial Statements for further discussion on transactions with our former parent UTC.
2019 Compared with 2018
Cash generated from operating activities in 2019 was $81 million lower than 2018, primarily due to higher income taxes settled with UTC. Cash outflows for working capital increased by $24 million over the prior period to support higher organic sales.
2019 Changes in Working Capital
The 2019 cash outflows related to current assets and current liabilities operating activity were $32 million. These cash outflows were primarily driven by:
•Accounts receivable, net, which increased $191 million due to increased sales volume and timing of receipts of payments;
The cash outflows were partially offset by cash inflows related to:
•Net change in Contract assets, current and Contract liabilities, current of $97 million due to the timing of billings on contracts compared to the progression on current contracts; and
•Inventories, net, which decreased $60 million due to lower production inventory.
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Cash Flow - Investing Activities
Net cash flows used in investing activities $ (353) $ (203) $ (201)
Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, proceeds received on the sale of fixed assets, and settlement of derivative contracts.
2020 compared to 2019
Investing Activities:
Capital expenditures $ (183) $ (145) $ (38)
Investments in businesses, net of cash acquired (53) (47) (6)
Investments in equity securities (51) — (51)
Receipts (payments) on settlements of derivative contracts (69) (5) (64)
Other investing activities, net 3 (6) 9
Net cash flows used in investing activities $ (353) $ (203) $ (150)
Cash flows used in investing activities in 2020 compared to 2019 increased $150 million, including a $64 million increase in payments on settlements of derivative contracts, a $51 million investment in the current year related to equity securities, a $38 million increase in capital expenditures, and a $6 million increase in investments in businesses. Increases in our capital expenditures reflect investments in assets to support the Separation, as well as investments in software for internal use to support our digital and strategic initiatives.
As discussed in Note 17, "Financial Instruments" to the 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 outflow of $69 million in 2020, which includes $21 million of payments associated with the hedges of foreign-denominated TMA indemnification assets.
2019 compared to 2018
Cash flows used in investing activities in 2019 compared to 2018 remained relatively flat, primarily due to a $27 million decrease in capital expenditures, offset by a $15 million decrease in proceeds received on the sale of certain fixed assets and a $15 million increase in short-term investing activity.
Cash Flow - Financing Activities
Net cash flows used in financing activities $ (844) $ (1,133) $ (1,497)
Financing activities primarily include issuance of long-term debt, increases (decreases) in short-term borrowings, dividends paid to common shareholders, dividends paid to noncontrolling interest and transfers to and from UTC, consisting of, among other things, cash transfers, distributions, cash investments and changes in receivables and payables between Otis and UTC. See Note 5, "Related Parties" to the Consolidated Financial Statements for further discussion on transactions with UTC.
2020 compared to 2019
Net cash used in financing activities decreased $289 million in 2020 compared to 2019, primarily due to the issuance of long-term notes of $5.3 billion, the draw of $1.0 billion from the term loan, and an increase in short-term borrowings of
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$641 million primarily from the issuance of commercial paper in 2020. These were partially offset by a $5.4 billion increase in net transfers to UTC related to the Separation, the full repayment of the $1.0 billion term loan, a $260 million increase in dividends paid on Common Stock, and $43 million in payments of long-term debt issuance costs in 2020. See Note 10, "Borrowings and Lines of Credit" to the Consolidated Financial Statements for further discussion on borrowings.
2019 compared to 2018
Net cash used in financing activities decreased $364 million in 2019 compared to 2018 primarily due to a decrease in Net transfers to UTC.
CRITICAL ACCOUNTING ESTIMATES
Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements describes the significant accounting policies used in preparation of the Consolidated Financial Statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management’s estimates.
Revenue Recognition from Contracts with Customers
Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09 and its related amendments (referred to as "ASC 606”) and elected the modified retrospective approach. The impact of ASC 606 did not significantly change the revenue recognition model for us nor our policies and procedures. For new equipment and modernization contracts, equipment and installation are typically procured in a single contract providing the customer with a complete installed elevator or escalator unit. The combination of equipment and installation promises are typically a single performance obligation. For these performance obligations, revenue is typically recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress. Contract costs are usually incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. Contract costs included in the calculation are comprised of labor, materials, subcontractors’ costs or other direct costs and indirect costs, which include indirect labor costs.
The long-term nature of the contracts, the complexity of the products and the scale of the projects can affect our ability to estimate costs precisely. We review cost estimates on significant new equipment and modernization contracts on a quarterly basis and, for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method and we review changes in contract estimates for their impact on net sales or operating profit in the Consolidated Financial Statements. Modifications are recognized as a cumulative catch-up or treated as a separate accounting contract if the modification adds distinct goods or services and the modification is priced at its stand-alone selling price.
See Note 2, "Summary of Significant Accounting Policies" and Note 4, "Revenue Recognition" to the Consolidated Financial Statements for further discussion.
Income Taxes
The future tax benefit arising from deductible temporary differences and tax carryforwards was $642 million at December 31, 2020 and $619 million at December 31, 2019. Management estimates that our earnings during the periods when the temporary differences become deductible will be generally sufficient to realize the related future income tax benefits, which may be realized over an extended period of time. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.
In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are
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enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. See Notes 3, "Earnings Per Share" and 14, "Accumulated Other Comprehensive Income (Loss)" to the Consolidated Financial Statements for further discussion. Additionally, see Note 21, "Contingent Liabilities" to the Consolidated Financial Statements for discussion of administrative review proceedings with the German Tax Office.
Goodwill
We have generated goodwill as a result of our acquisitions. At the time of acquisition, we account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
We review our goodwill for impairment on an annual basis at July 1 or more frequently if events or a change in circumstances indicate that the carrying amount may not be recoverable. We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is one level below the business segment level. We have determined there to be three reporting units within each business segment.
In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, we initially perform a qualitative assessment (commonly known as “step zero”) to determine whether further impairment testing is necessary before performing the two-step test. The qualitative assessment requires judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required. If we determine, based on this assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative goodwill impairment test by comparing the reporting unit’s fair value with its carrying value. An impairment loss is recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment loss is recognized if the fair value of the reporting exceeds its carrying value.
We completed the annual goodwill impairment test for all of our reporting units as of July 1, 2020 and determined that no adjustment to goodwill was necessary as the fair value of each reporting unit was significantly in excess of the carrying value of each reporting unit.
Contingent Liabilities
Otis is party to litigation related to a number of matters as described in Note 21, "Contingent Liabilities" to the Consolidated Financial Statements. In particular, they may include risks associated with contractual, regulatory and other matters, which may arise in the ordinary course of business. The outcome of these matters may have a material effect on the financial position, results of operations or cash flows. Management regularly analyzes current information about these matters and accrues for contingent losses that are probable and reasonably estimable. To assess the exposure to potential liability, we consult with relevant internal and external counsel. In making the decision regarding the need for loss accruals, management considers the degree of probability of an unfavorable outcome and the ability to make a sufficiently reliable estimate of the amount of loss. See Part I, Item 1A, "Risk Factors" in the Form 10-K for further discussion.
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Employee Benefit Plans
We sponsor domestic and international defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels and mortality rates. Assumptions are determined based on company data and appropriate market indicators, and are evaluated each year at December 31. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the Consolidated Financial Statements.
In the following table, we show the sensitivity of our pension and other postretirement benefit plan liabilities and net periodic cost to a 25 basis point change in the discount rates for benefit obligations, as of December 31, 2020:
Pension plans
Projected benefit obligation $ (33) $ 34
Net periodic pension (benefit) cost (1) 2
The impact on the accumulated postretirement benefit obligation and on the net periodic postretirement (benefit) cost is less than $1 million.
Pension expense is also sensitive to changes in the expected long-term rate of asset return. An increase or decrease of 25 basis points in the expected long-term rate of asset return would have decreased or increased 2020 pension expense by approximately $2 million.
The weighted-average discount rates used to measure pension liabilities and costs utilize each plan’s specific cash flows and are then compared to high-quality bond indices for reasonableness. Global market interest rates decreased in 2020 as compared with 2019, and, as a result, the weighted-average discount rate used to measure pension liabilities was 1.05% in 2020 and 1.50% in 2019.
See Note 13, "Employee Benefit Plans" to the Consolidated Financial Statements for further discussion.
Off-Balance Sheet Arrangements and Contractual Obligations
We extend a variety of financial guarantees to third parties in support of our business. We also have obligations arising from environmental, health and safety, tax and employment matters. Circumstances that could cause the contingent obligations and liabilities arising from these arrangements to come to fruition include changes in the underlying transaction, non-performance under a contract or deterioration in the financial condition of the guaranteed party.
Below is a summary of our contractual obligations and commitments as of December 31, 2020:
Payments Due by Period
Purchase obligations include amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders. Where it is not practically feasible to determine the legally enforceable portion of our obligation under certain of our long-term purchase agreements, we include additional expected purchase obligations beyond what may be legally enforceable. In connection with the Separation and transition to a standalone public company, we entered into contractual purchase commitments with suppliers, service vendors, and various transition services agreements to support our information technology that are either necessary to operate as a standalone business or are resulting from implementing
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strategic initiatives.
Other long-term liabilities primarily include amounts on our December 31, 2020 Consolidated Balance Sheet representing obligations under product service and warranty policies, estimated remediation costs, expected contributions under employee benefit programs and $239 million of payables to RTX for reimbursement of tax payments RTX is responsible to pay after the Separation pursuant to the TMA. The timing of expected cash flows associated with these obligations is based upon management's estimates over the terms of these agreements and is largely based upon historical experience.
The above table excludes unrecognized tax benefits of $397 million, the timing of which is uncertain to become payable. See Note 15, "Income Taxes" to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.
Market Risk and Risk Management
We are exposed to fluctuations in foreign currency exchange rates and commodity prices. To manage certain of those exposures, we use derivative instruments, including forward contracts. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools, involve relatively little complexity and are not used for trading or speculative purposes. We diversify the counterparties used and monitor the concentration of risk to limit our counterparty exposure.
We have evaluated our exposure to changes in foreign currency exchange rates and interest rates in our market risk sensitive instruments, which are primarily cash, debt and derivative instruments, using a value at risk analysis. Based on a 95% confidence level and one-day holding period, at December 31, 2020, the potential loss in fair value on our market risk sensitive instruments was not material in relation to our financial position, results of operations or cash flows. Our calculated value at risk exposure represents an estimate of reasonably possible net losses based on volatilities and correlations, and is not necessarily indicative of actual results. Additionally, any losses or gains on derivative instruments would be mostly offset by corresponding gains or losses in the remeasurement of the underlying transactions being hedged.
Refer to Note 2, "Summary of Significant Accounting Policies", Note 10, "Borrowings and Lines of Credit" and Note 17, "Financial Instruments" to the Consolidated Financial Statements for additional discussion of foreign currency exchange, interest rates and financial instruments, including the aggregate notional amount of our outstanding foreign currency hedges.
Foreign Currency Exposures
The value of certain foreign currencies as compared to the U.S. Dollar may impact Otis’ financial results. We have a high volume of foreign currency exposures that result from our international sales, purchases, investments and other international transactions. International sales were approximately $9.3 billion, $9.5 billion and $9.5 billion in 2020, 2019 and 2018, respectively. We manage foreign currency exposures that are associated with committed foreign currency purchases and sales as well as foreign currency denominated assets and liabilities that are created in the ordinary course of business. More than insignificant exposures, that cannot be naturally offset, are generally hedged with foreign currency derivatives.
For our non-U.S. based entities, a substantial portion of revenues are generated and costs are incurred in local currencies. We transact business in various foreign currencies. which exposes our cash flows and earnings to changes in foreign currency exchange rates. We periodically enter into sales contracts denominated in currencies other than the functional currency of the parties to the transaction, which can create foreign exchange exposure. While the objective of the hedging program is to minimize the foreign currency exchange impact on operating results, there are typically variances between the hedging gains or losses and the translational impact due to the length of hedging contracts, changes in the sales profile, volatility in the exchange rates and other such operational considerations. Otis does not enter into hedging contracts for speculative purposes.
As discussed in Note 17, "Financial Instruments" to the Consolidated Financial Statements as of December 31, 2020, we have €420 million of euro-denominated commercial paper, which qualifies as a net investment hedge against our investments in European businesses. As of December 31, 2020, the net investment hedge is deemed to be effective.
Interest Rate Risk
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 would be designated as fair value hedges and the gains and losses on the swaps would be reported in interest expense, reflecting that portion of interest expense at a variable rate.
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Cautionary Note Concerning Factors That May Affect Future Results
This 2020 Annual Report to Shareholders (2020 Annual Report) 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, 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 ("Common Stock"), which, if commenced, 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 or containment actions, restructuring costs and related 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., including the new U.S. Administration, and other countries in which Otis and its businesses operate, including the United Kingdom’s recent 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, including changes as a result of the new U.S. Administration;
•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 and the timing thereof;
•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;
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•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, resources, systems, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties.
In addition, this 2020 Annual Report 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 Consolidated Financial Statements" under the heading "Note 1: Description of Business" and "Note 22: Segment Financial Data" and the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Business Overview," "Results of Operations," "Liquidity and Financial Condition," and "Critical Accounting Estimates." Our Annual Report on Form 10-K for 2020 also includes important information as to these factors in "Item 1. Business" under the headings "General," "Description of Business by Segment" and "Other Matters Relating to Our Business as a Whole," and in "Item 1A. Risk Factors". 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.
Management's Report on Internal Control over Financial Reporting
The management of Otis is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of Otis' internal control over financial reporting as of December 31, 2020. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Management concluded that based on its assessment, Otis' internal control over financial reporting was effective as of December 31, 2020. The effectiveness of Otis' internal control over financial reporting, as of December 31, 2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
OTIS WORLDWIDE CORPORATION(Registrant)
by: /s/ JUDITH F. MARKS
Judith F. Marks
President and Chief Executive Officer
by: /s/ RAHUL GHAI
Rahul Ghai
Executive Vice President and Chief Financial Officer
by: /s/ MICHAEL P. RYAN
Michael P. Ryan
Vice President and Chief Accounting Officer
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Otis Worldwide Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Otis Worldwide Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Estimated Costs at Completion for New Equipment Contracts
As described in Notes 2 and 22, to the consolidated financial statements, the Company recognized $5.4 billion of revenue from new equipment contracts for the year ended December 31, 2020. For new equipment contracts, equipment and installation are typically procured in a single contract providing the customer with a complete installed elevator or escalator unit. The combination of equipment and installation promises are typically a single performance obligation. For these performance obligations, revenue is typically recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress. As disclosed by management, contract costs are usually incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. The long-term nature of the contracts, the complexity of the products and the scale of the projects can affect management’s ability to estimate costs precisely. Management reviews cost estimates on significant new equipment contracts on a quarterly basis and, for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. Management records changes in contract estimates using the cumulative catch-up method and reviews changes in contract estimates for their impact on net sales or operating profit in the consolidated financial statements. Contract costs included in the calculation are comprised of labor, materials, subcontractors’ costs or other direct costs and indirect costs, which include indirect labor costs.
The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs at completion for new equipment contracts is a critical audit matter are the significant judgment by management to determine the estimated costs at contract completion, which in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the estimated expected labor and indirect labor costs used in the development of estimated costs at contract completion.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of the estimated costs at contract completion and development of the significant assumptions related to the estimated expected labor and indirect labor costs. These procedures also included, among others, evaluating and testing management’s process for developing and modifying estimated costs at contract completion for a sample of contracts, which included evaluating the reasonableness of significant assumptions related to the estimated expected labor and indirect labor costs considered by management specific to each contract. Evaluating the reasonableness of the estimated expected labor and indirect labor costs involved assessing management’s ability to reasonably estimate costs at completion by (i) testing costs incurred to date and obtaining a sample of executed contracts and related change orders, (ii) performing a comparison of the originally estimated and actual costs incurred on similar completed equipment contracts, and (iii) evaluating the timely identification of circumstances that may warrant a modification to estimated total cost to complete.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 5, 2021
We have served as the Company’s auditor since 2019.
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OTIS WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share amounts) 2020 2019 2018
Net sales:
Costs and expenses:
Other income (expense), net (64) (39) 25
Non-service pension cost (benefit) 6 (33) (44)
Interest expense (income), net 122 (14) (14)
Less: Noncontrolling interest in subsidiaries' earnings 150 151 161
Net income attributable to common shareholders $ 906 $ 1,116 $ 1,049
Earnings per share (Note 3):
Weighted average number of shares outstanding
See accompanying Notes to Consolidated Financial Statements
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OTIS WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 8 (26) (126)
Pension and postretirement benefit plan adjustments:
Net actuarial gain (loss) (43) (28) (37)
Prior service credit — — 1
Amortization of actuarial loss and prior service credit 15 9 11
Tax benefit (expense) 11 9 4
Pension and postretirement benefit plan adjustments, net of tax (36) (32) (16)
Change in unrealized cash flow hedging:
Unrealized cash flow hedging gain (loss) 10 (3) —
Adjustment for net (gain) loss realized and included in net income (3) — —
Change in unrealized cash flow hedging, net of tax 7 (3) —
Other comprehensive income (loss), net of tax (21) (61) (142)
Comprehensive income attributable to common shareholders $ 849 $ 1,066 $ 928
See accompanying Notes to Consolidated Financial Statements
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OTIS WORLDWIDE CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value) 2020 2019
Assets
Cash and cash equivalents $ 1,782 $ 1,446
Future income tax benefits 334 373
Operating lease right-of-use assets 542 535
Liabilities and (Deficit) Equity
Short-term borrowings $ 701 $ 34
Future pension and postretirement benefit obligations 654 590
Operating lease liabilities 367 386
Future income tax obligations 321 695
Other long-term liabilities 634 311
Commitments and contingent liabilities (Note 21)
Redeemable noncontrolling interest 83 95
Shareholders' (Deficit) Equity:
Accumulated deficit (3,076) —
UTC Net Investment — 2,458
Accumulated other comprehensive income (loss) (815) (758)
Total Shareholders' (Deficit) Equity (3,832) 1,700
Noncontrolling interest 548 531
Total Liabilities and (Deficit) Equity $ 10,710 $ 9,687
See accompanying Notes to Consolidated Financial Statements
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OTIS WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in millions, except per share amounts) 2020 2019 2018
Common Stock and Additional Paid-In Capital
Balance at January 1 — — —
Issuance of common stock (a) 4 — —
Stock-based compensation 52 — —
Common Stock issued under employee plans 3 — —
Balance at December 31 59 — —
Accumulated Deficit
Balance at January 1 — — —
Reclassification of UTC Net Investment (Deficit) (a) (3,556) — —
Net income 741 — —
Cash dividends declared ($0.60, $0.00 and $0.00 per common share) (260) — —
Acquisitions, disposals and other changes in noncontrolling interest 4 — —
Other (5) — —
Balance at December 31 (3,076) — —
UTC Net Investment (Deficit)
Acquisitions, disposals and other changes in noncontrolling interest — — (1)
Adoption of credit loss standard, net of tax (Note 6) (25) — —
Adoption of revenue standard, net of tax (Note 2) — — (49)
Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss), net of tax (57) (50) (121)
Noncontrolling Interest
Other comprehensive income (loss), net of tax 38 (8) (13)
Dividends attributable to noncontrolling interest (147) (163) (173)
Acquisitions, disposals and other changes in noncontrolling interest (23) 7 (1)
Redeemable noncontrolling interest in subsidiaries earnings (1) 7 (4)
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest in subsidiaries' earnings 1 (7) 4
Other comprehensive income (loss), net of tax (2) (3) (8)
Changes in redeemable noncontrolling interest redemption value 2 (4) (7)
(a)Upon Separation from UTC
See accompanying Notes to Consolidated Financial Statements
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OTIS WORLDWIDE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Deferred income tax benefit (51) (8) 127
Stock compensation cost 63 37 38
Loss on fixed asset impairment 71 — —
Loss on disposal of business — 26 —
Change in:
Contract assets and liabilities, current 282 97 9
Other current assets 28 30 (11)
Accrued liabilities (14) (34) 42
Pension contributions (64) (32) (34)
Other operating activities, net 137 31 27
Net cash flows provided by operating activities 1,480 1,469 1,550
Investing Activities:
Investments in businesses, net of cash acquired (Note 9) (53) (47) (50)
Investments in equity securities (51) — —
Receipts (payments) on settlements of derivative contracts (69) (5) 3
Other investing activities, net 3 (6) 18
Net cash flows used in investing activities (353) (203) (201)