Otis Worldwide Corporation (NYSE:OTIS) Q4 2020 Earnings Conference Call February 1, 2021 10:00 AM ET Company Participants Stacy Laszewski - Vice President of FP&A and Investor Relations Judy Marks - President and Chief Executive Officer Rahul Ghai - Executive Vice President and Chief Financial Officer Conference Call Participants Jeff Sprague - Vertical Research Nigel Coe - Wolfe Research Steve Tusa - JPMorgan Cai von Rumohr - Cowen Julian Mitchell - Barclays John Walsh - Crédit Suisse Carter Copeland - Mel ...

[PART I – FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Unaudited%20Financial%20Statements%3A) This section presents the unaudited condensed consolidated financial statements for the quarter and nine months ended September 30, 2020, compared with the same periods in 2019, including statements of operations, comprehensive income, balance sheets, changes in equity, and cash flows, along with detailed notes and the independent auditor's report Condensed Consolidated Statements of Operations (Q3 2020 vs Q3 2019) | (dollars in millions) | Quarter Ended Sep 30, 2020 | Quarter Ended Sep 30, 2019 | | :--- | :--- | :--- | | **Net Sales** | **$3,268** | **$3,313** | | Product sales | $1,423 | $1,450 | | Service sales | $1,845 | $1,863 | | **Operating Profit** | **$454** | **$482** | | **Net Income** | **$310** | **$361** | | Net Income Attributable to Common Shareholders | $266 | $317 | | **Diluted EPS** | **$0.61** | **$0.73** | Condensed Consolidated Statements of Operations (Nine Months 2020 vs 2019) | (dollars in millions) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | **Net Sales** | **$9,263** | **$9,765** | | Product sales | $3,840 | $4,221 | | Service sales | $5,423 | $5,544 | | **Operating Profit** | **$1,199** | **$1,378** | | **Net Income** | **$777** | **$1,013** | | Net Income Attributable to Common Shareholders | $655 | $898 | | **Diluted EPS** | **$1.51** | **$2.07** | Condensed Consolidated Balance Sheets (Sep 30, 2020 vs Dec 31, 2019) | (dollars in millions) | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Total Current Assets** | **$6,271** | **$5,658** | | **Total Assets** | **$10,473** | **$9,687** | | **Total Current Liabilities** | **$6,291** | **$5,374** | | Long-term debt | $5,512 | $5 | | **Total Liabilities** | **$13,856** | **$7,361** | | **Total (Deficit) Equity** | **($3,481)** | **$2,231** | Condensed Consolidated Statements of Cash Flows (Nine Months 2020 vs 2019) | (dollars in millions) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | **Net cash flows provided by operating activities** | **$1,171** | **$1,015** | | Net cash flows used in investing activities | ($289) | ($150) | | Net cash flows used in financing activities | ($589) | ($694) | | **Net increase in cash and cash equivalents** | **$293** | **$130** | - On April 3, 2020, Otis became an independent, publicly-traded company following its separation from United Technologies Corporation (UTC)[32](index=32&type=chunk) - The COVID-19 pandemic impacted financial results for the quarter and nine months ended September 30, 2020, and its future impact remains uncertain[38](index=38&type=chunk)[39](index=39&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes the company's financial condition and results of operations, covering business segments, the impacts of the UTC separation and COVID-19, detailed operating results, and discussions on liquidity, capital resources, and contractual obligations [Business Overview](index=38&type=section&id=BUSINESS%20OVERVIEW) This section outlines Otis's global business structure, comprising New Equipment and Service segments, and highlights the impacts of the UTC separation and the ongoing COVID-19 pandemic - Otis is the **world's largest elevator and escalator company**, operating through two segments: New Equipment (design, manufacture, sale, and installation) and Service (maintenance, repair, and modernization)[146](index=146&type=chunk)[147](index=147&type=chunk) - The company completed its **separation from UTC on April 3, 2020**, and now trades on the NYSE under the symbol "OTIS", leading to non-recurring separation-related costs and ongoing expenses as a standalone public company[150](index=150&type=chunk)[152](index=152&type=chunk) - The COVID-19 pandemic **negatively impacted operations** during the first nine months of 2020 due to factory and job site closures, customer liquidity constraints, and reduced demand, with anticipated negative impact for at least the remainder of 2020[160](index=160&type=chunk)[162](index=162&type=chunk) [Results of Operations](index=41&type=section&id=RESULTS%20OF%20OPERATIONS) This section details the company's operating results for Q3 and the nine months ended September 30, 2020, showing net sales decreases due to lower organic volume, increased SG&A from separation costs, and a higher effective tax rate Net Sales Change (Year-over-Year) | Period | Total % Change | Organic Volume | Foreign Currency | Acquisitions/Divestitures | | :--- | :--- | :--- | :--- | :--- | | **Q3 2020** | (1.4)% | (1.2)% | 0.2% | (0.2)% | | **9M 2020** | (5.1)% | (3.3)% | (1.4)% | (0.4)% | - Selling, general and administrative (SG&A) expenses **increased by $37 million in Q3 and $58 million in the first nine months of 2020**, driven by non-recurring separation-related costs and incremental standalone public company costs[177](index=177&type=chunk) - Restructuring costs for the nine months ended September 30, 2020, were **$46 million**, primarily for ongoing cost reduction actions, including workforce reductions[179](index=179&type=chunk) - **Interest expense increased significantly** in 2020 due to new external debt of **approximately $6.3 billion** issued in connection with the separation from UTC[186](index=186&type=chunk)[187](index=187&type=chunk)[81](index=81&type=chunk) [Segment Review](index=46&type=section&id=Segment%20Review) This section analyzes the New Equipment and Service segments, noting declines in New Equipment sales and profit due to COVID-19 and mix, while the Service segment showed resilient operating profit despite slightly lower sales, driven by productivity gains Segment Performance (Q3 2020 vs Q3 2019) | Segment (in millions) | Net Sales 2020 | Net Sales 2019 | Operating Profit 2020 | Operating Profit 2019 | Operating Margin 2020 | Operating Margin 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **New Equipment** | $1,423 | $1,450 | $95 | $115 | 6.7% | 7.9% | | **Service** | $1,845 | $1,863 | $409 | $407 | 22.2% | 21.8% | - **New Equipment Q3 organic sales declined 1.0%**, and **operating profit fell 17.4%** due to under-absorption, field inefficiencies, and unfavorable mix, which more than offset material productivity and cost actions[201](index=201&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk) - **Service Q3 organic sales decreased 1.4%**, but **operating profit grew 0.5%** as **productivity gains (8.8%)** offset the impact of lower volume and price concessions[209](index=209&type=chunk)[212](index=212&type=chunk) [Liquidity and Financial Condition](index=50&type=section&id=LIQUIDITY%20AND%20FINANCIAL%20CONDITION) This section details the company's financial position as of September 30, 2020, highlighting total debt of **$6.05 billion** and net debt of **$4.32 billion** from separation financing, alongside strong operating cash flow of **$1.17 billion**, indicating sufficient liquidity Financial Condition (as of Sep 30, 2020) | (dollars in millions) | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,733 | $1,446 | | Total debt | $6,050 | $39 | | **Net debt** | **$4,317** | **($1,407)** | - In Q1 2020, the company issued **$6.3 billion in debt** (notes and a term loan) to fund a cash distribution to UTC as part of the separation[224](index=224&type=chunk)[225](index=225&type=chunk) - The company made a **$750 million prepayment** on its term loan on September 28, 2020[224](index=224&type=chunk)[80](index=80&type=chunk) - **Cash from operating activities for the first nine months of 2020 was $1,171 million**, a **$156 million increase** from 2019, primarily due to improved working capital management[230](index=230&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=53&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section reports no significant changes in the company's market risk exposure during Q3 2020, including interest rate and foreign currency risks, noting the use of **€420 million** in euro-denominated commercial paper as a net investment hedge - There has been **no significant change** in the company's exposure to market risk during the quarter and nine months ended September 30, 2020[245](index=245&type=chunk) - The company holds **€420 million of euro-denominated commercial paper** which serves as a net investment hedge against its investments in European businesses[244](index=244&type=chunk) [Item 4. Controls and Procedures](index=53&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's **disclosure controls and procedures were effective** as of September 30, 2020, providing reasonable assurance that required information is recorded and reported in a timely manner[246](index=246&type=chunk) - There were **no changes in internal control over financial reporting** during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[247](index=247&type=chunk) [PART II – OTHER INFORMATION](index=56&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=56&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 17 for details on material legal proceedings, confirming no material developments since previous quarterly filings - For details on material legal proceedings, the report refers to **Note 17**, which covers German tax litigation, asbestos matters, and a putative class action lawsuit[253](index=253&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk)[124](index=124&type=chunk) [Item 1A. Risk Factors](index=56&type=section&id=Item%201A.%20Risk%20Factors) This section highlights no material changes to the company's risk factors, except for the ongoing and uncertain impact of the COVID-19 pandemic, which continues to pose risks to operations, supply chains, and customer demand - The **COVID-19 pandemic remains a significant risk factor**, with the potential for prolonged business restrictions, supply chain disruptions, and adverse effects on customer liquidity and demand, which could materially impact the company's business and financial condition[256](index=256&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=56&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities or use of proceeds from such sales during the reporting period - There were **no unregistered sales of equity securities** to report for the period[257](index=257&type=chunk) [Item 6. Exhibits](index=57&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including amendments to credit agreements, an executive severance plan, officer certifications, and XBRL-formatted financial statements - The exhibits filed with this report include amendments to the Revolving Credit and Term Loan Agreements, the Executive Leadership Group Severance Plan, and various officer certifications[259](index=259&type=chunk)

Table of Contents ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-39221 ____________________________________ OTIS WORLDWIDE CORPORATION ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Exact name of registrant as specified in its charter) ____________________________________ For the quarterly period ended June 30, 2020 OR UNITED STATES SECURITIES AND EXCHANGE COMM ...

[PART I – FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Item 1. Unaudited Financial Statements](index=4&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) The unaudited Q1 2020 financial statements reflect decreased sales and income due to COVID-19 and separation costs Condensed Combined Statements of Operations (Q1 2020 vs Q1 2019) | Indicator | Q1 2020 (in millions) | Q1 2019 (in millions) | Change | | :--- | :--- | :--- | :--- | | **Net Sales** | **$2,966** | **$3,101** | **-4.4%** | | Product Sales | $1,123 | $1,271 | -11.6% | | Service Sales | $1,843 | $1,830 | +0.7% | | **Operating Profit** | **$329** | **$415** | **-20.7%** | | **Net Income Attributable to Otis** | **$165** | **$273** | **-39.6%** | | **Diluted EPS** | **$0.38** | **$0.63** | **-39.7%** | Condensed Combined Balance Sheets (As of March 31, 2020) | Indicator | March 31, 2020 (in millions) | Dec 31, 2019 (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,207 | $1,446 | | Total Assets | $9,524 | $9,687 | | Long-term debt | $6,258 | $5 | | Total Liabilities | $13,713 | $7,361 | | Total (Deficit) Equity | $(4,284) | $2,231 | Condensed Combined Statements of Cash Flows (Q1 2020 vs Q1 2019) | Indicator | Q1 2020 (in millions) | Q1 2019 (in millions) | | :--- | :--- | :--- | | Net cash from operating activities | $159 | $297 | | Net cash used in investing activities | $(92) | $(18) | | Net cash used in financing activities | $(256) | $(312) | - The company's operations are classified into two segments: **New Equipment** and **Service**[27](index=27&type=chunk) - The spin-off from UTC was completed on April 3, 2020, with prior financial statements prepared on a **"carve-out" basis**[28](index=28&type=chunk)[29](index=29&type=chunk) - The company issued approximately **$6.3 billion in long-term debt** to fund a distribution to UTC in connection with the separation[68](index=68&type=chunk)[69](index=69&type=chunk)[71](index=71&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net sales declined 4.4% in Q1 2020 due to COVID-19 impacts, while debt increased significantly to fund the UTC spin-off Net Sales Change Drivers (Q1 2020 YoY) | Driver | Percentage Change | | :--- | :--- | | Organic volume | (2.1)% | | Foreign currency translation | (1.8)% | | Acquisitions and divestitures, net | (0.5)% | | **Total % change** | **(4.4)%** | - The **COVID-19 pandemic** impacted financial performance in Q1 2020 and is expected to have a continued negative impact[136](index=136&type=chunk)[137](index=137&type=chunk) - Selling, general and administrative (SG&A) expenses increased by $24 million, driven by **$32 million in separation costs** and **$22 million in standalone public company costs**[150](index=150&type=chunk) - Other expense increased by $59 million year-over-year, primarily due to a **$55 million fixed asset impairment charge**[158](index=158&type=chunk) - The capital structure changed significantly with the issuance of **$6.3 billion in debt**, resulting in a total debt to total capitalization ratio of 310%[184](index=184&type=chunk)[190](index=190&type=chunk) [Segment Review](index=38&type=section&id=Segment%20Review) The New Equipment segment's sales declined due to COVID-19, while the Service segment demonstrated resilient organic growth Segment Performance (Q1 2020 vs Q1 2019) | Segment | Net Sales (Q1 2020) | Net Sales (Q1 2019) | % Change | Operating Profit (Q1 2020) | Operating Profit (Q1 2019) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | New Equipment | $1,123M | $1,271M | -11.6% | $64M | $59M | +8.5% | | Service | $1,843M | $1,830M | +0.7% | $400M | $386M | +3.6% | - New Equipment organic sales **declined 9.8%**, with a double-digit decline in Asia due to COVID-19[174](index=174&type=chunk) - Service segment organic sales **grew 3.3%**, supported by growth in both maintenance and repair and modernization[179](index=179&type=chunk) [Liquidity and Financial Condition](index=42&type=section&id=Liquidity%20and%20Financial%20Condition) The company's financial condition was transformed by incurring $6.3 billion in debt to fund a distribution to UTC for the spin-off Key Financial Condition Metrics | Indicator (in millions) | March 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,207 | $1,446 | | Total debt | $6,325 | $39 | | Net debt | $5,118 | $(1,407) | - In Q1 2020, Otis issued **$5.3 billion in long-term notes** and drew down a **$1.0 billion term loan**, using the proceeds for a distribution to UTC[187](index=187&type=chunk)[188](index=188&type=chunk)[190](index=190&type=chunk) - Net cash from operating activities **decreased by $138 million** year-over-year, impacted by separation costs and working capital changes[196](index=196&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk exposure relates to interest rates on its variable-rate debt, with no significant changes in Q1 2020 - The company's long-term debt is primarily fixed-rate, but variable-rate debt creates **exposure to interest rate changes** like LIBOR[207](index=207&type=chunk) - There was **no significant change** in the company's exposure to market risk during the quarter ended March 31, 2020[208](index=208&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes identified - Based on an evaluation as of March 31, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were **effective**[209](index=209&type=chunk) - **No material changes** to internal control over financial reporting were identified during the first quarter of 2020[210](index=210&type=chunk) [PART II – OTHER INFORMATION](index=41&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) There were no material developments in legal proceedings since the disclosures in the company's Form 10 registration statement - For details on material legal proceedings, the report refers to Note 16, which discusses matters such as **German Tax Litigation** and **Asbestos claims**[96](index=96&type=chunk)[97](index=97&type=chunk)[215](index=215&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) The COVID-19 pandemic is highlighted as a significant ongoing risk factor with the potential to materially impact the business - The **COVID-19 pandemic** is identified as a key risk, with potential for further disruption to operations and financial condition[217](index=217&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds from such sales during the first quarter - There were **no unregistered sales of equity securities** in the period[218](index=218&type=chunk) [Item 6. Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists key exhibits filed with the Form 10-Q, including separation and financing agreements - Key exhibits filed include the **Separation and Distribution Agreement**, Tax Matters Agreement, and the Indenture for newly issued notes[219](index=219&type=chunk)[220](index=220&type=chunk)