Otis Worldwide (OTIS) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Unaudited Financial Statements 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] - The spin-off from UTC was completed on April 3, 2020, with prior financial statements prepared on a "carve-out" basis[28][29] - The company issued approximately $6.3 billion in long-term debt to fund a distribution to UTC in connection with the separation[68][69][71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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][137] - 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] - Other expense increased by $59 million year-over-year, primarily due to a $55 million fixed asset impairment charge[158] - 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][190] Segment Review 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] - Service segment organic sales grew 3.3%, supported by growth in both maintenance and repair and modernization[179] Liquidity and Financial Condition 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][188][190] - Net cash from operating activities decreased by $138 million year-over-year, impacted by separation costs and working capital changes[196] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - There was no significant change in the company's exposure to market risk during the quarter ended March 31, 2020[208] Item 4. Controls and Procedures 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] - No material changes to internal control over financial reporting were identified during the first quarter of 2020[210] PART II – OTHER INFORMATION Item 1. Legal Proceedings 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][97][215] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 6. Exhibits 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][220]