Otis Worldwide (US:OTIS)2020-10-28 20:11PART I – FINANCIAL INFORMATION Item 1. Financial Statements 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 - The COVID-19 pandemic impacted financial results for the quarter and nine months ended September 30, 2020, and its future impact remains uncertain3839 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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)146147 - 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 company150152 - 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 2020160162 Results of Operations 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 costs177 - Restructuring costs for the nine months ended September 30, 2020, were $46 million, primarily for ongoing cost reduction actions, including workforce reductions179 - Interest expense increased significantly in 2020 due to new external debt of approximately $6.3 billion issued in connection with the separation from UTC18618781 Segment Review 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 actions201202203 - 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 concessions209212 Liquidity and Financial Condition 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 separation224225 - The company made a $750 million prepayment on its term loan on September 28, 202022480 - 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 management230 Item 3. Quantitative and Qualitative Disclosures About Market Risk 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, 2020245 - The company holds €420 million of euro-denominated commercial paper which serves as a net investment hedge against its investments in European businesses244 Item 4. Controls and Procedures 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 manner246 - 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 controls247 PART II – OTHER INFORMATION Item 1. Legal Proceedings 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 lawsuit253121122124 Item 1A. Risk Factors 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 condition256 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 period257 Item 6. Exhibits 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 certifications259