Otis Worldwide (OTIS) - 2020 Q4 - Annual Report

PART I Business Otis is the world's leading elevator and escalator company, operating globally with New Equipment and Service segments, becoming independent in April 2020 - Otis is the world's leading elevator and escalator company, serving customers in over 200 countries with a direct presence in approximately 80 countries[19] - The company became an independent, publicly-traded company on April 3, 2020, following its separation from United Technologies Corporation (UTC)[19] 2020 Financial and Operational Highlights | Metric | Value | | :--- | :--- | | Net Sales | $12.8 billion | | Operating Profit | $1.6 billion | | International Sales % of Net Sales | 73% | | New Equipment Segment % of Net Sales | 42% | | Service Segment % of Net Sales | 58% | | New Equipment Segment % of Operating Profit | 16% | | Service Segment % of Operating Profit | 84% | - The company employs approximately 69,000 employees globally, with 41% in Asia, 37% in EMEA, and 22% in the Americas[59][60] New Equipment Segment This segment designs, manufactures, and installs elevators and escalators, generating $5.4 billion in sales in 2020, with China as a critical market New Equipment Segment Performance (2020) | Metric | Value | | :--- | :--- | | Sales | $5.4 billion | | Operating Profit | $318 million | - In 2020, New Equipment unit sales in China accounted for over half of the company's global unit sales[25] - Key product offerings include the digitally native Gen360 elevator and the Gen2 system, which has sold over one million units since 2000[27][28] Service Segment This segment provides maintenance and modernization services for over 2 million units globally, generating $7.4 billion in sales in 2020, with a focus on IoT solutions Service Segment Performance (2020) | Metric | Value | | :--- | :--- | | Net Sales | $7.4 billion | | Operating Profit | $1.6 billion | - The company maintains a service portfolio of over 2 million units globally, including Otis and third-party equipment[34] - By the end of 2020, approximately 540,000 units were connected globally, including nearly 100,000 Otis ONE units[41] Research and Development & Intellectual Property In 2020, the company invested $199 million in R&D and digital initiatives, holding approximately 3,000 issued patents globally 2020 Innovation Investment | Category | Amount (USD) | % of Net Sales | | :--- | :--- | :--- | | R&D Expense | $152 million | 1.2% | | Digital & Strategic Initiatives | $47 million | N/A | | Total | $199 million | 1.6% | - The company holds approximately 3,000 globally issued patents and has about 3,100 patent applications pending worldwide[44] Risk Factors The company faces diverse risks including global economic conditions, COVID-19 impacts, international operations, supply chain, debt, litigation, and post-separation challenges - Business Risks: Global economic conditions, the COVID-19 pandemic, and construction industry challenges affect the company, with international operations (73% of 2020 sales) facing currency and geopolitical risks, especially in China[75][76][77][79] - Financial & Operational Risks: The company's $6.0 billion debt (as of Dec 31, 2020) may reduce flexibility, alongside risks from supply chain, competition, and litigation including FCPA and antitrust claims[82][86][88][98] - Separation-Related Risks: Historical financial data may not be indicative of future performance, IT system transitions pose risks, and the Tax Matters Agreement (TMA) restricts certain strategic transactions and includes indemnification obligations[127][129][130][132] Properties The company maintains a global real estate portfolio of approximately 16 million square feet across 2,300 facilities in about 80 countries - The company has a physical presence in approximately 80 countries with a property portfolio of about 16 million square feet[140] - The portfolio includes over 1,400 branches, 11 R&D centers, and 18 manufacturing facilities globally, with 10 owned[140] Legal Proceedings The company is involved in various legal proceedings, including German tax litigation and asbestos-related lawsuits, with no material adverse effect expected - For a discussion regarding material legal proceedings, refer to Note 21, Contingent Liabilities in the 2020 Annual Report[142] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity Securities Otis common stock trades on the NYSE under 'OTIS'; a $1 billion share repurchase program was authorized in April 2020, but no shares were repurchased in 2020 - The company's common stock is listed on the NYSE under the symbol "OTIS"[145] - On April 27, 2020, the Board authorized a share repurchase program for up to $1 billion of Common Stock, with no repurchases made in 2020[147] Selected Financial Data This section presents a five-year financial summary, highlighting stable net sales, a decrease in 2020 net income, and a significant increase in total debt due to separation financing Five-Year Financial Summary (in millions, except per share data) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $12,756 | $13,118 | $12,915 | | Net income attributable to common shareholders | $906 | $1,116 | $1,049 | | Diluted earnings per share | $2.08 | $2.58 | $2.42 | | Cash dividends per common share | $0.60 | — | — | | Total assets | $10,710 | $9,687 | $9,135 | | Total debt | $5,963 | $39 | $28 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, Otis's net sales decreased 2.8% to $12.8 billion, impacted by the COVID-19 pandemic and separation costs, while operating profit was $1.6 billion and cash flow from operations remained strong at $1.5 billion Results of Operations In 2020, net sales decreased 2.8% to $12.8 billion, gross margin improved to 29.6%, while SG&A expenses increased 6.3% due to separation costs, leading to a decrease in operating profit to $1.6 billion Year-Over-Year Net Sales Change (2020 vs. 2019) | Driver | % Change | | :--- | :--- | | Organic volume | (2.1)% | | Foreign currency translation | (0.4)% | | Acquisitions and divestitures, net | (0.2)% | | Other | (0.1)% | | Total % change | (2.8)% | - SG&A expenses increased by $114 million (6.3%) in 2020, primarily due to non-recurring separation-related and incremental public company costs[218] - Restructuring costs for 2020 were $77 million, expected to generate recurring pre-tax savings of approximately $57 million annually once fully implemented[221][222] Segment Review In 2020, New Equipment net sales fell 4.9% to $5.4 billion with operating profit down 19.1%, while Service net sales decreased 1.1% to $7.4 billion but operating profit grew 0.5% due to productivity and pricing Segment Performance (2020 vs. 2019) | Segment | 2020 Net Sales (in millions) | YoY % Change | 2020 Operating Profit (in millions) | YoY % Change | | :--- | :--- | :--- | :--- | :--- | | New Equipment | $5,371 | (4.9)% | $318 | (19.1)% | | Service | $7,385 | (1.1)% | $1,611 | 0.5% | - New Equipment operating profit decreased primarily due to lower volume and unfavorable rate drivers, including under-absorption, field inefficiencies, and higher bad debt expense[247] - Service operating profit increased due to favorable productivity, pricing, and mix, offsetting price concessions, lower volume, and higher bad debt expense[254] Liquidity and Financial Condition As of December 31, 2020, Otis had $1.8 billion in cash and $6.0 billion in total debt, resulting in $4.2 billion net debt, with strong operating cash flow of $1.5 billion Financial Position (as of Dec 31, 2020) | Metric | Value (in millions) | | :--- | :--- | | Cash and cash equivalents | $1,782 | | Total debt | $5,963 | | Net debt | $4,181 | | Total equity | $(3,284) | - In 2020, the company issued $6.3 billion in debt, with net proceeds used for cash distribution to UTC as part of the separation[262][263] - Net cash provided by operating activities was $1.48 billion in 2020, slightly higher than $1.47 billion in 2019, demonstrating resilient cash generation[268][269] Critical Accounting Estimates Management identifies critical accounting estimates including revenue recognition for long-term contracts, income taxes, goodwill impairment, contingent liabilities, and employee benefit plans, all requiring significant judgment - Revenue Recognition: For new equipment and modernization contracts, revenue is recognized over time using a cost-to-cost method, requiring significant judgment in estimating total costs to completion[286][330] - Goodwill: Annual impairment testing in 2020 determined no adjustment was necessary as the fair value of each reporting unit significantly exceeded its carrying value[296] - Employee Benefit Plans: Pension accounting is sensitive to assumptions like the discount rate and expected return on assets; a 25 basis point change in discount rate would alter the projected benefit obligation by approximately $33-34 million[298][299] Financial Statements and Supplementary Data This section incorporates the company's audited consolidated financial statements for 2018-2020, reflecting its transition to a standalone public entity, with 2020 net sales of $12.8 billion and a total equity deficit of $3.3 billion Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2020) | Metric | Value (in millions) | | :--- | :--- | | Net sales | $12,756 | | Operating profit | $1,639 | | Net income | $1,056 | | Net income attributable to common shareholders | $906 | Consolidated Balance Sheet Highlights (As of Dec 31, 2020) | Metric | Value (in millions) | | :--- | :--- | | Total Current Assets | $6,493 | | Total Assets | $10,710 | | Total Current Liabilities | $6,673 | | Long-term debt | $5,262 | | Total Liabilities | $13,911 | | Total (Deficit) Equity | $(3,284) | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31, 2020) | Metric | Value (in millions) | | :--- | :--- | | Net cash provided by operating activities | $1,480 | | Net cash used in investing activities | $(353) | | Net cash used in financing activities | $(844) | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective[153] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[154] PART III Directors, Executive Officers and Corporate Governance This section provides information on executive officers, including Judith F. Marks as CEO and Rahul Ghai as CFO, and references corporate governance details from the 2021 Proxy Statement - Judith F. Marks serves as President and Chief Executive Officer, and Rahul Ghai serves as Executive Vice President and Chief Financial Officer[158] - The company has adopted a code of ethics, "The Otis Absolutes," applicable to all directors, officers, employees, and representatives[160] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans as of December 31, 2020, showing approximately 3.8 million securities to be issued and 27.9 million available for future issuance Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price of Outstanding Options (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by Shareholders | 3,825,504 | $60.41 | 27,938,146 | | Not Approved by Shareholders | - | - | - | PART IV Exhibits and Financial Statement Schedule This section lists all exhibits filed with the 10-K, including key separation agreements from UTC and the financial statement schedule for Valuation and Qualifying Accounts - Key agreements filed as exhibits include the Separation and Distribution Agreement, Transition Services Agreement (TSA), Tax Matters Agreement (TMA), and Employee Matters Agreement (EMA), all dated April 2, 2020[169][170] Schedule II - Valuation and Qualifying Accounts (in millions) | Account | Balance at Dec 31, 2019 | Balance at Dec 31, 2020 | Key 2020 Changes | | :--- | :--- | :--- | :--- | | Allowance for Doubtful Accounts | $83 | $161 | +$28 (credit standard adoption), +$40 (provision) | | Future Income Tax Benefits - Valuation Allowance | $55 | $242 | +$63 (charged to expense), +$137 (Separation activity) |