Otis Worldwide Corporation — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. Otis manufactures, installs, maintains and modernizes elevators and escalators through its New Equipment and Service segments. These are pre-separation carve-out results derived from UTC’s records. Otis became an independent, publicly traded company on April 3, 2020; the interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2.966 billion | $3.101 billion | Down 4.4% |
| Operating profit | $329 million | $415 million | Down 20.7% |
| Operating margin | 11.1% | 13.4% | Down 2.3 percentage points |
| Net income attributable to Otis | $165 million | $273 million | Down 39.6% |
| Diluted EPS | $0.38 | $0.63 | Down $0.25 |
| Operating cash flow | $159 million | $297 million | Down $138 million |
Gross margin was $897 million, or 30.2% of sales, versus $901 million, or 29.1%, a 1.1-point rate improvement. Service sales rose 0.7% to $1.843 billion and operating profit rose 3.6% to $400 million; Service margin improved to 21.7% from 21.1%. New Equipment sales fell 11.6% to $1.123 billion, while segment operating profit increased 8.5% to $64 million and margin rose to 5.7% from 4.6%, reflecting favorable productivity and cost factors despite lower volume.
Investing cash outflow was $92 million, compared with $18 million; financing cash outflow was $256 million, compared with $312 million. Cash and cash equivalents were $1.207 billion at quarter-end, down from $1.446 billion at year-end 2019. Total debt was $6.325 billion and net debt was $5.118 billion. The company reported a $4.284 billion deficit in equity, versus $2.231 billion of equity at year-end, principally reflecting a $6.557 billion net transfer to UTC.
Material changes and unusual items
- Sales declined mainly from New Equipment volume, particularly in Asia amid COVID-19; overall organic volume declined 2.1%. Service organic sales grew 3.3%.
- Operating results included approximately $55 million of fixed-asset impairment and $12 million of related license costs, as well as $32 million of separation costs and $22 million of additional stand-alone public-company costs. Management attributed approximately $93 million after tax of lower attributable net income to significant non-operational or nonrecurring items; it estimated a $0.22 per-share impact.
- Q1 debt financing comprised $5.3 billion of notes and a $1.0 billion term loan. The approximately $6.3 billion net proceeds were distributed to UTC in connection with the separation. Long-term debt had an average maturity of approximately 10.6 years and an average interest rate of about 2.5%.
- Contract liabilities increased $278 million during the quarter, primarily because customer billings exceeded revenue earned. Remaining performance obligations were approximately $16.3 billion; Otis expected about 91% to be recognized as sales over the following 24 months.
Outlook, risks and contingencies
Otis gave no quantified full-year earnings or sales guidance in the filing. Management expected COVID-19 to negatively affect business, cash flow and results in Q2 and likely for the remainder of 2020. Risks cited include customer liquidity and payment delays, order cancellations or deferrals, factory or job-site disruptions, and reduced access to equipment for maintenance. The duration and extent of the effects were described as uncertain. Management did not expect a significant impact on liquidity based on available cash and credit access, and said it was focused on cash preservation and short-term liquidity needs.
After the quarter, Otis had a $1.5 billion revolving credit facility and a $1.5 billion commercial-paper program available, both effective April 3, 2020. The Board authorized up to $1 billion in share repurchases, but Otis said it did not expect repurchases in 2020 while focusing on deleveraging. The company also expected higher stand-alone public-company costs; it believed operating cash flows would be sufficient to fund them.
Contingencies include German tax litigation involving approximately €215 million ($237 million) of disputed tax benefits and estimated interest of approximately €118 million ($130 million); UTC had previously paid €275 million to German authorities, and Otis recorded a separate interest accrual of approximately €44.7 million ($49.1 million). Asbestos liabilities were estimated at $24 million to $45 million; $24 million was accrued, with a $5 million insurance recovery receivable. Management did not expect the identified matters, individually or collectively, to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter sales, service access, cash collections, customer credit risk and working capital.
- Post-separation operating costs, cash generation and progress in reducing the $5.118 billion of reported net debt.
- The cash-flow impact and timing of restructuring plans, and whether anticipated cost savings are achieved.
- Developments in German tax litigation and other legal or tax contingencies, including the allocation of pre-separation obligations under the tax matters agreement.
- Whether the reported carve-out results and allocated UTC costs are comparable to Otis’s results as a stand-alone public company.