Otis Worldwide Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited; PwC performed a review, not an audit. Otis operates New Equipment and Service businesses, manufacturing, installing, maintaining and modernizing elevators and escalators.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $3.620B | $3.268B | $10.729B | $9.263B |
| Operating profit | $542M | $454M | $1.612B | $1.199B |
| Operating margin | 15.0% | 13.9% | 15.0% | 12.9% |
| Net income attributable to common shareholders | $331M | $266M | $965M | $655M |
| Diluted EPS | $0.77 | $0.61 | $2.23 | $1.51 |
| Operating cash flow | Not separately provided | Not separately provided | $1.473B | $1.171B |
- Q3 sales rose 10.8% year over year, including 8.1% organic growth; nine-month sales rose 15.8%, including 11.2% organic growth. New Equipment drove most of the organic growth.
- Q3 gross margin was 29.3%, down 0.7 percentage point year over year, primarily due to segment mix. Nine-month gross margin was 29.4%, down 0.5 point.
- Q3 New Equipment sales increased 18.1% and operating margin improved to 7.8% from 6.7%. Service sales increased 5.1% and operating margin improved to 22.9% from 22.2%.
- Nine-month operating cash flow increased $302M. Investing activities used $69M, while financing activities used $1.621B; cash and cash equivalents ended at $1.553B, down from $1.782B at year-end 2020.
- At September 30, total debt was approximately $5.496B and net debt was $3.943B. Long-term debt was $5.458B; short-term borrowings were $38M. The company reported negative total equity of $3.295B.
- Current assets were $6.375B and current liabilities $6.363B. Approximately 97% of cash was held by foreign subsidiaries. The company had an undrawn $1.5B revolving credit facility and no commercial-paper borrowings at quarter-end.
Material changes and management commentary
- Growth reflected stronger New Equipment demand and continuing Service growth. Management cited installation productivity and higher volumes, with commodity cost pressures and unfavorable price and mix offsetting some gains.
- Service benefited from volume and pricing/mix; Q3 maintenance and repair grew organically 4.7%, while modernization declined 1.2%. Nine-month organic growth was 4.5% for maintenance and repair and 2.7% for modernization.
- Q3 SG&A was broadly flat year over year; nine-month SG&A rose $58M, including higher employment, IT and foreign-exchange costs, partly offset by lower separation costs and the absence of former-parent cost allocations.
- Nine-month net income benefited from higher operating profit and a lower effective tax rate. The nine-month effective tax rate was 26.7%, versus 30.2% in 2020; management expects quarter-to-quarter tax-rate variability from discrete items.
- Restructuring costs were $35M for the first nine months, with $47M of savings realized for 2021 and 2020 actions during that period. Management expects further cash payments to complete announced actions.
Outlook, transactions and risks
- On September 23, 2021, Otis announced a tender offer for the remaining shares of Zardoya Otis at €7.00 per share, subsequently adjusted to €6.93 following a dividend. The offer required Spanish CNMV approval. Otis owned 50.02% and already consolidated Zardoya Otis.
- The offer value was approximately €1.63B after the price adjustment. Otis arranged a €1.65B bridge facility, expected to be drawn only if permanent financing was not obtained before closing. Completion, financing terms and anticipated benefits were uncertain.
- Management expected to suspend share repurchases through 2022 as it focused on deleveraging after the tender offer. It expected to fund operations and investment mainly through operating cash flow, cash, credit lines and capital-market access.
- COVID-19 could affect demand, order timing, customer credit, supplier capacity and costs. Management did not expect a significant near-term impact on capital resources or liquidity, but warned that future effects could be material.
- Notable contingencies include German tax litigation over approximately €215M of claimed tax benefits plus estimated interest of approximately €118M; the company had recorded an interest accrual of €45M. The filing says it cannot assure a favorable outcome. Other disclosed matters include asbestos claims, a putative employee-benefits class action, environmental obligations and European elevator/escalator overcharge claims; management did not expect the matters, individually or collectively, to materially adversely affect the company.
- The filing provides no specific full-year financial guidance. Forward-looking results remain exposed to construction demand, COVID-19, commodity and foreign-exchange movements, supply constraints, financing availability, tender-offer execution and legal and tax outcomes.
Important facts for investors to verify
- CNMV approval, tender participation, closing timing and final funding mix and cost for the Zardoya Otis offer.
- Whether post-offer leverage and foreign-held cash constrain liquidity, dividends or the planned repurchase suspension and deleveraging.
- Whether commodity inflation, price/mix and supply constraints pressure gross margins and New Equipment profitability.
- Cash-flow sustainability, including working-capital contributions from payables and contract billings, and progress converting the $17.3B remaining performance obligation into sales (88% expected within 24 months).
- Developments in the German tax litigation and other contingencies, and any material changes in COVID-19 or customer and supplier conditions.