Otis Worldwide Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Otis completed its separation from United Technologies Corporation (UTC) and began trading as an independent public company on April 3, 2020. Pre-separation results reflect allocated costs and cash management under UTC, which limits comparability with standalone results.
Business context and results
Otis manufactures, installs, maintains, repairs and modernizes elevators and escalators. Its two segments are New Equipment and Service. COVID-19 affected demand, operations and customer access during the quarter.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $3,029 | $3,351 | $5,995 | $6,452 |
| Operating profit | $416 | $481 | $745 | $896 |
| Operating margin | 13.7% | 14.4% | 12.4% | 13.9% |
| Net income | $265 | $352 | $467 | $652 |
| Net income attributable to common shareholders | $224 | $308 | $389 | $581 |
| Diluted EPS | $0.52 | $0.71 | $0.90 | $1.34 |
Q2 sales fell 9.6% year over year (organic volume down 6.5%; foreign exchange down 2.6%). For the first half, sales fell 7.1% (organic volume down 4.4%). Q2 gross margin was 29.4%, unchanged year over year; first-half gross margin rose to 29.8% from 29.2%.
Segment performance and changes
- New Equipment: Q2 sales decreased 13.7% to $1,294 and operating profit fell 42.8% to $79; margin contracted to 6.1% from 9.2%. Management cited pandemic-driven volume declines, under-absorption, bad debt and unfavorable mix, partly offset by productivity and cost containment.
- Service: Q2 sales decreased 6.3% to $1,735, while operating profit declined 1.8% to $381; margin increased to 22.0% from 21.0%. For the first half, Service sales declined 2.8%, but operating profit rose 0.9% to $781. Productivity, pricing/mix and cost actions helped offset lower volume, price concessions and bad debt.
- For the first half, consolidated operating profit included $179 of general corporate expenses and other, versus $75 in 2019. The increase primarily reflected a $55 fixed-asset impairment, $12 of related license costs, $53 of separation costs and higher standalone-company costs.
Cash flow, debt and liquidity
- First-half operating cash flow was $823, up from $651 in 2019. Investing cash outflow was $142; financing cash outflow was $180. Cash and cash equivalents at June 30 were $1,912.
- Total debt was $6,293, including $6,260 of long-term debt and $33 of short-term borrowings; net debt was $4,381. Long-term debt increased substantially following $5.3 billion of notes and a $1.0 billion term loan issued or drawn in connection with the separation. Net proceeds were distributed to UTC.
- Otis had a $1.5 billion undrawn revolving credit facility and a $1.5 billion commercial-paper program. Approximately 80% of cash was held by foreign subsidiaries. The company said it did not expect a significant near-term impact to liquidity, while noting that future capital-market access is not assured.
- The company authorized a $1 billion share repurchase program but said it did not expect repurchases in 2020 while prioritizing deleveraging. It declared $0.20 per common share in dividends during the first half.
Outlook, unusual items and risks
- Management expected COVID-19 to negatively affect the business in Q3 and at least the remainder of 2020; it provided no quantified sales or earnings guidance in this filing. Risks include construction-site closures, delayed or cancelled orders, reduced factory capacity, limits on service access, customer liquidity and collection pressure, and supplier disruption.
- Remaining performance obligations were approximately $16.4 billion at June 30; Otis expected about 90% to be recognized as sales over the following 24 months, versus 91% at year-end 2019.
- First-half net income included $26 of restructuring costs and approximately $136 of pre-tax significant non-operational or nonrecurring items, including separation costs and the fixed-asset impairment. Management attributed $0.27 of first-half diluted EPS impact to these items and restructuring.
- 2020 restructuring actions had $23 of costs incurred in the first half, with $28 of expected costs remaining; estimated annual recurring savings are approximately $34 over the two years after initiation. Prior-year actions had $10 remaining and approximately $45 of estimated annual savings, of which $16 had been realized in the first half of 2020.
- Material contingencies include German tax litigation concerning approximately €215 million ($241 million) of claimed tax benefits and estimated related interest of approximately €118 million ($132 million); a $50 million net interest accrual is recorded. Asbestos liabilities are estimated at $24–$45 million, with $24 million accrued and an approximately $5 million insurance recovery receivable. Management did not expect the disclosed matters, individually or together, to materially adversely affect the company, but outcomes remain uncertain.
- The separation produced a reported shareholders’ deficit of $4,242 and total deficit equity of $3,672 at June 30, versus positive total equity of $2,231 at year-end 2019. The filing attributes major equity movements to separation-related transfers and reclassification, rather than simply operating losses.
Important facts for investors to verify
- Whether COVID-19-related demand, customer payment delays and service-access constraints persist beyond 2020, and how they affect New Equipment and Service differently.
- Debt repayment capacity, leverage-covenant compliance and the company’s deleveraging plans; the first covenant test was scheduled for September 30, 2020.
- Whether reported operating cash flow is sustainable, given the contribution from contract billing timing and working-capital movements.
- Progress and actual costs of separation, standalone operations and restructuring, compared with expected savings and future expenses.
- Developments in the German tax litigation, related tax indemnities and other contingencies; the filing’s estimates do not establish the eventual cash outcome.