Otis Worldwide Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited; PwC performed a review, not an audit. Otis manufactures, installs, maintains, repairs and modernizes elevators and escalators through its New Equipment and Service segments.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $3,701 million | $3,029 million | $7,109 million | $5,995 million |
| Operating profit | $561 million | $416 million | $1,070 million | $745 million |
| Operating margin | 15.2% | 13.7% | 15.1% | 12.4% |
| Net income attributable to common shareholders | $326 million | $224 million | $634 million | $389 million |
| Diluted EPS | $0.76 | $0.52 | $1.47 | $0.90 |
| Gross margin | 29.0% | 29.4% | 29.5% | 29.8% |
| Operating cash flow | Not presented quarterly | $1,118 million | $823 million |
Q2 sales rose 22.2% year over year, including 15.4% organic volume growth and 6.5% foreign-currency translation. First-half sales increased 18.6%, including 12.9% organic volume growth. Higher sales and operating profit lifted earnings; gross margin nevertheless declined 0.4 percentage point in Q2 and 0.3 point for the first half, principally due to segment mix.
First-half operating cash flow increased $295 million year over year, mainly on higher net income and working-capital inflows. Investing cash flow was a $67 million use; capital expenditures were $84 million. Operating cash flow less capital expenditures was approximately $1.03 billion. Financing cash flow was a $916 million use, including $506 million of share repurchases and $189 million of common dividends.
Segments and changes versus prior period
- New Equipment: Q2 sales of $1,727 million rose 33.5%; operating profit was $147 million versus $79 million, and margin expanded to 8.5% from 6.1%. Management cited volume, productivity and foreign-exchange benefits, partly offset by commodity headwinds, unfavorable price and mix, and higher SG&A.
- Service: Q2 sales of $1,974 million rose 13.8%; operating profit increased to $441 million from $381 million, with margin of 22.3% versus 22.0%. Growth reflected maintenance, repair and modernization, pricing and lower bad debt; higher SG&A and the absence of prior-year COVID cost containment were offsets.
- First-half Service sales were $3,924 million, including $3,220 million in maintenance and repair and $704 million in modernization. The $17.5 billion remaining performance obligation backlog at June 30 was expected to be recognized 89% over the following 24 months.
- Results benefited from recovery from COVID-19 and improved volume. The 2020 comparison also included $67 million of fixed-asset impairment and related costs, as well as higher Separation-related and former-parent allocated costs. Q2 2021 included no Separation costs in the quarter; first-half Separation costs were $9 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $1.923 billion, versus $1.782 billion at year-end 2020. Approximately 86% of cash was held by foreign subsidiaries.
- Total debt was $5.800 billion, down from $5.963 billion at year-end; net debt was $3.877 billion, down from $4.181 billion. Long-term debt was $5.457 billion and short-term borrowings were $343 million. The company issued $199 million of yen notes and used proceeds to repay euro commercial paper.
- A $1.5 billion revolving credit facility was undrawn. Otis reported compliance with debt covenants. Current assets of $6.681 billion were slightly below current liabilities of $6.716 billion.
- Total shareholders’ deficit was $3.856 billion; total deficit equity was $3.317 billion. The company repurchased $506 million of shares in the first half, with approximately $494 million remaining under its $1 billion authorization.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said COVID-19 could continue to affect demand, orders, collections and supplier capacity, while stating it did not expect a significant impact on capital and financial resources or overall liquidity at that time.
- Management cited commodity costs, supply-chain delays, foreign exchange, customer financial condition, construction demand, restructuring execution and access to financing among factors that could affect results. The TSA and related exit costs were expected to wind down in the second half of 2021.
- Restructuring costs were $26 million in the first half. Remaining restructuring cash payments were expected to total $50 million, including $13 million of additional expenses; management expected annual recurring savings of $26 million from 2021 actions and $58 million from 2020 actions.
- German tax litigation concerns approximately $258 million of disputed tax benefits and an estimated $142 million of related interest. Otis appealed an adverse lower-court decision; it had accrued approximately $53 million of remaining interest. The filing says the ultimate outcome is uncertain.
- Recorded asbestos liabilities were $23 million, the minimum of an estimated $23 million to $45 million range, partly offset by a $5 million insurance recovery receivable. Otis also disclosed a putative class action related to post-spin-off compensation adjustments; it could not estimate a possible loss.
- The 2020 Germany manufacturing-facility fire property-damage claim was settled, with a final $16 million insurance payment received in the first half of 2021; discussions on the business-interruption claim continued.
Most important facts for investors to verify
- Whether growth and margin improvement continue, especially in New Equipment, and whether commodity pressures or unfavorable price and mix intensify.
- Cash conversion and working-capital trends, including dependence on contract billings, and the amount and location of cash available for corporate use.
- Debt, negative equity and capital returns: sustainability of dividends and buybacks relative to operating cash flow and future investment needs.
- Developments in the German tax appeal, the class action and other contingencies, including any change in recorded exposure.
- COVID-19 and supplier constraints, expected restructuring savings and costs, and completion of TSA exits.