Otis Worldwide Corporation — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021; unaudited interim results, compared with the quarter ended March 31, 2020. Otis became a standalone public company on April 3, 2020, so the prior-period presentation reflects the business before separation from UTC and includes allocated costs and separation-related items that may limit comparability.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $3.408 billion | $2.966 billion |
| Operating profit | $509 million | $329 million |
| Net income attributable to common shareholders | $308 million | $165 million |
| Diluted EPS | $0.71 | $0.38 |
| Operating cash flow | $585 million | $159 million |
| Gross margin | 29.9% | 30.2% |
| Operating margin | 14.9% | 11.1% |
- Sales rose 14.9%, comprising 10.3% organic volume growth, 4.4% foreign-currency translation and 0.2% net acquisitions and divestitures.
- New Equipment sales increased 29.8% to $1.458 billion; segment operating profit rose 62.5% to $104 million, with margin expanding to 7.1% from 5.7%. Organic sales growth was 25.1%, reflecting strong Asia and Americas performance, partly against COVID-affected prior-year comparisons.
- Service sales increased 5.8% to $1.950 billion; segment operating profit rose 7.5% to $430 million, with margin improving to 22.1% from 21.7%. Organic sales grew 1.3%.
- Gross margin declined 30 basis points, primarily due to segment mix, partly offset by operational improvement in both segments. Consolidated operating margin improved substantially, reflecting higher profit and lower corporate and separation-related costs.
- Effective tax rate declined to 25.9% from 38.2%. Management attributed the decrease to the absence of prior-year tax costs, tax-law benefits and changes in estimates and planned debt repayments. Q1 2021 net income included a $17 million non-recurring tax benefit.
- Operating cash flow increased by $426 million year over year. Net contract asset and liability activity contributed a $328 million cash inflow; the filing also cites timing of other working-capital items. Cash flow should be assessed in light of these timing effects.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.725 billion at March 31, 2021, down from $1.782 billion at year-end; approximately 92% was held by foreign subsidiaries.
- Total debt was $5.798 billion and net debt was $4.073 billion, compared with $5.963 billion and $4.181 billion, respectively, at December 31, 2020. Long-term debt was $5.457 billion; short-term borrowings were $341 million.
- Current assets were $6.346 billion versus current liabilities of $6.395 billion. Shareholders’ deficit was $3.910 billion; total deficit equity was $3.351 billion.
- Cash used in investing was $50 million; cash used in financing was $574 million. Financing included $300 million of share repurchases and $87 million of common dividends.
- Otis issued $199 million of five-year yen notes and used proceeds to repay euro commercial paper. It reported no borrowings on its $1.5 billion revolving credit facility and compliance with debt covenants.
- The company repurchased 4.7 million shares for approximately $300 million under its $1 billion authorization, leaving approximately $700 million available at quarter-end. A $0.24 per-share dividend was declared April 19, payable June 10, 2021.
Outlook, commentary and risks
- The filing does not provide specific full-year revenue, earnings or cash-flow guidance. Management said it expects to fund operating, investing and financing needs principally through operating cash flow, cash on hand, bank facilities and capital-market access.
- Management said COVID-19 may continue to affect demand, order timing or cancellations, customer liquidity and credit reserves, and supplier capacity and costs. It did not expect a significant impact on capital and financial resources or overall liquidity at the time of filing.
- The TSA and related exit costs were expected to wind down during the second half of 2021. Restructuring actions are intended to reduce costs: management expected annual recurring savings of about $17 million from 2021 actions and about $61 million from 2020 actions over the stated two-year periods. Most remaining actions were targeted for completion in 2021.
- Key uncertainties include construction demand, foreign-exchange and interest-rate movements, supply-chain disruption, credit availability, restructuring execution, and legal and tax outcomes. Management cautioned that actual results may differ from forward-looking statements.
- German tax litigation concerns approximately €215 million ($254 million) of disputed tax benefits, plus estimated interest of approximately €118 million ($139 million). The company appealed an adverse December 2020 local tax-court ruling; it accrued €45 million ($53 million) of remaining interest. Management could not assure a favorable outcome.
- Other disclosed matters include asbestos claims, a putative class action relating to incentive and deferred compensation adjustments after the spin-offs, environmental obligations and European elevator/escalator cartel claims. Management did not expect these matters, individually or together, to have a material adverse effect, while noting outcomes can be uncertain.
Most important facts for investors to verify
- Whether strong New Equipment growth and Service performance persist after accounting for the prior-year COVID comparison, currency effects and post-separation comparability.
- How much operating cash flow is recurring versus driven by contract billing and working-capital timing.
- The effect of negative equity, debt levels and the high proportion of cash held overseas on liquidity and capital allocation.
- Whether restructuring savings are realized as expected and whether remaining TSA exit costs or other standalone expenses change.
- Developments in German tax litigation, COVID-related demand and supply risks, and the company’s access to financing on acceptable terms.