Otis Worldwide Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter earnings filing; the supplied filing text does not provide a clear set of Q4-only financial results. Otis manufactures, installs, maintains and modernizes elevators and escalators. Its New Equipment and Service segments represented 45% and 55% of 2021 sales, respectively; approximately 74% of sales came from international operations.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net sales | $14.298 billion | $12.756 billion | Up 12.1%; organic volume up 8.9%, foreign exchange added 3.0% |
| Operating profit | $2.108 billion | $1.639 billion | Up $469 million |
| Operating margin | 14.7% | 12.8% | Up 190 basis points |
| Gross margin | 29.3% | 29.6% | Down 30 basis points |
| Net income attributable to Otis | $1.246 billion | $906 million | Up 37.5% |
| Diluted earnings per share | $2.89 | $2.08 | Up 39.0% |
| Cash flow from operations | $1.750 billion | $1.480 billion | Up $270 million |
| Capital expenditures | $156 million | $183 million | Down $27 million |
| Cash and cash equivalents | $1.565 billion | $1.782 billion | Excludes restricted cash |
| Total debt | $7.273 billion | $5.963 billion | Net debt was $5.708 billion, versus $4.181 billion |
Segment results
- New Equipment: Sales of $6.428 billion, up 19.7%; operating profit of $459 million, up 44.3%; margin improved to 7.1% from 5.9%. Higher volume and installation/material productivity supported results; price and mix and commodity costs were headwinds.
- Service: Sales of $7.870 billion, up 6.6%; operating profit of $1.762 billion, up 9.4%; margin improved to 22.4% from 21.8%. Maintenance and repair sales rose 7.0%; modernization rose 4.5%.
Material changes and capital position
- Business recovery drove sales growth after COVID-19-related declines in 2020. New Equipment organic sales rose 15.5%; Service organic sales rose 4.1%.
- Operating profit benefited from higher segment volumes and lower general corporate costs versus 2020, which included a $71 million fixed-asset impairment and $14 million of related licensing costs. The 2021 effective tax rate fell to 27.6% from 30.1%, also supporting earnings.
- Operating cash flow increased, while financing activity included $725 million of share repurchases and $393 million of common dividends. Repurchases were suspended as Otis focused on deleveraging.
- Year-end restricted cash was approximately $1.910 billion, primarily held in escrow for the pending Zardoya Otis tender offer. Cash and cash equivalents were $1.565 billion; approximately 91% was held by foreign subsidiaries.
- Total equity was a deficit of $3.144 billion. The company issued approximately $1.8 billion of Euro-denominated notes in November 2021 to fund the tender offer; long-term debt had an average maturity of approximately 8.9 years. Otis reported compliance with debt covenants and had no year-end borrowings under its $1.5 billion revolving facility.
Outlook, risks and unusual items
- The filing provides no specific consolidated 2022 sales or earnings guidance. Management expected to expand its digital ecosystem in 2022; approximately 35% of the global service portfolio was connected at year-end 2021.
- The Zardoya Otis tender offer remained pending as of February 4, 2022, subject to Spanish regulatory approval. The offer price was €7.07 per share after dividend adjustment; approximately €1.9 billion of restricted cash was set aside to fund it. Otis said the offer could be delayed, fail to close or deliver fewer benefits than expected.
- COVID-19 and the ongoing recovery could continue to affect customer demand and liquidity, job-site access, orders, suppliers and costs. Otis also cited component shortages, long lead times, labor availability and inflationary commodity pressures.
- China is a significant exposure: it represented approximately 35% of global New Equipment sales and more than half of global unit volume. Other notable risks include foreign-exchange movements, construction-market conditions, competition, product safety, cybersecurity, and legal and regulatory matters.
- German tax litigation concerns approximately €243 million of claimed tax benefits plus estimated interest of approximately €134 million; a further interest accrual of approximately €50 million was recorded at year-end. The company expected an appeal decision in the first quarter of 2022. Otis also disclosed asbestos claims and European cartel-related claims; management stated it did not expect the matters discussed to have a material adverse effect, while noting outcomes can be uncertain.
- New Equipment revenue is recognized over time using costs incurred relative to estimated costs to complete. Estimation uncertainty on these long-term contracts was identified as a critical audit matter. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the Zardoya Otis tender offer received approval and closed, its final cost, and the resulting debt, ownership and earnings effects.
- Progress in reducing net debt and the timing or conditions for resuming share repurchases.
- Whether margins and cash conversion hold up as commodity, labor and supply-chain costs evolve.
- New Equipment contract estimates and any material changes in costs to complete or contract profitability.
- Developments in German tax litigation, tax contingencies and other material legal or compliance matters.
- Effects of COVID-19, China market conditions and currency movements on demand and reported results.