01—Abstract
Summary
Summary of the 10-K filed February 5, 2021. Cited figures are marked; the original filing is the authoritative source.
Otis Worldwide Corporation's Form 10-K for the year ended December 31, 2020 reports net sales of $12.8 billiona (12,756 million, down from 13,118 million in 2019) and operating profit of $1.6 billion (1,639 million, versus 1,814 million in 2019).
The company became an independent public company on April 3, 2020, when United Technologies Corporation (now Raytheon Technologies) distributed its Otis shares to shareholders. Net income attributable to common shareholders was $906 millionb, or $2.08 diluted EPS, compared with $1.116 billion and $2.58 in 2019. Results were affected by non-recurring Separation-related costs of $119 million, fixed asset impairments of $71 million, and restructuring costs of $77 million, along with COVID-19 pressure on organic volume (down 2.1%).
The Service segment, at $7.4 billionc in net sales and $1.6 billion in operating profit, generated 84% of segment operating profit, while the New Equipment segment (5.4 billion in sales, 318 million operating profit) was more pressured, with its operating margin falling to 5.9% from 7.0%. Otis ended 2020 with $1.8 billion of cash, total debt of $5.96 billion (up from $39 million in 2019), and a $1.0 billion share repurchase program authorized in April 2020 with no repurchases made in 2020. The company issued $6.3 billion of debt in 2020 and distributed the proceeds to UTC as part of the Separation, which left total shareholders' deficit of $3.83 billion at year end.
Quarterly dividends of $0.60d per share were declared in 2020. Investors should weigh the company's large installed Service base (over 2 million maintenance units under contract and approximately 540,000 connected units) and its 17.2 billion of remaining performance obligations, about 90% of which the company expects to recognize as sales over the following 24 months, against the leverage taken on at the Separation, ongoing German tax litigation, and the TMA indemnity obligations owed to RTX and Carrier.
02—Key points
Key Highlights
- Net sales were $12.76 billion in 2020, down from $13.12 billion in 2019; organic volume declined 2.1%, reflecting COVID-19 impacts.
- Operating profit was $1.64 billion in 2020 versus $1.81 billion in 2019, including non-recurring Separation-related costs of $119 million and fixed asset impairments of $71 million.
- Service segment net sales were $7.39 billion with operating profit of $1.61 billion (21.8% margin), making up 84% of segment operating profit; New Equipment operating profit fell to $318 million (5.9% margin).
- Diluted EPS was $2.08 in 2020 versus $2.58 in 2019, and the 2020 results include an impact of $0.44 per diluted share from restructuring and non-operational/non-recurring items.
- Total debt rose to $5.96 billion at December 31, 2020 from $39 million, after $6.3 billion of debt issuance whose net proceeds were distributed to UTC in connection with the Separation.
- A $1.0 billion share repurchase program was authorized on April 27, 2020, but no shares were repurchased in 2020; the company expects to commence repurchases in 2021.
- Remaining performance obligations were approximately $17.2 billion at December 31, 2020, with about 90% expected to be recognized as sales over the following 24 months.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 5, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $12.76B$13.12B | −2.8% |
| R&D Expenses | $152.00M$163.00M | −6.7% |
| SG&A Expenses | $1.92B$1.81B | +6.3% |
| Operating Expenses | $11.05B$11.27B | −1.9% |
| Operating Income | $1.64B$1.81B | −9.6% |
| Interest Expense | $124.00M$0 | — |
| Net Income | $906.00M$1.12B | −18.8% |
| EPS (Basic) | $2.09$2.55 | −18.0% |
| EPS (Diluted) | $2.08$2.55 | −18.4% |
| Shares Outstanding (Basic) | 433.20M433.10M | 0.0% |
| Shares Outstanding (Diluted) | 434.60M433.10M | +0.3% |
05—Questions
Frequently Asked Questions
How did Otis's 2020 financial performance compare with 2019?
Net sales declined to $12.76 billion from $13.12 billion, and operating profit fell to $1.64 billion from $1.81 billion. Net income attributable to common shareholders dropped to $906 million from $1.116 billion. The filing attributes the decline mainly to COVID-19 volume pressure, non-recurring Separation-related costs, fixed asset impairments, restructuring charges and incremental standalone public company costs.
What were the main drivers of the Separation-related and non-recurring charges?
The filing reports non-recurring Separation-related costs of $119 million in 2020, of which $106 million was recorded in Selling, general and administrative expense. It also reports a $71 million write-off of assets under construction tied to a review of technology strategies after the Separation, along with associated license costs of about $14 million.
How is the company's debt structure and capital allocation following the Separation?
Otis issued $5.3 billion of unsecured notes in February 2020 and drew a $1.0 billion term loan, which it fully repaid by November 2020. Total long-term debt was $5.26 billion and short-term borrowings were $701 million at year end. The company reports cash of $1.78 billion and a total shareholders' deficit of $3.83 billion, and it paid $0.60 per share in cash dividends during 2020.
What obligations does Otis have to RTX and Carrier under the Separation agreements?
Under the Tax Matters Agreement, Otis must indemnify RTX for a percentage of the TCJA toll charge installments due after April 3, 2020, and for taxes arising from certain qualification failures or Otis-triggered transactions. The filing records a $239 million contractual indemnity obligation in other long-term liabilities. The TMA also restricts certain equity issuances, share repurchases and acquisitions for two years after the Separation.
What legal and tax contingencies does the filing highlight?
The filing describes German tax litigation over approximately €215 million (about $264 million) of disallowed tax benefits, plus roughly €118 million (about $145 million) of associated interest; an adverse ruling was issued on December 7, 2020, and an appeal was filed. Otis also faces a putative class action filed in August 2020 relating to long-term incentive awards, which it believes is without merit and whose outcome it cannot predict.
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