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Otis Worldwide Corp - Quarter Report: 2020 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 ____________________________________ 
FORM 10-Q
____________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 001-39221
____________________________________ 
OTIS WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________ 
Delaware 83-3789412
(State or other jurisdiction of incorporation)(I.R.S. Employer Identification No.)
One Carrier Place, Farmington, Connecticut 06032
(Address of principal executive offices, including zip code)

(860) 233-6847
(Registrant's telephone number, including area code)
____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange
on which registered
Common Stock ($0.01 par value)OTISNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý.    No  ¨.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý.    No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerýAccelerated Filer¨
Non-accelerated Filer¨Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  .    No  ý.

At April 30, 2020 there were 433,079,455 shares of Common Stock outstanding.
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OTIS WORLDWIDE CORPORATION
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended March 31, 2020
 
 Page

Otis Worldwide Corporation and its subsidiaries' names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of Otis Worldwide Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms "we," "us," "our," "the Business," or "Otis," unless the context otherwise requires, mean Otis Worldwide Corporation and its subsidiaries. References to internet websites in this Form 10-Q are provided for convenience only. Information available through these websites is not incorporated by reference into this Form 10-Q.
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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
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OTIS WORLDWIDE CORPORATION
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited) 
 Quarter Ended March 31,
(amounts in millions, except per share amounts)20202019
Net sales:
Product sales$1,123  $1,271  
Service sales1,843  1,830  
2,966  3,101  
Costs and expenses:
Cost of products sold914  1,060  
Cost of services sold1,155  1,140  
Research and development38  39  
Selling, general and administrative465  441  
2,572  2,680  
Other (expense) income, net(65) (6) 
Operating profit329  415  
Non-service pension benefit(3) (11) 
Interest expense, net  
Income from operations before income taxes327  425  
Income tax expense125  125  
Net income202  300  
Less: Noncontrolling interest in subsidiaries' earnings37  27  
Net income attributable to Otis Worldwide Corporation$165  $273  
Earnings Per Share of Common Stock - Basic and Diluted:
Net income attributable to Otis Worldwide Corporation$0.38  $0.63  
Number of Basic and Diluted shares outstanding433.1  433.1  

See accompanying Notes to Condensed Combined Financial Statements

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OTIS WORLDWIDE CORPORATION
CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

Quarter Ended March 31,
(dollars in millions)20202019
Net income $202  $300  
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(122) 35  
Pension and postretirement benefit plan adjustments (22) 
Change in unrealized cash flow hedging11  —  
Other comprehensive income (loss), net of tax(110) 13  
Comprehensive income92  313  
Less: Comprehensive income attributable to noncontrolling interest(31) (26) 
Comprehensive income attributable to Otis Worldwide Corporation$61  $287  
See accompanying Notes to Condensed Combined Financial Statements
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OTIS WORLDWIDE CORPORATION
CONDENSED COMBINED BALANCE SHEETS
(Unaudited)
(dollars in millions)March 31, 2020December 31, 2019
Assets
Cash and cash equivalents$1,207  $1,446  
Accounts receivable (net of allowance for expected credit losses of $113 and $83)
2,888  2,861  
Contract assets, current491  529  
Inventories, net599  571  
Other assets, current329  251  
Total Current Assets5,514  5,658  
Future income tax benefits428  373  
Fixed assets1,776  1,803  
Less: Accumulated depreciation(1,088) (1,082) 
Fixed assets, net688  721  
Operating lease right-of-use assets

535  535  
Intangible assets, net462  490  
Goodwill1,608  1,647  
Other assets289  263  
Total Assets$9,524  $9,687  
Liabilities and (Deficit) Equity
Short-term borrowings$67  $34  
Accounts payable1,102  1,331  
Accrued liabilities1,645  1,739  
Contract liabilities, current2,541  2,270  
Total Current Liabilities5,355  5,374  
Long-term debt6,258   
Future pension and postretirement benefit obligations579  590  
Operating lease liabilities

379  386  
Future income tax obligations839  695  
Other long-term liabilities303  311  
Total Liabilities13,713  7,361  
Commitments and contingent liabilities (Note 16)
Redeemable noncontrolling interest95  95  
UTC Net (Deficit) Investment:
UTC Net (Deficit) Investment(3,959) 2,458  
Accumulated other comprehensive loss(862) (758) 
Total UTC Net (Deficit) Investment(4,821) 1,700  
Noncontrolling interest537  531  
Total (Deficit) Equity(4,284) 2,231  
Total Liabilities and (Deficit) Equity$9,524  $9,687  

See accompanying Notes to Condensed Combined Financial Statements
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OTIS WORLDWIDE CORPORATION
CONDENSED COMBINED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

Quarter Ended March 31, 2020
(dollars in millions)UTC Net Investment (Deficit) Accumulated Other Comprehensive (Loss)Total UTC Net Investment (Deficit)Noncontrolling InterestTotal UTC Net Investment (Deficit)Redeemable Noncontrolling Interest
Balance January 1, 2020$2,458  $(758) $1,700  $531  $2,231  $95  
Net income165  —  165  37  202  —  
Other comprehensive loss, net of tax—  (104) (104) (4) (108) (2) 
Dividends attributable to noncontrolling interest—  —  —  (21) (21) —  
Acquisition, disposal and other changes in noncontrolling interest—  —  —  (6) (6) —  
Changes in redeemable noncontrolling interest redemption value—  —  —  —  —   
Adoption of credit loss standard, net of tax (Note 6)(25) —  (25) —  (25) —  
Net transfers to UTC(6,557) —  (6,557) —  (6,557) —  
Balance March 31, 2020$(3,959) $(862) $(4,821) $537  $(4,284) $95  



Quarter Ended March 31, 2019
(dollars in millions)UTC Net InvestmentAccumulated Other Comprehensive (Loss)Total UTC Net InvestmentNoncontrolling InterestTotal UTC Net InvestmentRedeemable Noncontrolling Interest
Balance January 1, 2019$2,277  $(708) $1,569  $537  $2,106  $109  
Net income273  —  273  27  300  —  
Redeemable noncontrolling interest in subsidiaries' earnings—  —  —    (3) 
Other comprehensive income (loss), net of tax—  14  14   15  (2) 
Dividends attributable to noncontrolling interest—  —  —  (30) (30) —  
Acquisition, disposal and other changes in noncontrolling interest—  —  —    —  
Changes in redeemable noncontrolling interest redemption value—  —  —  —  —   
Net transfers to UTC(298) —  (298) —  (298) —  
Balance March 31, 2019$2,252  $(694) $1,558  $542  $2,100  $109  


See accompanying Notes to Condensed Combined Financial Statements
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OTIS WORLDWIDE CORPORATION
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
 Quarter Ended March 31,
(dollars in millions)20202019
Operating Activities:
Net income$202  $300  
Adjustments to reconcile net income to net cash flows provided by operating activities, net of acquisitions:
Depreciation and amortization43  45  
Deferred income tax provision (benefit)16  (2) 
Stock compensation cost11   
Loss on fixed asset impairment (Note 17)55  —  
Change in:
Accounts receivable, net(116) (56) 
Contract assets and liabilities, current355  268  
Inventories, net(49)  
Other assets, current(85)  
Accounts payable and accrued liabilities(289) (309) 
Pension contributions(10) (10) 
Other operating activities, net26  40  
Net cash flows provided by operating activities159  297  
Investing Activities:
Capital expenditures(39) (28) 
Investments in businesses, net of cash acquired (Note 8)(5) (19) 
Investments in equity securities(51) —  
Other investing activities, net 29  
Net cash flows used in investing activities(92) (18) 
Financing Activities:
Proceeds from issuance of long-term debt6,300  —  
Payment of long-term debt issuance costs(43) —  
Increase in short-term borrowings, net36  15  
Net transfers to UTC(6,550) (306) 
Dividends paid to noncontrolling interest(21) (30) 
Other financing activities, net22   
Net cash flows used in financing activities(256) (312) 
Effect of foreign exchange rate changes on cash and cash equivalents(50) 20  
Net (decrease) in cash, cash equivalents and restricted cash(239) (13) 
Cash, cash equivalents and restricted cash, beginning of year1,459  1,346  
Cash, cash equivalents and restricted cash, end of period1,220  1,333  
Less: Restricted cash13  13  
Cash and cash equivalents, end of period$1,207  $1,320  

See accompanying Notes to Condensed Combined Financial Statements
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OTIS WORLDWIDE CORPORATION

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)

The Condensed Combined Financial Statements at March 31, 2020 and for the quarters ended March 31, 2020 and 2019 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The Condensed Combined Balance Sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States. The results reported in these Condensed Combined Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our registration statement on Form 10 (File No. 001-39221), initially filed with the Securities and Exchange Commission (“SEC”) on February 7, 2020, as amended by Amendment No. 1 filed on March 11, 2020 ("Form 10").

Note 1: Description of Business

Otis Worldwide Corporation (“Otis,” “the Business,” “we,” “us” or “our”) is the world’s largest elevator and escalator manufacturing, installation and service company. Our operations are classified into two segments: New Equipment and Service. Through the New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators as well as escalators and moving walkways for residential and commercial building and infrastructure projects. The Service segment provides maintenance and repair services for both our products and those of other manufacturers, and provides modernization services to upgrade elevators and escalators.

On November 26, 2018, United Technologies Corporation, subsequently renamed to Raytheon Technologies Corporation on April 3, 2020 ("UTC" or “Parent”), announced its intention to spin-off its Otis reportable segment into a separate publicly traded company (the "Separation"). On April 3, 2020, UTC completed the spin-off of Otis through a pro-rata distribution of 0.5 shares of Otis common stock for every share of UTC common stock held at the close of business on the record date of March 19, 2020. Otis began to trade as a separate public company (New York Stock Exchange ("NYSE"): OTIS) on April 3, 2020.

Note 2: Basis of Presentation

These accompanying Condensed Combined Financial Statements reflect the historical financial position, results of operations and cash flows of the Business for the periods presented as historically managed within UTC. The Condensed Combined Financial Statements have been derived from the consolidated financial statements and accounting records of UTC. They have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The Condensed Combined Financial Statements at March 31, 2020 and for the quarters ended March 31, 2020 and 2019 are prior to the Separation and thus are prepared on a "carve-out" basis.

The Condensed Combined Statements of Operations include all revenues and costs directly attributable to Otis, including costs for facilities, functions and services used by Otis. Costs for certain functions and services performed by centralized UTC organizations are directly charged to Otis based on specific identification when possible or based on a reasonable allocation driver such as net sales, headcount, usage or other allocation methods. All charges and allocations for facilities, functions and services performed by UTC organizations have been deemed settled in cash by Otis to UTC in the period in which the cost was recorded on the Condensed Combined Statements of Operations. Current and deferred income taxes have been determined based on the stand-alone results of Otis. However, because the Business was included in UTC’s tax group in certain jurisdictions, the Business’ actual tax balances may differ from those reported. The Business’ portion of its domestic income taxes and certain income taxes for jurisdictions outside the United States are deemed to have been settled in the period the related tax expense was recorded.

All significant intracompany accounts and transactions within the Business have been eliminated in the preparation of the Condensed Combined Financial Statements. The Condensed Combined Financial Statements of the Business include assets and liabilities that have been determined to be specifically or otherwise attributable to the Business.

Risks and Uncertainties. In March 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus ("COVID-19") a global pandemic and recommended a number of restrictive measures to contain the spread. Many governments in the regions where we generate the majority of our revenue have adopted such policies, including social distancing and restrictions on businesses deemed non-essential. The Business is closely monitoring the impact of the
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COVID-19 pandemic and managing the effects on its business globally as the situation continues to evolve. It is difficult to estimate at this time the duration and extent of the impact of the pandemic on the business, financial position, cash flow and results of operations. The results of our operations and overall financial performance were impacted during the quarter ended March 31, 2020, with varied impacts across all regions.
Due to existing conditions and uncertainty, the Business believes that COVID-19 will have an impact on its business, cash flow and results of operations for the three months ended June 30, 2020 and likely for the remainder of the year ending December 31, 2020. The extent of the impact will depend largely on future developments, which are highly uncertain and cannot be predicted with certainty, including the emergence of new information concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things.

Use of Estimates. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 at March 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of our goodwill and other long-lived assets, financial assets and revenue recognition. While there was not a material impact to our Condensed Combined Financial Statements as of and for the quarter ended March 31, 2020 resulting from our assessments, future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our Condensed Combined Financial Statements in future reporting periods.

Note 3: Earnings per Share
On April, 3, 2020, the date of consummation of the Separation, 433,079,455 shares of the Business' common stock, par value $0.01 per share, were distributed to UTC shareholders of record as of March 19, 2020. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation as all common stock was owned by UTC prior to the Separation. For the 2020 and 2019 year to date calculations, these shares are treated as issued and outstanding at January 1, 2020 and 2019 for purposes of calculating historical basic and diluted earnings per share.

 Quarter Ended March 31,
(dollars in millions, except per share amounts; shares in millions)20202019
Net income attributable to Otis Worldwide Corporation$165  $273  
Basic and diluted number of shares outstanding433.1  433.1  
Earnings Per Share:
Basic and Diluted$0.38  $0.63  
Note 4: Revenue Recognition

We account for revenue in accordance with Accounting Standards Codification ("ASC") Topic 606: Revenue from Contracts with Customers.

Performance Obligations. The Business' revenue streams include new equipment, maintenance and repair and modernization (including related installation). New equipment, modernization and repair services revenue is typically recognized over time as we are enhancing an asset the customer controls. Maintenance revenue is recognized on a straight-line basis over the life of the maintenance contract.

For new equipment and modernization transactions, equipment and installation are typically procured in a single contract providing the customer with a complete installed elevator or escalator unit. The combination of equipment and installation promises are typically a single performance obligation. For repair services, the customer typically contracts for specific short-term services which form a single performance obligation. For these performance obligations, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress.

For maintenance contracts, given the continuous nature of the maintenance services throughout the year, we recognize revenue on maintenance contracts on a straight-line basis which aligns with the cost profile of these services.


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Contract Assets and Liabilities. Contract assets reflect revenue recognized in advance of customer billing. Contract liabilities are recognized when a customer pays consideration, or we have a right to receive an amount of unconditional consideration, in advance of the satisfaction of performance obligations under the contract. We typically receive progress payments from our customers as we perform our work over time.

Total contract assets and contract liabilities as of March 31, 2020 and December 31, 2019 are as follows:
(dollars in millions)March 31, 2020December 31, 2019
Contract assets, current$491  $529  
Total contract assets
491  529  
Contract liabilities, current2,541  2,270  
Contract liabilities, noncurrent (included within Other long-term liabilities)25  18  
Total contract liabilities
2,566  2,288  
Net contract liabilities$2,075  $1,759  

Contract assets decreased by $38 million during the quarter ended March 31, 2020 as a result of timing of billing on customer contracts and contract completions. Contract liabilities increased by $278 million during the quarter ended March 31, 2020 primarily due to customer billings in excess of revenue earned. In the quarters ended March 31, 2020 and 2019, we recognized revenue of $0.9 billion related to the contract liabilities as of January 1, 2020 and as of January 1, 2019.

Remaining Performance Obligations ("RPO"). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of March 31, 2020, our total RPO was approximately $16.3 billion. Of the total RPO as of March 31, 2020, we expect approximately 91% will be recognized as sales over the following 24 months. On December 31, 2019, we had approximately $16.4 billion of remaining performance obligations, at which time we expected to recognize approximately 91% of these remaining performance obligations as sales in the next 24 months.

Note 5: Related Parties

Historically, the Business has been managed and operated in the normal course of business with other affiliates of UTC. Accordingly, certain shared costs had been allocated to the Business and reflected as expenses in these Condensed Combined Financial Statements.

Allocated Centralized Costs. The Condensed Combined Financial Statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of UTC.

UTC incurred significant corporate costs such as treasury, tax, accounting, human resources, audit, legal, purchasing, information technology and other such services. The costs associated with these services generally include all payroll and benefit costs, as well as overhead costs related to certain functions. All such amounts have been deemed to have been incurred and settled by the Business in the period in which the costs were recorded. The allocated functional service expenses and general corporate expenses for the quarters ended March 31, 2020 and 2019 were approximately $16 million and $17 million, respectively, and are primarily included in Selling, general and administrative on the Condensed Combined Statements of Operations. The future results of operations, financial position and cash flows could differ materially from the historical results presented herein.

Separation Costs. In connection with the Separation as further described in Note 1, we have incurred pre-Separation costs of approximately $32 million for the quarter ended March 31, 2020. The Separation costs are primarily recorded in Selling, general and administrative on the Condensed Combined Statements of Operations and primarily consist of employee-related costs, costs to establish certain stand-alone functions and information technology systems, professional services fees and other transaction-related costs to transition to being a stand-alone public company. There were no costs incurred in connection with the Separation for the quarter ended March 31, 2019.

Cash Management and Financing. The Business participated in UTC's centralized cash management and financing programs. Disbursements were made through centralized accounts payable systems which were operated by UTC. Cash receipts were transferred to centralized accounts, which were also maintained by UTC. As cash is received and disbursed by UTC, it was
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accounted for by the Business through UTC Net (Deficit) Investment. All short and long-term debt was financed by UTC prior to the issuance of the notes and the term loan in connection with the Separation, and the financing decisions for wholly and majority owned subsidiaries were determined by UTC. The Business' cash that is not included in the centralized cash management and financing programs was classified as Cash and cash equivalents on the Condensed Combined Balance Sheets.

At March 31, 2020, the Business was in bank overdraft position of approximately $30 million, which is included in Short term borrowings on the Condensed Combined Balance Sheets. The bank overdraft amount is due from UTC and is recorded through UTC Net (Deficit) Investment on the Condensed Combined Balance Sheets. The balance from UTC was paid in full to the Business prior to the Separation.

During the quarter ended March 31, 2020, net liabilities of $43 million were contributed to the Business by UTC, primarily consisting of deferred tax assets and liabilities and fixed assets. These non-cash contributions are recorded as Net transfers to UTC on the Condensed Combined Statements of Changes in Equity through UTC Net (Deficit) Investment.

Long-Term Debt, Accounts Receivable and Accounts Payable. Certain related party transactions between the Business and UTC have been included within UTC Net (Deficit) Investment on the Condensed Combined Balance Sheets in the historical periods presented. The UTC Net Investment includes related party receivables due from UTC and its affiliates of $0.0 billion and $7.7 billion as of March 31, 2020 and December 31, 2019, respectively. The UTC Net (Deficit) Investment includes related party payables due to UTC and its affiliates of $278 million and $750 million as of March 31, 2020 and December 31, 2019, respectively, which primarily relate to centralized cash management and financing programs. The UTC Net (Deficit) Investment includes related party debt due to UTC and its affiliates of $0 million and $100 million as of March 31, 2020 and December 31, 2019, respectively. The total effect of the settlement of these related party transactions is reflected as a financing activity on the Condensed Combined Statements of Cash Flows.

Guarantees. UTC provided parent guarantees to certain customers or other third parties regarding the product performance obligations of Otis under certain installation and long-term maintenance contracts. The guarantees terminated upon Separation.

UTC provided parent guarantees on behalf of Otis to guarantee ordinary course of business performance obligations as required by certain Otis customers and banks to support credit facilities to Otis' affiliates. At December 31, 2019, the total outstanding parent guarantees were approximately $1.8 billion and have since been terminated in connection with the Separation.

UTC provided parent guarantees of the Otis long-term debt that terminated upon Separation.

Note 6: Accounts Receivable, Net

Adoption of Credit Loss Standard

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and its related amendments (collectively, the Credit Loss Standard) modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments including trade receivables, contract assets, long term receivables and off-balance sheet credit exposures. The Credit Loss Standard requires consideration of a broader range of information to estimate expected credit losses, including historical information, current conditions and evaluate this assessment through a reasonable forecast period. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the expected increase or decrease of expected credit losses that have taken place during the period, which may result in earlier recognition of certain losses. We adopted this standard effective January 1, 2020 utilizing a modified retrospective approach. A cumulative-effect non-cash after-tax adjustment to retained earnings as of January 1, 2020 was recorded in the amount of approximately $25 million.

We are exposed to credit losses primarily through our net sales of products and services to our customers which are recorded as Accounts Receivable, net on the Condensed Combined Balance Sheet. We evaluate each customer's ability to pay through assessing customer creditworthiness, historical experience, current economic conditions and through a reasonable forecast period. Factors considered in our evaluation of assessing collectability and risk include: underlying value of any collateral or security interests, significant past due balances, historical losses and existing economic conditions including country and political risk. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses. We may require collateral or prepayment to mitigate credit risk.

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We estimate expected credit losses of financial assets with similar risk characteristics. We determine an asset is impaired when our assessment identifies there is a risk that we will be unable to collect amounts due according to the contractual terms of the agreement. We monitor our ongoing credit exposure through reviews of customer balances against contract terms and due dates, current economic conditions and dispute resolution. Estimated credit losses are written off in the period in which the financial asset is no longer collectible.

Accounts receivable, net consisted of the following at March 31, 2020 and December 31, 2019:

(dollars in millions)March 31, 2020December 31, 2019
Trade receivables$2,780  $2,723  
Unbilled receivables116  108  
Miscellaneous receivables105  113  
3,001  2,944  
Less: Allowance for expected credit losses1
113  83  
Balance$2,888  $2,861  
1 Prior to January 1, 2020 allowances for doubtful accounts were recorded when accounts receivable were determined to be uncollectible.

The changes in allowance for credit losses related to Accounts receivable for the quarter ended March 31, 2020 is as follows:

(dollars in millions)March 31, 2020
Balance as of December 31, 2019$83  
Impact of credit standard adoption28  
Current period provision for expected credit losses 
Write-offs charged against the allowance for expected credit losses(3) 
Other 
Balance as of March 31, 2020$113  
Note 7: Inventories, net
(dollars in millions)March 31, 2020December 31, 2019
Raw materials and work-in-process$108  $103  
Finished goods491  468  
Total$599  $571  

Raw materials, work-in-process and finished goods are net of valuation reserves of $102 million and $103 million as of March 31, 2020 and December 31, 2019, respectively.

Note 8: Business Acquisitions, Goodwill and Intangible Assets

Business Acquisitions. Our investments in businesses, net of cash acquired, totaled $5 million and $19 million in the quarters ended March 31, 2020 and 2019, respectively. The acquisitions consisted of a number of individually insignificant acquisitions in our Service segment. Transaction costs incurred were not considered significant.

Goodwill. Changes in our Goodwill balances during the quarter ended March 31, 2020 were as follows:
(dollars in millions)Balance as of January 1, 2020Goodwill Resulting
From Business Combinations
Foreign Currency
Translation and Other
Balance as of March 31, 2020
New Equipment$337  $—  $(8) $329  
Service1,310  —  (31) 1,279  
Total$1,647  $—  $(39) $1,608  
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Intangible Assets. Identifiable intangible assets are comprised of the following:

March 31, 2020December 31, 2019
(dollars in millions)Gross AmountAccumulated
Amortization
Gross AmountAccumulated
Amortization
Amortized:
Purchased service portfolios$2,016  $(1,572) $2,069  $(1,598) 
Patents, trademarks/trade names20  (15) 21  (15) 
Customer relationships and other45  (39) 46  (40) 
2,081  (1,626) 2,136  (1,653) 
Unamortized:
Trademarks and other —   —  
Total$2,088  $(1,626) $2,143  $(1,653) 

Amortization of intangible assets for the quarters ended March 31, 2020 and 2019 was $22 million and $24 million, respectively. Excluding the impact of currency translation adjustments, there were no other significant changes in our Intangible Assets during the quarters ended March 31, 2020 and 2019.

Note 9: Borrowings and Lines of Credit
(dollars in millions)March 31, 2020December 31, 2019
Commercial paper$—  $—  
Other borrowings67  34  
Total short-term borrowings$67  $34  

As of March 31, 2020, we have entered into a revolving credit agreement with various banks. This revolving credit facility permits aggregate borrowings of up to $1.5 billion available on April 3, 2020, pursuant to an unsecured, unsubordinated 5-year revolving credit facility with an interest rate of LIBOR plus 125 basis points and a commitment fee rate of 12.5 basis points. As of March 31, 2020, there were no borrowings under the revolving credit facility. The undrawn portion of the revolving credit facility serves as a backstop for the issuance of commercial paper.

As of March 31, 2020, we have entered into a $1.5 billion unsecured, unsubordinated commercial paper program that became available on April 3, 2020. We plan to use our commercial paper borrowings for general corporate purposes including to finance acquisitions, pay dividends and for debt refinancing. The need for commercial paper borrowings may arise if the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.

On February 10, 2020, the Business entered into a Term Loan Credit Agreement ("Term Loan") providing for a $1.0 billion unsecured, unsubordinated 3-year loan credit facility. On March 27, 2020, the Business drew on the full amount of the term loan.

Additionally, on February 27, 2020, we issued $5.3 billion unsecured, unsubordinated notes ("the Notes").

The net proceeds of the financing arrangements described above of approximately $6.3 billion in the aggregate were distributed to UTC.

The revolving credit agreement, term loan agreement and indenture contain affirmative and negative covenants customary for financings of these types that, among other things, limit the Business and its subsidiaries’ ability to incur additional liens, to make certain fundamental changes and to enter into sale and leaseback transactions. In addition, the revolving credit agreement and the term loan credit agreement require that we maintain a maximum consolidated total leverage ratio. The revolving credit agreement, term loan credit agreement and indenture also contain events of default customary for financings of these types.
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Long-term debt as of March 31, 2020 and December 31, 2019 consisted of the following:
(dollars in millions)March 31, 2020December 31, 2019
LIBOR plus 112.5 bps Term Loan due 2023 2,4
$1,000  $—  
LIBOR plus 45 bps floating rate notes due 2023 1,3
500  —  
2.056% notes due 2025 3
1,300  —  
2.293% notes due 2027 3
500  —  
2.565% notes due 2030 3
1,500  —  
3.112% notes due 2040 3
750  —  
3.362% notes due 2050 3
750  —  
Other (including finance leases)  
Total principal long-term debt$6,305  $ 
Other (discounts and debt issuance costs)(47) —  
Total long-term debt$6,258  $ 
Less: current portion—  —  
Long-term debt, net of current portion$6,258  $ 
1 The three-month LIBOR rate at March 31, 2020 was approximately 1.45%.
2 The six-month LIBOR rate at March 31, 2020 was approximately 1.18%.
3 On February 27, 2020, we issued $5.3 billion of unsecured, unsubordinated notes. We may redeem these notes at our option pursuant to their terms.
4 On March 27, 2020, we drew down $1.0 billion of our unsecured, unsubordinated term loan.

We recorded $47 million of debt issuance costs related to the Notes. Debt issuance costs are presented as a reduction of debt on the Condensed Combined Balance Sheets and are amortized as a component of interest expense over the term of the related debt using the effective interest method.

We had no debt payments during the quarter ended March 31, 2020. The average maturity of our long-term debt at March 31, 2020 is approximately 10.6 years. The average interest expense rate on our total borrowings for the quarter ended March 31, 2020 is approximately 2.5%. The schedule of principal payments required on long-term debt for the next five years and thereafter is:

(dollars in millions)
2020$—  
2021 
2022 
20231,501  
2024 
Thereafter4,800  
Total $6,305  
Note 10: Employee Benefit Plans

Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:
 Quarter Ended March 31,
(dollars in millions)20202019
Defined benefit plans$10  $10  
Defined contribution plans16  11  
Multi-employer pension and postretirement plans
37  38  


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The following table illustrates the components of net periodic benefit cost for our defined benefit pension plans:
 Quarter Ended March 31,
(dollars in millions)20202019
Service cost$10  $ 
Interest cost  
Expected return on plan assets(7) (6) 
Amortization of prior service credit—  (1) 
Recognized actuarial net loss   
Net settlement and curtailment loss —   
Total net periodic benefit cost$11  $10  

Postretirement Benefit Plans. We sponsor postretirement benefit plans that provide health and life benefits to eligible retirees. The postretirement plans are unfunded. The net periodic benefit cost was less than $1 million for the quarters ended March 31, 2020 and 2019, respectively.

UTC Sponsored Defined Benefit Plans. Defined benefit pension and postretirement benefit plans sponsored by UTC have been accounted for as multi-employer plans in these Condensed Combined Financial Statements, in accordance with FASB ASC Topic 715-30: Defined Benefit Plans – Pension and FASB ASC Topic 715-60: Defined Benefit Plans – Other Postretirement. FASB ASC Topic 715: Compensation-Retirement Benefits provides that an employer that participates in a multi-employer defined benefit plan is not required to report a liability beyond the contributions currently due and unpaid to the plan. Therefore, no assets or liabilities related to these plans have been included on the Condensed Combined Balance Sheets.

These pension and post retirement expenses were allocated to the Business and reported in Cost of products and services sold, Selling, general and administrative and Non-service pension benefit on the Condensed Combined Statements of Operations. The amounts for pension and retirement expenses for the quarters ended March 31, 2020 and 2019 were as follows:
Quarter Ended March 31,
(dollars in millions)
20202019
Service cost$ $ 
Non-service pension benefit(5) (13) 
Total$(4) $(9) 
Note 11: Accumulated Other Comprehensive Loss

A summary of the changes in each component of Accumulated other comprehensive loss, net of tax for the quarters ended March 31, 2020 and 2019 is provided below:
(dollars in millions)
Foreign
Currency
Translation
Defined Benefit
Pension and
Postretirement
Plans
Unrealized
Hedging
(Losses)
Gains
Accumulated
Other
Comprehensive
(Loss) Income
Quarter Ended March 31, 2020
Balance at December 31, 2019$(588) $(167) $(3) $(758) 
Other comprehensive (loss) income before
reclassifications, net
(116) —  11  (105) 
Amounts reclassified, pre-tax—   —   
Tax benefit reclassified—  (3) —  (3) 
Balance at March 31, 2020$(704) $(166) $ $(862) 

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(dollars in millions)
Foreign
Currency
Translation
Defined Benefit
Pension and
Postretirement
Plans
Unrealized
Hedging
(Losses) Gains
Accumulated
Other
Comprehensive
(Loss) Income
Quarter Ended March 31, 2019
Balance at December 31, 2018$(573) $(135) $—  $(708) 
Other comprehensive income (loss) before
reclassifications, net
36  (28) —   
Amounts reclassified, pre-tax—   —   
Tax expense reclassified—   —   
Balance at March 31, 2019$(537) $(157) $—  $(694) 

Amounts reclassified that relate to defined benefit pension and postretirement plans include amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented. See Note 10 Employee Benefit Plans for additional information.
Note 12: Income Taxes

The increase in the effective tax rate for the quarter ended March 31, 2020 is primarily the result of the tax impact of one-time Separation costs and a fixed asset impairment loss.

As part of the Separation process, the Business determined that as a stand-alone company the Business no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S, which are different from the historical assertion of UTC. For the remainder of the Business' undistributed international earnings, the Business will continue to permanently reinvest these earnings unless it is tax effective to repatriate. As a result of the change in assertion, the Business recognized a one-time tax benefit of $9 million in the quarter resulting from an overall reduction in the liability previously recorded by UTC.

The Business conducts business globally and, as a result, the Business files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Business is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Canada, China, France, Germany, India, Italy, Japan, Mexico, South Korea, Spain, the United Kingdom, and the United States. With few exceptions, the Business is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for years before 2009.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that a range of a $10 million net increase to a $330 million net reduction of unrecognized tax benefits may occur within the next 12 months as a result of additional worldwide uncertain tax positions, the closure of tax statutes, or the revaluation of current uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals or in the courts. See Note 16, Contingent Liabilities, for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
Note 13: Restructuring Costs
During the quarters ended March 31, 2020 and 2019, we recorded pre-tax restructuring costs totaling $6 million and $25 million, respectively, for new and ongoing restructuring actions. We recorded pre-tax restructuring costs of $4 million related to 2020 actions and $2 million of costs related to 2019 actions. We recorded these charges as follows:
Quarter Ended March 31,
(dollars in millions)20202019
Cost of products and services sold$—  $ 
Selling, general and administrative 17  
Total$ $25  

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2020 Actions. During the quarter ended March 31, 2020, we recorded pre-tax restructuring costs of $4 million primarily included in Selling, general and administrative expenses on the Condensed Combined Statement of Operations. The 2020 actions relate to ongoing cost reduction efforts, including workforce reductions.
We are targeting to complete in 2021 the majority of remaining restructuring actions initiated in 2020. The following table summarizes the accrual balance and utilization for the 2020 restructuring actions for the quarter ended March 31, 2020:
(dollars in millions)SeveranceFacility Exit, Lease Termination and Other CostsTotal
Quarter Ended March 31, 2020
Net pre-tax restructuring costs$ $—  $ 
Utilization, foreign exchange and other costs(1) —  (1) 
Balance at March 31, 2020$ $—  $ 

The following table summarizes expected, incurred and remaining costs for the 2020 restructuring actions:
(dollars in millions)
Expected
Costs
Costs Incurred Quarter Ended
March 31, 2020
Remaining Costs at
March 31, 2020
Total restructuring$ $(4) $ 

2019 Actions. During the quarter ended March 31, 2020, we recorded pre-tax restructuring costs totaling $2 million for restructuring actions initiated in 2019, all of which were included in Selling, general and administrative expenses Condensed Combined Statement of Operations. The 2019 actions relate to ongoing cost reduction efforts, including workforce reductions.
The following table summarizes the accrual balances and utilization for the 2019 restructuring actions for the quarter ended March 31, 2020:    
(dollars in millions)Severance
Facility Exit,
Lease
Termination and
Other Costs
Total
Quarter Ended March 31, 2020
Restructuring accruals at January 1, 2019$ $—  $ 
Net pre-tax restructuring costs —   
Utilization, foreign exchange and other costs(6) —  (6) 
Balance at March 31, 2020$ $—  $ 

The following table summarizes expected, incurred and remaining costs for the 2019 restructuring actions:
(dollars in millions)
Expected
Costs
Costs incurred during 2019Costs Incurred Quarter Ended
March 31, 2020
Remaining Costs at
March 31, 2020
Total restructuring$63  $(45) $(2) $16  

2018 and Prior Actions. During the quarter ended March 31, 2020, no pre-tax restructuring costs were recorded for restructuring actions initiated in 2018 and prior.
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Note 14: Fair Value Measurements
In accordance with the provisions of ASC 820: Fair Value Measurements, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and non-recurring basis in our Condensed Combined Balance Sheets as of March 31, 2020 and December 31, 2019: 
March 31, 2020
(dollars in millions)TotalLevel 1Level 2Level 3
Recurring fair value measurements:
Equity securities$52  $52  $—  $—  
Derivative assets33  —  33  —  
Derivative liabilities(17) —  (17) —  

December 31, 2019
(dollars in millions)TotalLevel 1Level 2Level 3
Recurring fair value measurements:
Equity securities$ $ $—  $—  
Derivative assets —   —  
Derivative liabilities(5) —  (5) —  

Valuation Techniques. Our equity securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. The fair value gains or losses related to our equity securities are recorded through net income. Our derivative assets and liabilities include foreign exchange contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks. Our Notes are measured at fair value using closing bond prices from active markets. Our term loan is measured at fair value using external interest rates and market conditions to derive a market interest rate, which at March 31, 2020 approximated the actual rate.
As of March 31, 2020, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Combined Balance Sheets at March 31, 2020 and December 31, 2019:
 March 31, 2020December 31, 2019
(dollars in millions)
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Long-term receivables$62  $62  $62  $62  
Customer financing notes receivable77  77  62  62  
Short-term borrowings(67) (67) (34) (34) 
Long-term debt (excluding finance leases)(6,300) (6,123) —  —  
Long-term liabilities(3) (3) (4) (4) 
The following tables provide the valuation hierarchy classification of assets and liabilities that are not carried at fair value in the Condensed Combined Balance Sheet at March 31, 2020 and December 31, 2019:

March 31, 2020
(dollars in millions)TotalLevel 1Level 2Level 3
Long-term receivables$62  $—  $62  $—  
Customer financing notes receivable77  —  77  —  
Short-term borrowings(67) —  (67) —  
Long-term debt (excluding finance leases)(6,123) —  (5,123) (1,000) 
Long-term liabilities(3) —  (3) —  

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December 31, 2019
(dollars in millions)TotalLevel 1Level 2Level 3
Long-term receivables$62  $—  $62  $—  
Customer financing notes receivable62  —  62  —  
Short-term borrowings(34) —  (34) —  
Long-term liabilities(4) —  (4) —  
Note 15: Guarantees

The Business provides service and warranty on its products beyond normal service and warranty policies. The changes in the carrying amount of service and product guarantees for the quarters ended March 31, 2020 and 2019 are as follows:

(dollars in millions)20202019
Balance as of January 1$27  $47  
Warranties  
Settlements made(3) (3) 
Other(1)  
Balance as of March 31$30  $47  
Note 16: Contingent Liabilities

Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.

Environmental. As previously disclosed, the Business’ operations are subject to environmental regulation by authorities with jurisdiction over its operations. The Business has accrued for the costs of environmental remediation activities, including, but not limited to, investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassesses these amounts. Management believes that the likelihood of incurring losses materially in excess of amounts accrued is remote. The outstanding liability for environmental obligations was $12 million at the quarters ended March 31, 2020 and December 31, 2019 respectively and is included in Accrued liabilities and Other long-term liabilities on the Condensed Combined Balance Sheets.

Legal Proceedings.

German Tax Litigation

As previously disclosed, we have been involved in administrative review proceedings with the German Tax Office, which concern approximately €215 million (approximately $237 million as of March 31, 2020) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of our operations in Germany. Upon audit, these tax benefits were disallowed by the German Tax Office. We estimate interest associated with the aforementioned tax benefits is an additional approximately €118 million (approximately $130 million). On August 3, 2012, a suit was filed in the local German Tax Court (Berlin-Brandenburg). In March 2016, the local German Tax Court dismissed the suit, and we appealed this decision to the German Federal Tax Court. Following a hearing on July 24, 2018, the German Federal Tax Court remanded the matter to the local German Tax Court for further proceedings. In 2015, UTC made tax and interest payments to German tax authorities of €275 million (approximately $303 million) in order to avoid additional interest accruals pending final resolution of this matter. Pursuant to the tax matters agreement, the Business retains the liability associated with the remaining interest, and has recorded an interest accrual of €44.7 million (approximately $49.1 million), net of payments and other deductions, included within Other long-term liabilities on the Condensed Combined Balance Sheet at March 31, 2020. In the event that UTC and Otis prevail in this matter, any recoveries would be allocated between UTC and the Business pursuant to the terms of the tax matters agreement.



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Asbestos Matters

As previously disclosed, we have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos. While we have never manufactured any asbestos-containing component parts, and no longer incorporate asbestos in any current products, certain of our historical products have contained components manufactured by third parties incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or were covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos related claims were not material individually or in the aggregate as of and for the periods ended March 31, 2020 and December 31, 2019.

The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $24 million to $45 million. Because no amount within the range of estimates is more likely to occur than any other, we have recorded the minimum amount of $24 million, which is principally recorded in Other long-term liabilities on our Condensed Combined Balance Sheets as of March 31, 2020 and December 31, 2019. Amounts are on a pre-tax basis, not discounted, and excludes the Business’ legal fees to defend the asbestos claims (which will continue to be expensed as they are incurred). In addition, the Business has an insurance recovery receivable for probable asbestos related recoveries of approximately $5 million, which is included in Other assets on our Condensed Combined Balance Sheets as of March 31, 2020 and December 31, 2019.

Other.

As previously disclosed, we have commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based on a range of possible outcomes. If no amount within this range is a better estimate than any other, we accrue the minimum amount. While it is not possible to determine the ultimate disposition of each of these claims and whether they will be resolved consistent with our beliefs, we expect that the outcome of such claims, individually or in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows or results of operations.

As previously disclosed, in certain European countries, claims for overcharges on elevators and escalators related to civil cartel cases have been made, which we have accrued for based on our evaluation of the claims. While it is not possible to determine the ultimate disposition of each of these claims and whether they will be resolved consistent with our beliefs, historical settlement experience of these cases have not been material to the business, financial condition, cash flows or results of operations, however the future outcome of these cases cannot be determined.

As previously disclosed, in the ordinary course of business, the Business is also routinely a defendant in, party to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the Business and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Note 17: Segment Financial Data

Our operations are classified into two operating segments: New Equipment and Service. Through the New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators as well as escalators and moving walkways to customers in the residential and commercial building and infrastructure projects. The Service segment provides maintenance and repair services for both our products and those of other manufacturers, and provides modernization services to upgrade elevators and escalators. The operating segments are generally based on the management structure of the Business, how management allocates resources, assesses performance and makes strategic and operational decisions.

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Segment Information. Segment information for the quarters ended March 31, 2020 and 2019 are as follows:

Net SalesOperating ProfitOperating Profit Margin
(dollars in millions)202020192020201920202019
New Equipment$1,123  $1,271  $64  $59  5.7 %4.6 %
Service1,843  1,830  400  386  21.7 %21.1 %
Total segment2,966  3,101  464  445  15.6 %14.4 %
General corporate expenses and other 1
—  —  (135) (30) 
Total$2,966  $3,101  $329  $415  11.1 %13.4 %
1 The increase in general corporate expenses and other during the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019 is primarily driven by a fixed asset impairment charge and related costs of approximately $67 million, as well as Separation related costs of $32 million and standalone public company costs.

Total assets are not presented for each segment as they are not presented to or reviewed by the Chief Operating Decision Maker ("CODM").

Geographic External Sales. Geographic Net sales are attributed to the geographic regions based on their location of origin. With the exception of the U.S. and China, there were no individually significant countries with sales exceeding 10% of Net sales during the quarters ended March 31, 2020 and 2019.
External Net Sales
Quarter Ended March 31,
(dollars in millions)20202019
United States Operations:$890  $917  
International Operations:
China319  377  
Other1,757  1,807  
Total$2,966  $3,101  

Segment Net sales disaggregated by product and service type for the quarters ended March 31, 2020 and 2019 are as follows:
Quarter ended March 31,
(dollars in millions)20202019
Disaggregated Net sales by type
New Equipment$1,123  $1,271  
Maintenance and repair1,510  1,507  
Modernization333  323  
Total Service1,843  1,830  
$2,966  $3,101  

Major Customers. There were no customers that individually accounted for 10% or more of the Business’ combined Net sales for the quarters ended March 31, 2020 and 2019.
Note 18: Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes the disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. The Business adopted this standard effective January 1, 2020. The adoption of this ASU did not have a significant impact on our Condensed Combined Financial Statements.
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In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard includes updates to the disclosure requirements for defined benefit plans including several additions, deletions and modifications to the disclosure requirements. The provisions of this ASU are effective for years ending after December 15, 2020, with early adoption permitted. The Business adopted this standard effective January 1, 2020. The adoption of this ASU did not have a significant impact on our Condensed Combined Financial Statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard provides updated guidance surrounding implementation costs associated with cloud computing arrangements that are service contracts. The provisions of this ASU are effective for years beginning after December 15, 2019. The Business adopted this standard effective January 1, 2020. The adoption of this ASU did not have a material impact on our Condensed Combined Financial Statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The amendments in this update for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). Therefore, these amendments likely will result in more decision makers not having a variable interest through their decision-making arrangements. These amendments also will create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a Variable Interest Entity ("VIE"). If fewer decision-making fees are considered variable interests, the focus on determining which party within a related party group under common control may have a controlling financial interest will be shifted to the variable interest holders in the group with more significant economic interests. This will significantly reduce the risk that decision makers with insignificant direct and indirect interests could be deemed the primary beneficiary of a VIE. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. The Business adopted this standard effective January 1, 2020. The adoption of this ASU did not have a material impact on our Condensed Combined Financial Statements.
Note 19 - Subsequent Events

The Business evaluated events and transactions occurring subsequent to March 31, 2020.

Distribution from UTC. On April 3, 2020, the Separation was completed through UTC's pro-rata distribution (the “Distribution”) of 100% of the outstanding common stock of Otis, to holders of UTC common stock who held shares of UTC common stock, as of the close of business on the record date of March 19, 2020. UTC distributed 433,079,455 shares of Otis’ common stock, par value $0.01 per share, in the Distribution, which was effective at 12:01 a.m., Eastern Time, on April 3, 2020. As a result of the Distribution, UTC shareowners of record received 0.5 shares of Otis’ common stock for every share of UTC common stock. As a result of the Distribution, Otis became an independent, publicly-traded company and its common stock is listed under the symbol “OTIS” on the NYSE.

In connection with the Separation, the Business entered into several agreements with UTC and Carrier Global Corporation ("Carrier"), including a separation and distribution agreement that sets forth certain agreements with UTC and Carrier regarding the principal actions to be taken in connection with the Separation, including identifying the assets transferred, the liabilities assumed and the contracts transferred to each of UTC, Carrier and Otis as part of the Separation, and when and how these transfers and assumptions occurred. Other agreements that we entered into that govern aspects of our relationship with UTC and Carrier following the Separation include:

Transition Services Agreement. We entered into a transition services agreement under which UTC is to provide the Business with certain services and we will provide certain services to UTC for a limited time to help ensure an orderly transition following the Separation. The services we receive include, but are not limited to, information technology services, technical and engineering support, application support for operations, legal, payroll, finance, tax and accounting, general administrative services and other support services.

Tax Matters Agreement. We entered into a tax matters agreement with UTC and Carrier that governs the parties’ respective rights, responsibilities and obligations with respect to tax matters (including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other tax
24


matters). Subject to certain exceptions set forth in the tax matters agreement, Otis generally is responsible for federal, state and foreign taxes imposed on a separate return basis on Otis (or any of its subsidiaries) with respect to taxable periods (or portions thereof) that ended on or prior to the date of the Distribution. The tax matters agreement provides special rules that allocate responsibility for tax liabilities arising from a failure of the Separation transactions to qualify for tax-free treatment based on the reasons for such failure. The tax matters agreement also imposes restrictions on Otis during the two-year period following the Distribution that are intended to prevent certain transactions from failing to qualify as transactions that are generally tax-free.

Employee Matters Agreement and Intellectual Property Agreement. We also entered into an employee matters agreement and intellectual property agreement with UTC and Carrier in connection with the Separation.
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Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of Otis Worldwide Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed combined balance sheet of Otis Worldwide Corporation (the “Company”) as of March 31, 2020, and the related condensed combined statements of operations, of comprehensive income, of changes in equity and of cash flows for the three-month periods ended March 31, 2020 and 2019, including the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America, the combined balance sheet of the Company as of December 31, 2019, and the related combined statements of operations, of comprehensive income, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 7, 2020, we expressed an unqualified opinion on those combined financial statements. In our opinion, the information set forth in the accompanying condensed combined balance sheet information as of December 31, 2019, is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ PricewaterhouseCoopers LLP

Hartford, CT
May 8, 2020
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW

We are the world’s largest elevator and escalator manufacturing, installation and service company. Our company is organized into two segments - New Equipment and Service. Through our New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators, as well as escalators and moving walkways for residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers, general contractors, governments, architects and specialized consultants who develop and/or design buildings for residential, commercial, retail or mixed-use activity. We sell our New Equipment directly to customers, as well as through agents and distributors.

Through our Service segment, we perform maintenance and repair services for both our own products and those of other manufacturers and provide modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services to address equipment and component wear and tear and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed.

We serve our customers through a global network of approximately 69,000 employees. These include sales personnel, field technicians with separate skills in performing installation and service, as well as engineers driving our continued product development and innovation. We function under a centralized operating model whereby a single global strategy is set around New Equipment and Service because we seek to grow our maintenance portfolio, in part, through the conversion of new elevator and escalator installations into service contracts. Accordingly, we benefit from an integrated global strategy, which sets priorities and establishes accountability across the full product lifecycle.

The current status of significant factors affecting our business environment in 2020 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10.
Separation from United Technologies Corporation
On April 3, 2020, the Separation was completed through the Distribution of 100% of the outstanding common stock of Otis to holders of UTC common stock who held shares of UTC common stock as of the close of business on the record date of March 19, 2020. UTC distributed 433,079,455 shares of Otis' common stock, par value $0.01 per share in the Distribution, which was effective at 12:01 a.m. Eastern Time, on April 3, 2020. As a result of the Distribution, UTC shareowners of record received 0.5 shares of Otis' common stock for every share of UTC common stock. As a result of the Distribution, Otis became an independent, publicly traded company and its common stock is listed under the symbol "OTIS" on the NYSE.

The Condensed Combined Financial Statements included in this Form 10-Q have been prepared from UTC’s historical accounting records and are presented on a stand-alone basis as if the Business’ operations had been conducted independently from UTC. Our Condensed Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

In anticipation of the Separation during the quarter ended March 31, 2020 and subsequent to the Separation, we have and expect to continue to incur one-time Separation costs consisting primarily of employee-related costs such as recruitment and relocation expenses, costs to establish certain stand-alone functions and information technology systems, professional services fees and other transaction-related costs. Additionally, we will incur increased costs as a result of becoming an independent, publicly traded company, primarily from establishing or expanding the corporate support for our businesses, including information technology, human resources, treasury, tax, internal audit, risk management, stock-based compensation programs, accounting and financial reporting, investor relations, governance, legal, procurement and other services. We believe our cash flows from operations will be sufficient to fund these additional corporate expenses.

We entered into a transition services agreement with UTC and Carrier on April 2, 2020, in connection with the Separation pursuant to which UTC provides us with certain services and we provide certain services to UTC for a limited time to help ensure an orderly transition following the Separation. The services we receive include, but are not limited to, information technology services, technical and engineering support, application support for operations, legal, payroll, finance, tax and
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accounting, general administrative services and other support services. For additional discussion, see “Certain Relationships and Related Party Transactions,” in the Form 10.

As costs for these services historically were included in the Business' operating results through expense allocations from UTC, we do not expect the costs associated with the transition services agreement to be materially different and, therefore, we do not expect such costs to materially affect our results of operations or cash flows after becoming a stand-alone company.

In connection with the Separation, we entered into a tax matters agreement with UTC and Carrier on April 2, 2020, that governs the parties’ respective rights, responsibilities and obligations with respect to tax matters (including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other tax matters).

Subject to certain exceptions set forth in the tax matters agreement, the Business generally will be responsible for federal, state and foreign taxes imposed on a separate return basis on the Business (or any of its subsidiaries) with respect to taxable periods (or portions thereof) that ended on or prior to the date of the Distribution.

The tax matters agreement provides special rules that allocate responsibility for tax liabilities arising from a failure of the Separation transactions to qualify for tax-free treatment based on the reasons for such failure. The tax matters agreement also imposes restrictions on each of Otis and Carrier during the two-year period following the Distribution that are intended to prevent certain transactions from failing to qualify as transactions that are generally tax-free.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted which significantly changed U.S. tax law. This new legislation imposed a one-time toll charge, paid in installments over an 8-year period, on deemed repatriated earnings of foreign subsidiaries as of December 31, 2017. Under the terms of the tax matters agreement, Otis will indemnify UTC for a percentage of the toll charge installment payments due after April 3, 2020. As a result, a portion of the future income tax obligations corresponding to the toll charge will be reclassified as a contractual indemnity obligation within Other long-term liabilities on the Condensed Combined Balance Sheet. For additional discussion, see “Certain Relationships and Related Party Transactions,” in the Form 10.

In connection with the Separation, we entered into an employee matters agreement and intellectual property agreement with UTC and Carrier on April 2, 2020. These agreements are not expected to have a material impact on the financial results of Otis. For additional discussion see "Certain Relationships and Related Party Transactions" in the Form 10.

Impact of COVID-19 on our Business

A novel strain of coronavirus (“COVID-19”) surfaced in Wuhan, China in December 2019, and has since spread throughout the rest of the world, resulting in widespread travel restrictions and extended shutdowns of non-essential businesses. We continue to provide critical maintenance and repair services, however this pandemic has impacted our business, and is expected to continue to impact our business, as limitations remain in force globally.

The results of our operations and overall financial performance were impacted during the quarter ended March 31, 2020, with varied impacts across all regions. The broader implications of COVID-19 on our results of operations, including net sales and overall financial performance remain uncertain, however we anticipate it will negatively impact our business during the quarter ended June 30, 2020 and the remainder of 2020, potentially as a result of:

Customer liquidity constraints
Temporary closure or reduced capacity of our factory operations
New equipment job site closures
Cancellations or delays of customer orders
Challenges in accessing units to provide maintenance and repair services
Customer demand impacting our maintenance and repair business

We currently do not expect any significant impact to our capital and financial resources, including our overall liquidity position based on our available cash and cash equivalents and our access to credit facilities and the capital markets. We are focused on navigating these challenges presented by COVID-19 by preserving our liquidity and managing our cash flow through taking the necessary measures to meet our short-term liquidity needs. Such actions could include, but are not limited to, reducing our discretionary spending, reducing payroll costs and restructuring.

See the Liquidity and Financial Condition section for further detail.

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We also do not anticipate any material impairments to our goodwill, intangible asset and long-lived asset balances.

See Part I, Item 1A,"Risk Factors" below for further discussion.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our Condensed Combined Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the Condensed Combined Financial Statements, or are the most sensitive to change due to outside factors, are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" included in the Form 10. Except as disclosed in Note 6 and Note 18 to our Condensed Combined Financial Statements in this Form 10-Q, pertaining to adoption of new accounting pronouncements, there have been no material changes in these policies.
RESULTS OF OPERATIONS
Net Sales
 Quarter Ended March 31,
(dollars in millions)20202019
Net sales$2,966  $3,101  
Percentage change year-over-year(4.4)%
The factors contributing to the total percentage change year-over-year in total Net sales for the quarter ended March 31, 2020 are as follows:
Quarter Ended March 31, 2020
Organic volume(2.1)%
Foreign currency translation(1.8)%
Acquisitions and divestitures, net(0.5)%
Total % change(4.4)%

The Organic volume decrease of (2.1)% for the quarter ended March 31, 2020 was driven by a decrease in organic sales of (9.8)% in the New Equipment segment, partially offset by organic sales growth of 3.3% in the Service segment.

See "Segment Review" below for a discussion of Net sales by segment.
Cost of Products and Services Sold 
 Quarter Ended March 31,
(dollars in millions)20202019
Total cost of products and services sold$2,069  $2,200  
Percentage change year-over-year(6.0)%

The factors contributing to the percentage change year-over-year for the quarter ended March 31, 2020 in total cost of products and services sold are as follows: 
Quarter Ended March 31, 2020
Organic volume(3.3)%
Foreign currency translation(1.9)%
Acquisitions and divestitures, net(0.4)%
Restructuring(0.4)%
Total % change(6.0)%

The organic decrease in total cost of products and services sold for the quarter ended March 31, 2020 was primarily driven by the organic sales decrease noted above.
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Gross Margin
 Quarter Ended March 31,
(dollars in millions)20202019
Gross margin$897  $901  
Gross margin percentage30.2 %29.1 %

Gross margin increased 110 basis points for the quarter ended March 31, 2020 when compared to the same period for 2019, primarily driven by improvement in the New Equipment margin rate and overall segment mix.

See the Segment Review below for discussion of operating results by segment.

Research and Development 
 Quarter Ended March 31,
(dollars in millions)20202019
Research and development$38  $39  
Percentage of net sales1.3 %1.3 %

Research and development spending remained relatively consistent for the quarter ended March 31, 2020 compared to the same period in 2019. We continue to focus on our commitment to Internet of Things technology developing the next generation of connected elevators and escalators.

Selling, General and Administrative 
 Quarter Ended March 31,
(dollars in millions)20202019
Selling, general and administrative expenses$465  $441  
Percentage of net sales15.7 %14.2 %

Selling, general and administrative expenses increased $24 million or 5.4% for the quarter ended March 31, 2020 when compared to the same period in 2019. Lower employment costs were more than offset by Separation costs incurred of $32 million and additional standalone public company costs of $22 million. Selling, general and administrative costs increased as a percentage of Net sales during the quarter ended March 31, 2020, primarily driven by the increase in Separation costs and lower sales in 2020.

We are continuously evaluating our cost structure and have implemented restructuring actions as a method of keeping our cost structure competitive. For further discussion, see “Restructuring Costs” below and Note 13 in the Notes to the Condensed Combined Financial Statements.

Restructuring Costs
 Quarter Ended March 31,
(dollars in millions)20202019
Restructuring costs$ $25  

We initiate restructuring actions as a method to keep our cost structure competitive. Charges generally arise from severance related to workforce reductions, and to a lesser degree, facility exit and lease termination costs associated with the consolidation of field and manufacturing operations. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions. Total Restructuring costs were $6 million for the quarter ended March 31, 2020 and included $4 million of costs related to 2020 actions and $2 million of costs related to 2019 actions.

2020 Actions. During the quarter ended March 31, 2020, we recorded net pre-tax restructuring charges of $4 million relating to ongoing cost reduction actions initiated in 2020. We are targeting to complete in 2020 and 2021 the majority of the remaining workforce cost reduction actions initiated in 2020. Approximately 92% of the total expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2020, we had cash outflows of approximately $1 million related to the 2020 actions. We expect recurring pre-tax
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savings in continuing operations to increase to approximately $7 million annually over the two-year period subsequent to initiating the actions.

2019 Actions. During the quarters ended March 31, 2020 and 2019, we recorded net pre-tax restructuring charges of $2 million and $19 million, respectively, for actions initiated in 2019. We are targeting to complete in 2020 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2019. Approximately 96% of the total pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2020, we had cash outflows of approximately $6 million related to the 2019 actions. We expect to incur additional restructuring charges of $16 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period after initiating the actions to approximately $49 million annually, of which approximately $10 million was realized during the quarter ended March 31, 2020.

In addition, we recorded net pre-tax restructuring costs totaling $0 and $6 million in the quarters ended March 31, 2020 and 2019, respectively, for restructuring actions initiated in 2018 and prior. For additional discussion of restructuring, see Note 13 to the Condensed Combined Financial Statements.

Other (Expense) Income, Net 
 Quarter Ended March 31,
(dollars in millions)20202019
Other (expense) income, net$(65) $(6) 

Other (expense) income, net primarily includes the impact of changes in the fair value and settlement of embedded and foreign exchange derivatives, gains or losses on sale of businesses and fixed assets, earnings from equity method investments, fair value changes on equity securities, impairments and certain other operating items. The year-over-year increase in Other (expense) income, net of $(59) million for the quarter ended March 31, 2020 when compared to the same period in 2019 is primarily driven by a fixed asset impairment of approximately $(55) million and related license costs of approximately $(12) million, offset by favorable mark-to-market adjustments on foreign currency derivatives when compared to the same period in 2019.

Interest Expense, Net
 Quarter Ended March 31,
(dollars in millions)20202019
Interest expense, net$ $ 

Interest expense, net primarily relates to interest on newly issued external debt, offset partially by interest income primarily related to interest earned on cash balances, short-term investments and related party activity between Otis and UTC.

The increase in Interest expense, net in the quarter ended March 31, 2020 in comparison to the same period in 2019 was primarily driven by interest expense of approximately $13 million on the newly issued $5.3 billion of unsecured, unsubordinated notes on February 27, 2020 and the $1.0 billion drawn on the Term Loan on March 27, 2020, offset primarily by higher income earned on short-term investments for the quarter ended March 31, 2020.

The average interest rate on the newly acquired debt as of March 31, 2020 is approximately 2.5%.

For additional discussion of borrowings, see Note 9 to the Condensed Combined Financial Statements.
Income Taxes
 Quarter Ended March 31,
 20202019
Effective tax rate38.2 %29.4 %

The increase in the effective tax rate for the quarter ended March 31, 2020 is primarily the result of the tax impact on one-time Separation costs and a fixed asset impairment loss, discussed above.

As part of the Separation process, the Business determined that as a stand-alone company, the Business no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S., which are different from the historical assertion of UTC. For the remainder of the Business' undistributed international earnings, the
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Business will continue to permanently reinvest these earnings unless it is tax effective to repatriate. As a result of the change in assertion, the Business recognized a one-time tax benefit of $9 million in the quarter resulting from an overall reduction in the liability previously recorded by UTC.

The Business will continue to review and incorporate as necessary U.S. Tax Cuts and Jobs Act ("TCJA") changes related to forthcoming U.S. Treasury Regulations.

We anticipate some variability in the tax rate quarter to quarter from potential discrete items.

For additional discussion of income taxes and the effective income tax rate, see Note 12 to the Condensed Combined Financial Statements.
Noncontrolling Interest in Subsidiaries' Earnings
 Quarter Ended March 31,
(dollars in millions)20202019
Noncontrolling interest in subsidiaries' earnings$37  $27  

Noncontrolling interest in subsidiaries' earnings increased for the quarter ended March 31, 2020 in comparison to the same period in 2019 was primarily due to an increase in net income from subsidiaries with noncontrolling interests. There was no other significant activity for the quarter ended March 31, 2020.

Net Income Attributable to Otis Worldwide Corporation
 Quarter Ended March 31,
(dollars in millions, except per share amounts)20202019
Net income attributable to Otis Worldwide Corporation$165  $273  
Basic and diluted earnings per share from operations$0.38  $0.63  

Net income attributable to Otis Worldwide Corporation for the quarter ended March 31, 2020 includes restructuring charges, net of a tax benefit, of $4 million ($6 million pre-tax), as well charges relating to significant non-operational and/or nonrecurring items, net of a tax benefit, of approximately $93 million ($115 million pre-tax) which include the costs related to the separation from UTC and a fixed asset impairment loss. These significant non-operational and/or nonrecurring items, and the resulting higher effective tax rate, were the primary contributors to lower Net income attributable to Otis Worldwide Corporation for the quarter ended March 31, 2020 when compared to the same period in 2019. The effects of the above resulted in an impact of $0.22 on the basic and diluted earnings per share for the quarter ended March 31, 2020.

Net income attributable to Otis Worldwide Corporation for the quarter ended March 31, 2019 includes restructuring charges, net of a tax benefit, of $18 million ($25 million pre-tax). The effects of restructuring charges resulted in an impact of $0.04 on the basic and diluted earnings per share for the quarter ended March 31, 2019.
Segment Review
Summary performance for each of the operating segments for the quarters ended March 31, 2020 and 2019 was as follows:
Net SalesOperating ProfitOperating Profit Margin
(dollars in millions)202020192020201920202019
New Equipment$1,123  $1,271  $64  $59  5.7 %4.6 %
Service1,843  1,830  400  386  21.7 %21.1 %
Total segment$2,966  $3,101  $464  $445  15.6 %14.4 %
General corporate expenses and other—  —  (135) (30) —  —  
Total$2,966  $3,101  $329  $415  11.1 %13.4 %



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New Equipment

The New Equipment segment designs, manufactures, sells and installs a wide range of passenger and freight elevators, as well as escalators and moving walkways in residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers, general contractors, architects, governments and specialized consultants who develop and/or design buildings for residential, commercial, retail or mixed-use activity. We sell directly to customers as well as through agents and distributors.

Summary performance for the New Equipment segment for the quarters ended March 31, 2020 and 2019 were as follows:
 
(dollars in millions)20202019ChangeChange
Net sales$1,123  $1,271  $(148) (11.6)%
Cost of sales914  1,060  (146) (13.8)%
$209  $211  $(2) (0.9)%
Operating expenses and other145  152  (7) (4.6)%
Operating profit$64  $59  $ 8.5 %

New Equipment segment Quarter Ended March 31, 2020 compared with Quarter Ended March 31, 2019
 Net SalesCost of SalesOperating Profit
Organic/Operational(9.8)%(11.8)%3.4 %
Foreign currency translation(1.8)%(1.8)%(3.4)%
Restructuring cost— %(0.2)%8.5 %
Total % change(11.6)%(13.8)%8.5 %

Net sales

The organic sales decrease of (9.8)% was driven by organic sales declines in all regions, with a double digit decline in Asia primarily due to the COVID-19 impact in the region, and high single digit decline in the Americas.

Operating profit

New Equipment operational profit increased 3.4% as lower volume (31.7)% was more than offset by favorable rate of 30.5% primarily due to material productivity and lower commodity costs of 3.1%. In addition, favorable selling, general and administrative expenses contributed to the improvement in operating profit.
Service

The Service segment performs maintenance and repair services for both our products and those of other manufacturers and provides modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services that address equipment and component wear and tear, and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics, to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed.
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Summary performance for the Service segment for the quarters ended March 31, 2020 and 2019 was as follows:
 
(dollars in millions)20202019ChangeChange
Net sales$1,843  $1,830  $13  0.7 %
Cost of sales1,155  1,140  15  1.3 %
$688  $690  $(2) (0.3)%
Operating expenses and other288  304  (16) (5.3)%
Operating profit$400  $386  $14  3.6 %

Service segment Quarter Ended March 31, 2020 compared with Quarter Ended March 31, 2019
Net SalesCost of SalesOperating Profit
Organic/Operational3.3 %4.6 %2.3 %
Foreign currency translation(1.9)%(1.9)%(2.1)%
Acquisitions/Divestitures, net(0.7)%(0.9)%(0.2)%
Restructuring cost— %(0.5)%3.6 %
Total % change0.7 %1.3 %3.6 %

Net sales

The organic sales increase of 3.3% primarily consists of organic sales growth in maintenance and repair of 2.5% and modernization 6.8%.

Maintenance and repair net sales were flat year over year and was comprised of a 2.5% organic sales increase, offset by foreign currency headwinds (1.9)% and decreases related to net acquisitions and divestitures (0.4)%.

Modernization net sales increased 3.1% for the quarter which is made up of a 6.8% increase in organic sales, offset by decreases in foreign currency (1.5)% and from net acquisitions and divestitures (2.2)%.

Operating profit

Service operational profit increased 2.3% driven by higher volume 4.1%, favorable price/mix and productivity 4.7%; partially offset by labor inflation (4.1)% and under absorption of labor in certain parts of the world.
General corporate expenses and other
Quarter Ended March 31,
(dollars in millions)20202019
General corporate expenses and other$(135) $(30) 

General corporate expenses and other primarily reflects certain corporate overhead costs, Separation-related costs, standalone public company costs and a one-time fixed asset impairment. The increase in general corporate expenses and other during the quarter ended March 31, 2020 compared to the same period in 2019, is primarily driven by a fixed asset impairment of approximately $55 million and related license costs of approximately $12 million, Separation related costs of $32 million and standalone public company costs, partially offset by lower employment costs.
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LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions)March 31, 2020December 31, 2019
Cash and cash equivalents$1,207  $1,446  
Total debt6,325  39  
Net debt (total debt less cash and cash equivalents)5,118  (1,407) 
Total equity(4,284) 2,231  
Total capitalization (total debt plus total equity)2,041  2,270