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
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 $0.01 per share, were distributed to UTC shareholders of record as of March 19, 2020. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation as all common stock was owned by UTC prior to the Separation. For the 2020 and 2019 year to date calculations, these shares are treated as issued and outstanding at January 1, 2020 and 2019 for purposes of calculating historical basic and diluted earnings per share.
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Quarter Ended March 31,
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|
(dollars in millions, except per share amounts; shares in millions)
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2020
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2019
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|
|
|
|
|
|
Net income attributable to Otis Worldwide Corporation
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$
|
165
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|
|
$
|
273
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Basic and diluted number of shares outstanding
|
433.1
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|
|
433.1
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Earnings Per Share:
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|
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Basic and Diluted
|
$
|
0.38
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|
|
$
|
0.63
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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.
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:
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(dollars in millions)
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March 31, 2020
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|
December 31, 2019
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Contract assets, current
|
$
|
491
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|
|
$
|
529
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|
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Total contract assets
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491
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|
|
529
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|
|
|
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Contract liabilities, current
|
2,541
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|
|
2,270
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|
|
Contract liabilities, noncurrent (included within Other long-term liabilities)
|
25
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|
|
18
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|
|
Total contract liabilities
|
2,566
|
|
|
2,288
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|
Net contract liabilities
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$
|
2,075
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|
|
$
|
1,759
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|
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
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.
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:
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(dollars in millions)
|
March 31, 2020
|
|
December 31, 2019
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Trade receivables
|
$
|
2,780
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|
|
$
|
2,723
|
|
Unbilled receivables
|
116
|
|
|
108
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|
Miscellaneous receivables
|
105
|
|
|
113
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|
|
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:
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|
|
|
|
|
|
(dollars in millions)
|
|
March 31, 2020
|
Balance as of December 31, 2019
|
|
$
|
83
|
|
Impact of credit standard adoption
|
|
28
|
|
Current period provision for expected credit losses
|
|
4
|
|
Write-offs charged against the allowance for expected credit losses
|
|
(3)
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|
Other
|
|
1
|
|
Balance as of March 31, 2020
|
|
$
|
113
|
|
Note 7: Inventories, net
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|
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|
|
|
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|
|
(dollars in millions)
|
March 31, 2020
|
|
December 31, 2019
|
Raw materials and work-in-process
|
$
|
108
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|
|
$
|
103
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|
Finished goods
|
491
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|
|
468
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Total
|
$
|
599
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|
|
$
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
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Balance as of January 1, 2020
|
|
Goodwill Resulting
From Business Combinations
|
|
|
|
Foreign Currency
Translation and Other
|
|
Balance as of March 31, 2020
|
New Equipment
|
$
|
337
|
|
|
$
|
—
|
|
|
|
|
$
|
(8)
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|
|
$
|
329
|
|
Service
|
1,310
|
|
|
—
|
|
|
|
|
(31)
|
|
|
1,279
|
|
Total
|
$
|
1,647
|
|
|
|
$
|
—
|
|
|
|
|
|
$
|
(39)
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|
|
|
$
|
1,608
|
|
Intangible Assets. Identifiable intangible assets are comprised of the following:
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|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
(dollars in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
|
|
Gross Amount
|
|
Accumulated
Amortization
|
Amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased service portfolios
|
$
|
2,016
|
|
|
$
|
(1,572)
|
|
|
|
|
$
|
2,069
|
|
|
$
|
(1,598)
|
|
Patents, trademarks/trade names
|
20
|
|
|
(15)
|
|
|
|
|
21
|
|
|
(15)
|
|
Customer relationships and other
|
45
|
|
|
(39)
|
|
|
|
|
46
|
|
|
(40)
|
|
|
2,081
|
|
|
(1,626)
|
|
|
|
|
2,136
|
|
|
(1,653)
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
Trademarks and other
|
7
|
|
|
—
|
|
|
|
|
7
|
|
|
—
|
|
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, 2020
|
|
December 31, 2019
|
Commercial paper
|
$
|
—
|
|
|
$
|
—
|
|
Other borrowings
|
67
|
|
|
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.
Long-term debt as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2020
|
|
December 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)
|
5
|
|
|
5
|
|
Total principal long-term debt
|
$
|
6,305
|
|
|
$
|
5
|
|
Other (discounts and debt issuance costs)
|
(47)
|
|
|
—
|
|
Total long-term debt
|
$
|
6,258
|
|
|
$
|
5
|
|
Less: current portion
|
—
|
|
|
—
|
|
Long-term debt, net of current portion
|
$
|
6,258
|
|
|
$
|
5
|
|
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
|
2
|
|
2022
|
1
|
|
2023
|
1,501
|
|
2024
|
1
|
|
Thereafter
|
4,800
|
|
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)
|
2020
|
|
2019
|
|
|
|
|
Defined benefit plans
|
$
|
10
|
|
|
$
|
10
|
|
|
|
|
|
Defined contribution plans
|
16
|
|
|
11
|
|
|
|
|
|
Multi-employer pension and postretirement plans
|
37
|
|
|
38
|
|
|
|
|
|
The following table illustrates the components of net periodic benefit cost for our defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
|
|
|
|
|
(dollars in millions)
|
2020
|
|
2019
|
|
|
|
|
Service cost
|
$
|
10
|
|
|
$
|
8
|
|
|
|
|
|
Interest cost
|
4
|
|
|
5
|
|
|
|
|
|
Expected return on plan assets
|
(7)
|
|
|
(6)
|
|
|
|
|
|
Amortization of prior service credit
|
—
|
|
|
(1)
|
|
|
|
|
|
Recognized actuarial net loss
|
4
|
|
|
3
|
|
|
|
|
|
Net settlement and curtailment loss
|
—
|
|
|
1
|
|
|
|
|
|
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)
|
2020
|
|
2019
|
Service cost
|
$
|
1
|
|
|
$
|
4
|
|
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
|
—
|
|
|
4
|
|
|
|
|
—
|
|
|
4
|
|
Tax benefit reclassified
|
—
|
|
|
(3)
|
|
|
|
|
—
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
$
|
(704)
|
|
|
$
|
(166)
|
|
|
|
|
$
|
8
|
|
|
$
|
(862)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
|
|
|
—
|
|
|
8
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
2
|
|
|
|
|
—
|
|
|
2
|
|
Tax expense reclassified
|
—
|
|
|
4
|
|
|
|
|
—
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
2020
|
|
2019
|
Cost of products and services sold
|
$
|
—
|
|
|
$
|
8
|
|
Selling, general and administrative
|
6
|
|
|
17
|
|
|
|
|
|
Total
|
$
|
6
|
|
|
$
|
25
|
|
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)
|
Severance
|
|
Facility Exit, Lease Termination and Other Costs
|
|
Total
|
Quarter Ended March 31, 2020
|
|
|
|
|
|
Net pre-tax restructuring costs
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Utilization, foreign exchange and other costs
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Balance at March 31, 2020
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
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
|
$
|
5
|
|
|
$
|
(4)
|
|
|
|
|
|
|
$
|
1
|
|
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
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Net pre-tax restructuring costs
|
2
|
|
|
—
|
|
|
2
|
|
Utilization, foreign exchange and other costs
|
(6)
|
|
|
—
|
|
|
(6)
|
|
Balance at March 31, 2020
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes expected, incurred and remaining costs for the 2019 restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected
Costs
|
|
Costs incurred during 2019
|
|
Costs 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.
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)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
52
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
Derivative liabilities
|
(17)
|
|
|
—
|
|
|
(17)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
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, 2020
|
|
|
|
December 31, 2019
|
|
|
(dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term receivables
|
$
|
62
|
|
|
$
|
62
|
|
|
$
|
62
|
|
|
$
|
62
|
|
Customer financing notes receivable
|
77
|
|
|
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)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Long-term receivables
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
Customer financing notes receivable
|
77
|
|
|
—
|
|
|
77
|
|
|
—
|
|
Short-term borrowings
|
(67)
|
|
|
—
|
|
|
(67)
|
|
|
—
|
|
Long-term debt (excluding finance leases)
|
(6,123)
|
|
|
—
|
|
|
(5,123)
|
|
|
(1,000)
|
|
Long-term liabilities
|
(3)
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Long-term receivables
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
Customer financing notes receivable
|
62
|
|
|
—
|
|
|
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)
|
|
2020
|
|
2019
|
Balance as of January 1
|
|
$
|
27
|
|
|
$
|
47
|
|
Warranties
|
|
7
|
|
|
2
|
|
Settlements made
|
|
(3)
|
|
|
(3)
|
|
Other
|
|
(1)
|
|
|
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.
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.
Segment Information. Segment information for the quarters ended March 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
Operating Profit
|
|
|
|
Operating Profit Margin
|
|
|
(dollars in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
New Equipment
|
$
|
1,123
|
|
|
$
|
1,271
|
|
|
$
|
64
|
|
|
$
|
59
|
|
|
5.7
|
%
|
|
4.6
|
%
|
Service
|
1,843
|
|
|
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 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)
|
2020
|
|
2019
|
|
|
|
United States Operations:
|
$
|
890
|
|
|
$
|
917
|
|
|
|
|
International Operations:
|
|
|
|
|
|
|
|
|
China
|
319
|
|
|
377
|
|
|
|
|
Other
|
1,757
|
|
|
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)
|
2020
|
|
2019
|
|
|
Disaggregated Net sales by type
|
|
|
|
|
|
New Equipment
|
$
|
1,123
|
|
|
$
|
1,271
|
|
|
|
|
|
|
|
|
|
|
Maintenance and repair
|
1,510
|
|
|
1,507
|
|
|
|
Modernization
|
333
|
|
|
323
|
|
|
|
Total Service
|
1,843
|
|
|
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.
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
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.