Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE

						Page
Management's Report on Internal Control Over Financial Reporting						53
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)						54
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019						56
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019						57
Consolidated Balance Sheets as of December 31, 2021 and 2020						58
Consolidated Statements of Changes in Equity for the years ended December 31, 2021, 2020 and 2019						59
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019						60
Notes to Consolidated Financial Statements						61
Financial Statement Schedule - Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2021, 2020 and 2019						101

(All other schedules are not required and have been omitted)

Management's Report on Internal Control over Financial Reporting

The management of Otis is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Management has assessed the effectiveness of Otis' internal control over financial reporting as of December 31, 2021. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Management concluded that based on its assessment, Otis' internal control over financial reporting was effective as of December 31, 2021. The effectiveness of Otis' internal control over financial reporting, as of December 31, 2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

OTIS WORLDWIDE CORPORATION (Registrant)
by:			/s/ JUDITH F. MARKS
			Judith F. Marks
			Chair, President and Chief Executive Officer
by:			/s/ RAHUL GHAI
			Rahul Ghai
			Executive Vice President and Chief Financial Officer
by:			/s/ MICHAEL P. RYAN
			Michael P. Ryan
			Vice President and Chief Accounting Officer

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Otis Worldwide Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Otis Worldwide Corporation and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition - Estimated Costs at Completion for New Equipment Contracts

As described in Notes 2 and 23 to the consolidated financial statements, the Company recognized $6.4 billion of revenue from new equipment contracts for the year ended December 31, 2021. For new equipment contracts, 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 these performance obligations, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress. As disclosed by management, contract costs are usually incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. The long-term nature of the contracts, the complexity of the products and the scale of the projects can affect management’s ability to estimate costs precisely. Management reviews cost estimates on significant new equipment contracts on a quarterly basis and, for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. Management records changes in contract estimates using the cumulative catch-up method and reviews changes in contract estimates for their impact on net sales or operating profit in the consolidated financial statements. Contract costs included in the calculation are comprised of labor, materials, subcontractors’ costs or other direct costs and indirect costs, which include indirect labor costs.

The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs at completion for new equipment contracts is a critical audit matter are the significant judgment by management to determine the estimated costs at contract completion, which in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the estimated expected labor and indirect labor costs used in the development of estimated costs at contract completion.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of the estimated costs at contract completion and development of the significant assumptions related to the estimated expected labor and indirect labor costs. These procedures also included, among others, evaluating and testing management’s process for developing and modifying estimated costs at contract completion for a sample of contracts, which included evaluating the reasonableness of significant assumptions related to the estimated expected labor and indirect labor costs considered by management specific to each contract. Evaluating the reasonableness of the estimated expected labor and indirect labor costs involved assessing management’s ability to reasonably estimate costs at completion by (i) testing costs incurred to date and obtaining a sample of executed contracts and related change orders, (ii) performing a comparison of the margin, driven by the estimated and actual costs incurred, to that of similar completed equipment contracts, and (iii) evaluating the timely identification of circumstances that may warrant a modification to estimated total cost to complete.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

February 4, 2022

We have served as the Company’s auditor since 2019.

OTIS WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in millions, except per share amounts)						2021						2020						2019
Net sales:
Product sales						$	6,428					$	5,371					$	5,648
Service sales						7,870						7,385						7,470
						14,298						12,756						13,118
Costs and expenses:
Cost of products sold						5,293						4,439						4,640
Cost of services sold						4,812						4,538						4,652
Research and development						159						152						163
Selling, general and administrative						1,948						1,924						1,810
						12,212						11,053						11,265
Other income (expense), net						22						(64)						(39)
Operating profit						2,108						1,639						1,814
Non-service pension cost (benefit)						11						6						(33)
Interest expense (income), net						136						122						(14)
Net income before income taxes						1,961						1,511						1,861
Income tax expense						541						455						594
Net income						1,420						1,056						1,267
Less: Noncontrolling interest in subsidiaries' earnings						174						150						151
Net income attributable to Otis Worldwide Corporation						$	1,246					$	906					$	1,116
Earnings per share (Note 3):
Basic						$	2.91					$	2.09					$	2.55
Diluted						$	2.89					$	2.08					$	2.55
Weighted average number of shares outstanding
Basic shares						427.7						433.2						433.1
Diluted shares						431.4						434.6						433.1

See accompanying Notes to Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)															2021						2020						2019
Net income															$	1,420					$	1,056					$	1,267
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax															(53)						8						(26)
Pension and postretirement benefit plan adjustments:
Net actuarial gain (loss)															71						(43)						(28)
Amortization of actuarial loss and prior service credit															18						15						9
Other															13						(19)						(22)
															102						(47)						(41)
Tax benefit (expense)															(27)						11						9
Pension and postretirement benefit plan adjustments, net of tax															75						(36)						(32)
Change in unrealized cash flow hedging:
Unrealized cash flow hedging gain (loss)															(1)						10						(3)
Adjustment for net (gain) loss realized and included in net income															4						(3)						—
Change in unrealized cash flow hedging, net of tax															3						7						(3)
Other comprehensive income (loss), net of tax															25						(21)						(61)
Comprehensive income															1,445						1,035						1,206
Less: Comprehensive income attributable to noncontrolling interest															(147)						(186)						(140)
Comprehensive income attributable to Otis Worldwide Corporation															$	1,298					$	849					$	1,066

See accompanying Notes to Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONSOLIDATED BALANCE SHEETS

(dollars in millions)						2021						2020
Assets
Cash and cash equivalents						$	1,565					$	1,782
Restricted cash						1,910						17
Accounts receivable (net of allowance for expected credit losses of $175 and $161)						3,232						3,148
Contract assets						550						458
Inventories, net						622						659
Other current assets						382						429
Total Current Assets						8,261						6,493
Future income tax benefits						335						334
Fixed assets, net						774						774
Operating lease right-of-use assets						526						542
Intangible assets, net						419						484
Goodwill						1,667						1,773
Other assets						297						310
Total Assets						$	12,279					$	10,710
Liabilities and (Deficit) Equity
Short-term borrowings						$	24					$	701
Accounts payable						1,556						1,453
Accrued liabilities						1,993						1,977
Contract liabilities						2,674						2,542
Total Current Liabilities						6,247						6,673
Long-term debt						7,249						5,262
Future pension and postretirement benefit obligations						558						654
Operating lease liabilities						336						367
Future income tax obligations						267						321
Other long-term liabilities						606						634
Total Liabilities						15,263						13,911
Commitments and contingent liabilities (Note 22)
Redeemable noncontrolling interest						160						194
Shareholders' (Deficit) Equity:
Common Stock and additional paid-in-capital						119						59
Treasury Stock						(725)						—
Accumulated deficit						(2,256)						(3,106)
Accumulated other comprehensive income (loss)						(763)						(815)
Total Shareholders' (Deficit) Equity						(3,625)						(3,862)
Noncontrolling interest						481						467
Total (Deficit) Equity						(3,144)						(3,395)
Total Liabilities and (Deficit) Equity						$	12,279					$	10,710

See accompanying Notes to Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in millions, except per share amounts)						Common Stock and Additional Paid-In Capital						Treasury Stock						Accumulated Deficit						UTC Net Investment (Deficit)						Accumulated Other Comprehensive Income (Loss)						Total Shareholders' (Deficit) Equity						Noncontrolling Interest						Total (Deficit) Equity						Redeemable Noncontrolling Interest
Balance as of January 1, 2019						$	—					$	—					$	—					$	2,262					$	(708)					$	1,554					$	458					$	2,012					$	203
Net transfers (to) from UTC						—						—						—						(935)						—						(935)						—						(935)						—
Net income						—						—						—						1,116						—						1,116						147						1,263						4
Other comprehensive income (loss), net of tax						—						—						—						—						(50)						(50)						(9)						(59)						(2)
Dividends attributable to noncontrolling interest						—						—						—						—						—						—						(146)						(146)						(17)
Acquisitions, disposals and other changes						—						—						—						(13)						—						(13)						6						(7)						10
Balance as of December 31, 2019						$	—					$	—					$	—					$	2,430					$	(758)					$	1,672					$	456					$	2,128					$	198
Adoption of credit loss standard, net of tax (Note 2)						—						—						—						(25)						—						(25)						—						(25)						—
Net transfers (to) from UTC and Separation-related transactions						—						—						—						(6,150)						—						(6,150)						—						(6,150)						—
Issuance of Common Stock and reclassification of deficit						4						—						(3,584)						3,580						—						—						—						—						—
Net income						—						—						741						165						—						906						138						1,044						12
Other comprehensive income (loss), net of tax						—						—						—						—						(57)						(57)						34						(23)						2
Stock-based compensation and Common Stock issued under employer plans						55						—						—						—						—						55						—						55						—
Cash dividends declared ($0.60 per Common Share)						—						—						(260)						—						—						(260)						—						(260)						—
Dividends attributable to noncontrolling interest						—						—						—						—						—						—						(138)						(138)						(9)
Acquisitions, disposals and other changes						—						—						(3)						—						—						(3)						(23)						(26)						(9)
Balance as of December 31, 2020						$	59					$	—					$	(3,106)					$	—					$	(815)					$	(3,862)					$	467					$	(3,395)					$	194
Net income						—						—						1,246						—						—						1,246						163						1,409						11
Other comprehensive income (loss), net of tax						—						—						—						—						52						52						(15)						37						(12)
Stock-based compensation and Common Stock issued under employer plans						62						—						(2)						—						—						60						—						60						—
Cash dividends declared ($0.92 per Common Share)						—						—						(393)						—						—						(393)						—						(393)						—
Repurchase of Common Shares						—						(725)						—						—						—						(725)						—						(725)						—
Dividends attributable to noncontrolling interest						—						—						—						—						—						—						(145)						(145)						(11)
Acquisitions, disposals and other changes						(2)						—						(1)						—						—						(3)						11						8						(22)
Balance as of December 31, 2021						$	119					$	(725)					$	(2,256)					$	—					$	(763)					$	(3,625)					$	481					$	(3,144)					$	160

See accompanying Notes to Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)						2021						2020						2019
Operating Activities:
Net income						$	1,420					$	1,056					$	1,267
Adjustments to reconcile net income to net cash flows provided by operating activities, net of acquisitions:
Depreciation and amortization						203						191						180
Deferred income tax expense (benefit)						(92)						(51)						(8)
Stock compensation cost						65						63						37
Losses on fixed asset impairment or disposal of business						—						71						26
Change in:
Accounts receivable, net						(152)						(163)						(191)
Contract assets and liabilities, current						53						282						97
Inventories, net						14						(76)						60
Other current assets						43						28						30
Accounts payable						130						20						6
Accrued liabilities						72						(14)						(34)
Pension contributions						(37)						(64)						(32)
Other operating activities, net						31						137						31
Net cash flows provided by operating activities						1,750						1,480						1,469
Investing Activities:
Capital expenditures						(156)						(183)						(145)
Investments in businesses and intangible assets, net of cash acquired (Note 9)						(80)						(53)						(47)
Proceeds from sale of (investments in) equity securities						40						(51)						—
Receipts (payments) on settlements of derivative contracts						73						(69)						(5)
Other investing activities, net						34						3						(6)
Net cash flows used in investing activities						(89)						(353)						(203)
Financing Activities:
Net proceeds from (repayments of) borrowings (maturities of 90 days or less)						(304)						647						6
Proceeds from borrowings (maturities longer than 90 days)						152						—						—
Repayments of borrowings (maturities longer than 90 days)						(503)						—						—
Proceeds from issuance of long-term debt						2,030						6,300						—
Payment of debt issuance costs						(25)						(43)						—
Repayment of long-term debt						—						(1,000)						—
Dividends paid on Common Stock						(393)						(260)						—
Repurchases of Common Stock						(725)						—						—
Dividends paid to noncontrolling interest						(155)						(149)						(163)
Net transfers to UTC						—						(6,330)						(972)
Other financing activities, net						(19)						(9)						(4)
Net cash flows provided by (used in) financing activities						58						(844)						(1,133)
Effect of foreign exchange rate changes on cash and cash equivalents						(43)						59						(20)
Net increase in cash and cash equivalents						1,676						342						113
Cash, cash equivalents and restricted cash, beginning of year						1,801						1,459						1,346
Cash, cash equivalents and restricted cash, end of year						3,477						1,801						1,459
Less: Restricted cash						1,912						19						13
Cash and cash equivalents, end of period						$	1,565					$	1,782					$	1,446
Supplemental cash flow information:
Interest paid (including related party interest of $0, $0 and $18)						$	129					$	81					$	18
Income taxes paid, net of (refunds) (including related party of $0, $(15) and $255)						552						561						632

See accompanying Notes to Consolidated Financial Statements.

Note 1: Business Overview

Otis (as defined below) 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 "RTX", as applicable), announced its intention to spin-off its Otis reportable segment and its Carrier reportable segment into two separate publicly-traded companies (the "Separation"). On April 3, 2020, the Company became an independent publicly-traded company through a pro-rata distribution of 0.5 shares of Common Stock for every share of UTC common stock held at the close of business on the record date of March 19, 2020 ("Distribution"). Otis began to trade as a separate public company (New York Stock Exchange ("NYSE"): OTIS) on April 3, 2020.

Unless the context otherwise requires, references to "Otis", "we", "us", "our" and "the Company" refer to (i) Otis Worldwide Corporation's business prior to the Separation and (ii) Otis Worldwide Corporation and its subsidiaries following the Separation, as applicable. References to "UTC" relate to pre-Separation matters, and references to "RTX" relate to post-Separation matters.

The Separation was completed pursuant to a Separation and Distribution Agreement ("Separation Agreement") and other agreements with our former parent, UTC, related to the Separation, including but not limited to a transition services agreement (the "Transition Services Agreement" or "TSA"), a tax matters agreement (the "Tax Matters Agreement" or "TMA"), an employee matters agreement (the "Employee Matters Agreement" or "EMA") and an intellectual property agreement (the "Intellectual Property Agreement"). For further discussion on these agreements, see Note 5, "Related Parties".

Zardoya Otis Tender Offer

In September 2021, the Company announced a tender offer, subject to the terms and conditions thereof, to acquire all of the issued and outstanding shares of Zardoya Otis, S.A. ("Zardoya Otis") not owned by the Company at a price of €7.00 per share in cash (the "Tender Offer"), subject to adjustment for dividends and other distributions declared and paid by Zardoya Otis after the announcement, and its intention to delist the shares of Zardoya Otis from the Spanish stock exchanges subsequent to the Tender Offer. The price per share of the Tender Offer was first adjusted to €6.93 for the dividend paid on October 11, 2021. On December 21, 2021, the Company announced it reached an agreement for Euro Syns S.A. (a non-controlling equity owner in Zardoya Otis) to irrevocably tender its shares in the Tender Offer at an offer price of €7.14 per share in cash (€7.07 per share after adjusting for dividends paid by Zardoya Otis on January 10, 2022). As a result of this agreement, the Company increased the tender price to all shareholders to €7.07 per share in cash after adjusting for the dividends paid. The Tender Offer is subject to approval by the CNMV, which is still pending as of February 4, 2022. The value of the issued and outstanding shares of Zardoya Otis not owned by the Company is €1.66 billion based on the adjusted tender price of €7.07.

The Company owned a controlling interest and had operational control of Zardoya Otis as of and for the years ended December 31, 2021, 2020 and 2019, and therefore its financial results are included in our Consolidated Financial Statements. As of December 31, 2021, the Company owned 50.02% of Zardoya Otis. See Note 10, "Borrowings and Lines of Credit" and Note 20, "Guarantees" for additional information regarding financing and guarantee agreements entered into by the Company and its subsidiaries in connection with the Tender Offer.

Note 2: Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation. Prior to the Separation on April 3, 2020, our historical financial statements were prepared on a standalone combined basis and were derived from the consolidated financial statements and accounting records of our former parent, UTC. For the period subsequent to April 3, 2020, our financial statements are presented on a consolidated basis as the Company became a standalone public company (collectively, the financial statements for all periods presented, including the historical results of the Company prior to April 3, 2020, are now referred to as "Consolidated Financial Statements" to reflect this change). They have been prepared in accordance with the instructions to Form 10-K.

Prior to the Separation on April 3, 2020, the Consolidated Statements of Operations included 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 were 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 Consolidated Statements of Operations. Current and deferred income taxes were determined based on the standalone results of Otis. However, because the Company was included in our former parent UTC’s tax group in certain jurisdictions, the Company's actual tax balances may differ from those reported. The Company's portion of its domestic income taxes and certain income taxes for jurisdictions outside the U.S. are deemed to have been settled in the period the related tax expense was recorded prior to the Separation.

The Consolidated Financial Statements include the accounts of Otis and its controlled subsidiaries, as well as entities where Otis has a variable interest and is the primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation. The factors we use to determine the primary beneficiary of a variable interest entity ("VIE") may include decision authority, control over management of day-to-day operations and the amount of our equity investment in relation to others' investments.

All significant intracompany accounts and transactions within the Company have been eliminated in the preparation of the Consolidated Financial Statements.

Certain amounts for prior years have been reclassified to conform to the current year presentation, which are immaterial.

Use of Estimates. The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. In addition, estimates and assumptions may impact the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in the context of the information reasonably available to us and the unknown future impacts of coronavirus ("COVID-19") as of December 31, 2021 and 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 Consolidated Financial Statements as of and for the years ended December 31, 2021 and 2020 resulting from our assessments of these matters, 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 Consolidated Financial Statements in future reporting periods.

Risks and Uncertainties. As the global COVID-19 pandemic continues and the economic recovery is ongoing, the Company continues to closely monitor and manage the impact of the COVID-19 pandemic on its business globally. It is difficult to estimate at this time the duration and extent of the continued impact of the pandemic and ongoing economic recovery on the Company's business, financial position, cash flow and results of operations. The results of our operations and overall financial performance were impacted during the years ended December 31, 2021 and 2020, including impacts to customer demand for our new equipment, maintenance and repair and modernization businesses, cancellations or delays of customer orders, customer liquidity constraints and related credit reserves, and supplier and raw material capacity constraints, delays and related costs. Primarily in 2020, there were also temporary closures and reduced capacity of our operations, limited new equipment job site closures and challenges in accessing units to provide maintenance and repair services that also impacted our results.

Due to existing conditions and uncertainty, COVID-19 and ongoing economic recovery could have an impact on our business, cash flow and results of operations into 2022. The extent of the impact will depend largely on future developments, which are highly uncertain, including the severity of the outbreak and variants of COVID-19, efficacy, availability and distribution of vaccines, actions taken by government authorities to further contain the outbreak or address its impact and its longer-term impacts on the global economy, among other factors.

Cash and Cash Equivalents. Cash and cash equivalents includes cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.

Restricted Cash. In certain circumstances we are required to maintain cash deposits with certain banks with respect to contractual or other legal obligations, and therefore the use of these cash deposits for general operational purposes is restricted. Restricted cash as of December 31, 2021 is primarily cash of $1.9 billion required to be held in escrow to fund the Tender

Offer, which is expected to be completed in 2022. The non-current portion of restricted cash is $2 million as of December 31, 2021 and 2020, and is included in Other assets on the Consolidated Balance Sheets.

Accounts Receivable. The Company records accounts receivables when the right to consideration becomes unconditional. We regularly evaluate the collectability of our accounts receivable and maintain reserves for expected credit losses. See Note 6, "Accounts Receivable, Net" for additional information on the Company's policy for evaluation of expected credit losses. We do not believe that accounts receivable represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographic areas.

Retainage and Unbilled Receivables. Current and long-term accounts receivable as of December 31, 2021 and 2020 include retainage of $75 million and $61 million, respectively, and unbilled receivables of $109 million and $104 million, respectively. Retainage represents amounts that, pursuant to the applicable contract, are not due until after project completion and acceptance by the customer. Unbilled receivables represent revenues that are earned but may not be currently billable to the customer under the terms of the contract. These items are expected to be billed and collected in the ordinary course of business. Unbilled receivables where we have an unconditional right to payment are included in Accounts receivable, net as of December 31, 2021 and 2020.

Customer Financing Notes Receivable. Through financing arrangements with our customers, we extend payment terms, which are generally not more than one year in duration.

Factoring. The Company may sell certain trade accounts and notes receivable to lending institutions to manage credit risk. Financial assets sold under these arrangements are excluded from Accounts receivable, net in the Company’s Consolidated Balance Sheets at the time of sale if the Company has surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Gains and losses stemming from transfers reported as sales are included in Interest expense (income), net in the accompanying Consolidated Statements of Operations.

Contract Assets and Liabilities. Contract assets and liabilities represent the difference in the timing of revenue recognition from receipt of cash from our customers and billings.

Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Performance obligations partially satisfied in advance of customer billings are included in Contract assets, current. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. See Note 4, "Contract Assets and Liabilities" for further discussion of contract assets and liabilities.

Inventories. Inventories are stated at the lower of cost or estimated realizable value and are primarily based on a first-in, first-out (“FIFO”) method. Valuation reserves for excess, obsolete and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventoriable cost. See Note 7, "Inventories, Net" for further details of the inventories by classification.

Fixed Assets. Fixed assets, including software capitalized for internal-use, are recorded at cost. Depreciation of fixed assets is computed over the fixed assets' useful lives on a straight-line basis, unless another systematic and rational basis is more representative of the fixed asset's pattern of use. See Note 8, "Fixed Assets" for further details of useful lives.

Internal-use software. The Company capitalizes direct costs of services used in the development of, and external software acquired for use as, internal-use software. Amounts capitalized are amortized over a period ranging from three to five years, on a straight-line basis, unless another systematic and rational basis is more representative of the software's use. Amounts are reported as a component of Machinery and equipment.

Asset Retirement Obligations. The Company records the fair value of legal obligations associated with the retirement of tangible long-lived assets in the period in which the legal obligations are determined to exist. Upon initial recognition of a liability, the Company capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is adjusted for changes in its present value and the capitalized cost is depreciated over the useful life of the related asset.

Fair Value of Financial Instruments. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level I – Quoted prices for identical instruments in active markets.

Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level III – Instruments whose significant value drivers are unobservable.

The carrying amount of current trade receivables, accounts payable and accrued expenses approximates fair value due to the short maturity (less than one year) of the instruments.

Equity Method Investments. Entities in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in Other assets on the Consolidated Balance Sheets. Under this method of accounting, our share of the net earnings or losses of the investee entity is included in Other income (expense), net in the Consolidated Statements of Operations since the activities of the investee entity are closely aligned with the operations of the Company. We evaluate our equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.

Business Combinations. We account for transactions that are classified as business combinations in accordance with the FASB ASC Topic 805: Business Combinations. Once a business is acquired, the fair values of the identifiable assets acquired and liabilities assumed are determined with the excess cost recorded to goodwill. As required, preliminary fair values are determined once a business is acquired, with the final determination of the fair values being completed within the one-year measurement period from the date of acquisition.

Goodwill, Intangible Assets and Long-Lived Assets. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Intangible assets consist of service portfolios, patents, trademarks/trade names, customer relationships and other intangible assets. Acquired intangible assets are recognized at fair value during acquisition accounting and then amortized to Cost of products and services sold and Selling, general and administrative over the applicable useful lives.

Goodwill and Indefinite-Lived Intangible Assets. Goodwill and intangible assets deemed to have indefinite lives are not amortized. Goodwill and indefinite-lived intangible assets are subject to impairment testing annually or when a triggering event occurs using the guidance and criteria described in FASB ASC Topic 350: Intangibles – Goodwill and Other. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value.

We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is one level below the operating segment level. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identified that it is more likely than not that the fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, an impairment charge is recognized based on the difference between the reporting unit's carrying value and its fair value. When it is determined that a quantitative analysis is required, the Company primarily utilizes a discounted cash flow methodology to calculate the fair value of its reporting units. The Company completed its most recent annual impairment testing as of July 1, 2021, and determined in the qualitative assessment that quantitative testing is not necessary. There were no triggering events since the annual impairment test.

Finite-Lived Intangible Assets and Long-Lived Assets. Useful lives of finite-lived intangible assets are estimated based upon the nature of the intangible asset. These intangible assets are amortized based on the pattern in which the economic benefits of the intangible assets are consumed or if straight-line amortization approximates the pattern of economic benefit, a straight-line amortization method may be used. The range of estimated useful lives is as follows:

Purchased service portfolios						5 to 25 years
Patents, trademarks/trade names						4 to 40 years
Customer relationships and other						1 to 20 years

The Company evaluates the potential impairment of long-lived assets, including finite-lived intangible assets whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. If the carrying value of other long-lived assets held and used exceeds the sum of the undiscounted expected future cash flows, the carrying value is written down to fair value. See Note 8, "Fixed Assets" and Note 9, "Business Acquisitions, Goodwill and Intangible Assets" for additional information regarding intangible assets and other long-lived assets.

Income Taxes. 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. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest expense has also been recognized. We recognize accrued interest related to unrecognized tax benefits in Interest expense (income), net. Penalties, if incurred, would be recognized as a component of Income tax expense.

The U.S. Tax Cuts and Jobs Act ("TCJA") subjects the Company to a tax on Global Intangible Low-Taxed Income (“GILTI”). GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We account for GILTI as a period cost as incurred.

Income taxes as presented in the Consolidated Financial Statements of the Company for periods prior to the Separation attribute current and deferred income taxes of our former parent, UTC, to the Company's stand-alone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes (“ASC 740”). Accordingly, the Company's income tax provision for periods prior to the Separation was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a stand-alone enterprise. The calculation of our income taxes on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. As a result, actual transactions included in the consolidated financial statements of UTC may not be included in the Consolidated Financial Statements of the Company. Similarly, the tax treatment of certain items reflected in the Consolidated Financial Statements of the Company may not be reflected in the consolidated financial statements and tax returns of UTC. Therefore, such items as net operating losses, credit carry-forwards and valuation allowances may exist in the stand-alone financial statements that may or may not exist in UTC’s consolidated financial statements. As such, the income taxes of the Company as presented in the Consolidated Financial Statements prior to the Separation may not be indicative of the income taxes that the Company will report in the future.

See Note 5, "Related Parties" and Note 16, "Income Taxes" for additional information.

Revenue Recognition. We recognized revenue in accordance with FASB ASC Topic 606: Revenue from Contracts with Customers and its related amendments, (referred to, collectively, as "ASC 606”). The Company's revenue streams include new equipment, maintenance and repair, and modernization. New equipment, modernization and repair services revenue are 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.

New Equipment, Modernization and Repair services. 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. Incurred costs represent work performed, which corresponds with and best depicts transfer of control or the enhancement of the customer’s assets. Contract costs included in the calculation are comprised of labor, materials, subcontractors’ costs or other direct costs and indirect costs, which include indirect labor costs. Specific to new equipment and modernization arrangements, the Company, based on project progression, reviews cost estimates on significant contracts on a quarterly basis, and for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. These estimates form the basis for the amount of revenue to be recognized and include the latest updated total transaction price, costs and risks for each contract. These estimates for our ongoing contracts may materially change due to the change and completions of the contract scopes, cost estimates and customers' plans, among other factors.

For performance obligations recognized under the cost to cost method, we record changes in contract estimates using the cumulative catch-up method. Modifications are recognized as a cumulative catch-up or treated as a separate accounting contract if the modification adds distinct goods or services and the modification is priced at its stand-alone selling price.

Maintenance. Our customers purchase maintenance contracts which include services such as required periodic maintenance procedures, preventive services and stand ready obligations to remediate issues with the elevator/escalator when and if they arise. Given the continuous nature of these services throughout the year, we recognize revenue on maintenance contracts on a straight-line basis which aligns with the cost profile of these services. Contractual changes are typically recognized prospectively as most modifications are extensions of the existing arrangement.

Transaction Price Considerations. Our contracts typically include fixed payments which are generally received as we progress under our contracts. As a result, we have not identified any significant financing elements in our contract, and our contracts do not have significant estimates related to variable consideration except in the case of a project having an underlying performance issue, which is rare. In situations where multiple performance obligations in a single contract (e.g., new equipment and maintenance) exist, the transaction price is allocated to each performance obligation in proportion to their stand-alone selling prices. Estimates are made to account for changes in transaction prices attributable to pricing disputes that occur subsequent to the inception of contracts, based upon historical experience and the status of contracts.

Certain costs to obtain or fulfill contracts. Certain costs to obtain or fulfill a contract with a customer must be capitalized, to the extent recoverable from the associated contract margin, and subsequently amortized as the products or services are delivered to the customer. Sales commissions related to new equipment, modernization and maintenance contracts, excluding renewals, are capitalized as contract fulfillment costs and are amortized consistent with the pattern of transfer of the goods or services. Customer contract costs, which do not qualify for capitalization as contract fulfillment costs, are expensed as incurred.

Loss Contracts. Loss provisions on contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at contract inception. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become probable.

Remaining Performance Obligations ("RPO"). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of December 31, 2021, our total RPO was approximately $17.1 billion. Of the total RPO as of December 31, 2021, we expect approximately 89% will be recognized as sales over the following 24 months.

Additional disclosure required by ASC 606 is provided in Note 23, "Segment Financial Data", including disaggregation of revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Self-Insurance. The Company is primarily self-insured for a number of risks including, but not limited to, workers’ compensation, general liability, automobile liability and employee-related healthcare benefits. The Company has obtained insurance coverage for amounts exceeding individual and aggregate loss limits. The Company accrues for known future claims and incurred but not reported losses within Accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets, totaling $287 million and $299 million as of December 31, 2021 and 2020, respectively.

Derivatives and Hedging Activity. We have used derivative instruments, principally forward contracts, to help manage certain foreign currency and commodity price exposures. Derivative instruments are viewed as risk management tools by us and are not used for trading or speculative purposes. By their nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor

the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

Designated Derivative Instruments. Derivatives used for hedging purposes may be designated and effective as a hedge of the identified risk exposure at the inception of the contract. All derivative instruments are recorded on the Consolidated Balance Sheets at fair value. Derivatives used to hedge foreign currency denominated balance sheet items and commodity prices for materials recognized in cost of sales, and are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income (loss), net of tax and reclassified to earnings as a component of product sales or expenses, as applicable, when the hedged transaction occurs. Gains and losses on derivatives designated as cash flow hedges are recorded in Other operating activities, net within the Consolidated Statement of Cash Flows. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs.

Additional information pertaining to net investment hedging is included in Note 18, "Financial Instruments".

Non-designated Derivative Instruments. To the extent the hedge accounting criteria are not applied, the foreign currency forward contracts and commodity price contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. Additional information pertaining to these contracts is included in Note 18, "Financial Instruments".

In addition, the Company periodically enters into sales contracts denominated in currencies other than the functional currency of the parties to the transaction. The Company accounts for these transactions separately valuing the embedded derivative component of these contracts. The changes in the fair value of these embedded derivatives are recorded in Other income (expense), net in the Consolidated Statements of Operations. For the years ended December 31, 2021, 2020 and 2019, we recognized a gain of $1 million, a loss of $3 million and a loss of $27 million, respectively, due to the changes in fair value of embedded derivatives.

Environmental. Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including current laws, regulations and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. Liabilities with fixed or reliably determinable future cash payments are discounted. Accrued environmental liabilities are not reduced by potential insurance reimbursements. See Note 22, "Contingent Liabilities" for additional details on the environmental remediation activities.

Research and Development. These costs are expensed in the period incurred and are shown on a separate line of the Consolidated Statements of Operations. Research and development expenses, covering research and the advancement of potential new and improved products and their uses, primarily include salaries and other employment costs.

Other Income (Expense), Net. Other income (expense), net includes the impact of changes in the fair value and settlement of derivatives, gains or losses on sale of businesses and fixed assets, earnings from equity method investments, fair value changes on equity securities, impairments, non-recurring Separation-related expenses, gains on insurance recoveries and certain other infrequent operating income and expense items.

Foreign Exchange. We conduct business in many different currencies and, accordingly, are subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of substantially all of our foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. Dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred within Accumulated other comprehensive income (loss).

Pension and Postretirement Obligations. Guidance under FASB ASC Topic 715: Compensation – Retirement Benefits requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under this guidance, actuarial gains and losses, prior service costs or credits and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic benefit cost. Pension and postretirement obligation balances

and related costs reflected within the Consolidated Financial Statements include both costs directly attributable to plans dedicated to Otis, as well as an allocation of costs for Otis employees’ participation in our former parent, UTC’s plans prior to Separation. See Note 13, "Employee Benefit Plans" for additional information.

Additional Paid-in Capital. Additional paid-in capital includes the value of stock-based award activity, as well as the difference between the cost of acquiring the Noncontrolling interest in consolidated subsidiaries and Otis' carrying value of the Noncontrolling interest associated with those subsidiaries.

In 2021, the Company recorded in Additional paid-in capital $2 million for transaction costs associated with the anticipated acquisition of shares of Zardoya Otis not owned by the Company. Refer to Note 1, "Business Overview" for additional information on the Tender Offer.

Noncontrolling Interest. Ownership interest in the Company's consolidated subsidiaries held by parties other than the Company are presented separately from Shareholders' (Deficit) Equity as “Noncontrolling interest” within equity on the Consolidated Balance Sheets. The amount of net income attributable to Otis Worldwide Corporation and the noncontrolling interest are both presented on the Consolidated Statements of Operations.

All noncontrolling interest with redemption features, such as put options or other contractual obligations to acquire the noncontrolling interest, that are not solely within our control are redeemable noncontrolling interest. Redeemable noncontrolling interest are reported in the mezzanine section of the Consolidated Balance Sheets, between Liabilities and equity (deficit), at the greater of redemption value or initial carrying value.

In 2021, the Company identified a misclassification between noncontrolling interest and redeemable noncontrolling interest. The impact of the correction of the misclassification to the Consolidated Balance Sheets as of January 1, 2019 was an increase to redeemable noncontrolling interest of $94 million, a decrease to noncontrolling interest of $79 million and a decrease to UTC Net Investment of $15 million. The impact of the correction of the misclassification to the Consolidated Balance Sheets as of December 31, 2019 was an increase to redeemable noncontrolling interest of $103 million, a decrease to noncontrolling interest of $75 million and a decrease to UTC Net Investment of $28 million. The impact of the correction of the misclassification to the Consolidated Balance Sheets as of December 31, 2020 was an increase to redeemable noncontrolling interest of $111 million, a decrease to noncontrolling interest of $81 million and a decrease to Accumulated Deficit of $30 million. Additionally, the impact of redeemable noncontrolling interest to net income attributable to common shareholders was a reduction of $0.03 to basic and diluted earnings per share of Common Stock in 2019. There was no impact to basic or diluted earnings per share of Common Stock in 2020.

The activity attributable to noncontrolling interest and redeemable noncontrolling interest for the years ended December 31, 2021, 2020 and 2019 are presented in the Consolidated Statements of Changes in Equity.

UTC Net Investment. For periods prior to the Separation, UTC’s Net Investment in the Company was presented as “UTC Net Investment (Deficit)” on the Consolidated Balance Sheets. The Consolidated Statements of Changes in Equity includes activity in UTC Net Investment (Deficit) for corporate allocations, net cash transfers and other property transfers between our former parent, UTC, and the Company, as well as related party receivables, payables and long-term debt between the Company and other UTC affiliates that were settled on a current basis. Prior to the Separation, UTC performed cash management and other treasury-related functions on a centralized basis for nearly all of its legal entities, which included the Company, and, consequently, the net cash generated by the Company in legal entities that participated in UTC’s centralized cash management and financing programs was transferred to UTC through the related party accounts. See Note 5, "Related Parties" for additional information.

Recent Accounting Pronouncements

In June 2016, the FASB issued 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 and current conditions through a reasonable forecast period. The Credit Loss Standard 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 of $25 million was recorded.

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 were effective for years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard effective January 1, 2020. The adoption of this ASU did not have a material impact on our Consolidated 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 were effective for years beginning after December 15, 2019. The Company adopted this standard prospectively effective January 1, 2020. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The new standard allows companies to reclassify to retained earnings the stranded tax effects in Accumulated other comprehensive income from the then-newly-enacted TCJA. The new standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard and elected to reclassify the income tax effects of the TCJA from Accumulated other comprehensive (loss) to UTC Net Investment effective January 1, 2019. The adoption of this standard did not have a material impact on our Consolidated 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 were effective for years ending after December 15, 2020, with early adoption permitted. The Company adopted this standard effective January 1, 2020. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU were effective for years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard effective January 1, 2021. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.

Future Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04*,* Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions

affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 may be adopted and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. We are currently evaluating the impact of adopting this standard but do not expect it to have a material impact on our Consolidated Financial Statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early application permitted. We are currently evaluating the impact of adopting this standard, however we do not expect it to have a material impact on our Consolidated Financial Statements.

Note 3: Earnings per Share

On April 3, 2020, the date of consummation of the Separation, 433,079,455 shares of the 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 shares were owned by UTC prior to the Separation. For the 2019 calculations, these shares are treated as issued and outstanding at January 1, 2019 for purposes of calculating historical basic and diluted earnings per share.

(dollars in millions, except per share amounts; shares in millions)																		2021						2020						2019
Net income attributable to Otis Worldwide Corporation																		$	1,246					$	906					$	1,116
Impact of redeemable noncontrolling interest																		—						—						(13)
Net income attributable to common shareholders																		$	1,246					$	906					$	1,103
Basic weighted average number of shares outstanding																		427.7						433.2						433.1
Stock awards and equity units (share equivalent)																		3.7						1.4						—
Diluted weighted average number of shares outstanding																		431.4						434.6						433.1
Earnings Per Share of Common Stock:
Basic																		$	2.91					$	2.09					$	2.55
Diluted																		$	2.89					$	2.08					$	2.55

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the Common Stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted earnings per share excludes the effect of the potential exercise of stock awards when the awards' assumed proceeds exceed the average market price of the common shares during the period. There were 0.1 million and 4.6 million of anti-dilutive stock awards excluded from the computation for 2021 and 2020, respectively.

Prior to the Separation, Otis employees participated in UTC's equity incentive plans, pursuant to which they were granted stock options, stock appreciation rights, restricted stock units, and performance-based restricted stock units. All awards granted under these plans were related to UTC common shares. Upon Separation, outstanding awards held by Otis employees under UTC's equity incentive plans were converted in accordance with the EMA using the conversion ratios set forth in the EMA. Depending on whether the awards held on the Separation date were in an unvested or vested status, Otis employees either received converted awards solely in Otis based shares (unvested status) or a combination of Otis, UTC and Carrier share based awards (vested status). Former Otis employees, and current and former legacy UTC and Carrier employees, who on the Separation date were holding outstanding UTC awards in a vested status also received a combination of Otis, UTC and Carrier awards post-spin. The conversion methodology used was calculated in accordance with the EMA and with the purpose of maintaining the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value immediately prior to the Separation. See Note 13, "Employee Benefit Plans" for further detail.

For the purpose of the above diluted earnings per share computation, we only included the units associated with the converted Otis share-based awards. These awards were assumed to be outstanding beginning from the Separation date.

Note 4: 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 December 31, 2021 and 2020 are as follows:

(dollars in millions)						2021						2020
Contract assets, current						$	550					$	458
Total contract assets						550						458
Contract liabilities, current						2,674						2,542
Contract liabilities, noncurrent (included within Other long-term liabilities)						52						44
Total contract liabilities						2,726						2,586
Net contract liabilities						$	2,176					$	2,128

Contract assets increased by $92 million during the year ended December 31, 2021 as a result of the progression of current contracts and timing of billing on customer contracts. Contract liabilities increased by $140 million during the year ended December 31, 2021 primarily due to contract billings in excess of revenue earned. During the years ended December 31, 2021 and 2020, we recognized revenue of $2.0 billion and $1.6 billion related to the contract liabilities as of January 1, 2021 and as of January 1, 2020, respectively.

Note 5: Related Parties

In connection with the Separation as further described in Note 1, "Business Overview", the Company entered into several agreements with our former parent, UTC, and Carrier. These agreements include 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.

Under the TSA, which is substantially completed as of December 31, 2021, RTX provided the Company certain services and we provided certain services to RTX. The EMA allocates among Otis, UTC and Carrier the liabilities and responsibilities relating to employment matters, employee compensation and benefit plans, benefit programs and other related matters.

We entered into the TMA with our former parent 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 TMA, 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 TMA 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 TMA 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.

Net Transfers from (to) UTC and Separation Transactions. In connection with the Separation, certain assets and liabilities were contributed to the Company by our former parent, UTC, leading up to and at the time of the Separation. During 2020 prior to the Separation, net liabilities of $43 million were contributed to the Company by our former parent, UTC, primarily consisting of deferred tax assets and liabilities and fixed assets. Prior to the Separation, these non-cash contributions were recorded as Net transfers (to) from UTC on the Consolidated Statements of Changes in Equity through UTC Net Investment.

Upon Separation, the following were recorded as Net transfers (to) from UTC and Separation-related transactions on the Consolidated Statements of Changes in Equity through UTC Net Investment:

(dollars in millions)
Cash and cash equivalents						$	220
Taxes and other						187
Total						$	407

Prior to the Separation, our former parent, UTC, paid Otis Cash and cash equivalents of $190 million in connection with the Separation Agreement, and $30 million as settlement of related party receivables due from UTC to Otis as a result of a cash overdraft as of March 31, 2020.

Additionally, the TCJA imposed a non-recurring 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 TMA, Otis will indemnify RTX for a percentage of the toll charge installment payments due after April 3, 2020. As a result, a portion of Otis' balance of Future income tax obligations corresponding to the toll charge was reclassified as a contractual indemnity obligation within Other long-term liabilities on the Consolidated Balance Sheets. The TMA also provides for RTX to indemnify Otis for certain foreign tax obligations as a result of Otis' inclusion in certain foreign consolidated tax returns prior to the Separation. As a result, Otis reflected this contractual indemnification asset within Other current assets and the related tax obligations within Accrued liabilities on the Consolidated Balance Sheets. As a result of the Separation and the provisions of the TMA, Otis' total net tax-related liabilities on April 3, 2020 were reduced by $191 million, comprising the following impacts to the Consolidated Balance Sheets:

(dollars in millions)						Increase (Decrease)
Assets
Other current assets						$	167
Total Current Assets						167
Future income tax benefits						(4)
Total Assets						$	163
Liabilities and (Deficit) Equity
Accrued liabilities						$	110
Total Current Liabilities						110
Future income tax obligations						(377)
Other long-term liabilities						239
Total Liabilities						(28)
Total Shareholders' (Deficit) Equity						191
Total (Deficit) Equity						191
Total Liabilities and (Deficit) Equity						$	163

There were also $4 million of Other long-term liabilities recorded upon Separation on the Consolidated Balance Sheet.

In addition to Income taxes paid, net of (refunds) on the Consolidated Statements of Cash Flows, as a result of the TMA, the Company made payments of $56 million and $86 million in 2021 and 2020, respectively, for foreign tax obligations that were reimbursed by RTX.

Shared Costs. The Consolidated Financial Statements have been prepared on a standalone basis for the periods prior to the Separation on April 3, 2020, and for those periods are derived from the consolidated financial statements and accounting records of our former parent, UTC. Prior to the Separation, the Company had been managed and operated in the normal course of business with other affiliates of UTC, and UTC incurred 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 included 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 Company in the period in which the costs were recorded.

Accordingly, prior to the Separation, shared costs of $16 million and $80 million were allocated to the Company for 2020 and 2019, respectively, primarily reflected in Selling, general and administrative expense on the Consolidated Statements of Operations. There were no allocated centralized costs for the periods after the Separation.

Separation Costs. We have incurred non-recurring Separation costs as follows:

(dollars in millions)																		2021						2020						2019
Separation costs																		$	27					$	119					$	43

Separation-related costs prior to the Separation primarily consisted of employee-related costs, costs to establish certain standalone functions and information technology systems, professional services fees, costs to exit from certain services previously provided under the TSA and other transaction-related costs to transition to being a standalone public company. Costs after the Separation primarily consist of costs to exit from certain services previously provided under the TSA and other transaction-related costs to transition to being a standalone public company. Separation costs of $16 million, $106 million and $43 million, in 2021, 2020 and 2019, respectively, are recorded in Selling, general and administrative expense on the Consolidated Statements of Operations. Additional Separation-related items, which are recorded in Other income (expense), net, include adjustments to indemnification assets due from RTX related to the finalization of tax settlements in accordance with the TMA and other Separation-related costs.

Separation costs in 2021, 2020 and 2019 are partially offset by income tax benefits of $15 million, $20 million and $6 million, respectively.

Cash Management and Financing. Prior to the Separation, the Company participated in UTC's centralized cash management and financing programs. Disbursements were made through centralized accounts payable systems which were operated by our former parent, UTC. Cash receipts were transferred to centralized accounts, which were also maintained by UTC. As cash was received and disbursed by UTC, it was accounted for by the Company through UTC Net 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 cash reflected on the Consolidated Statements of Cash Flows as of December 31, 2019 represents cash on hand at certain foreign entities that did not participate in the centralized cash management program and were specifically identifiable to the Company.

Long-Term Debt, Accounts Receivable and Accounts Payable. Certain related party transactions between the Company and our former parent, UTC, have been included within UTC Net Investment on the Consolidated Balance Sheets in the historical periods presented prior to the Separation. The UTC Net Investment includes related party receivables due from UTC and its affiliates of $7.7 billion as of December 31, 2019. The UTC Net Investment includes related party payables due to UTC and its affiliates of $750 million as of December 31, 2019, which primarily related to centralized cash management and financing programs. The UTC Net Investment includes related party debt due to UTC and its affiliates of $100 million as of December 31, 2019. The interest income and interest expense related to the activity with UTC that was included in Otis' results is presented on a net basis in the Consolidated Statements of Operations as this is settled in cash. Interest income and interest expense on the activity with our former parent UTC in 2019 was $23 million and $18 million, respectively. There was no interest income or interest expense activity with our former parent, UTC, in 2021 or 2020. The total effect of the settlement of these related party transactions is reflected as a financing activity on the Consolidated Statements of Cash Flows for the historical periods presented.

Note 6: Accounts Receivable, Net

Accounts receivable, net consisted of the following as of December 31:

(dollars in millions)						2021						2020
Trade receivables						$	3,117					$	2,987
Unbilled receivables						109						104
Customer financing notes receivable						93						130
Miscellaneous receivables						88						88
						3,407						3,309
Less: allowance for expected credit losses						175						161
Balance						$	3,232					$	3,148

Credit Losses. 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 Consolidated Balance Sheets. We evaluate each customer's ability to pay through assessing customer creditworthiness, historical experience and current economic conditions 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.

The changes in allowance for credit losses related to Accounts receivable, net for the years ended December 31, 2021 and 2020 are as follows:

(dollars in millions)						2021						2020
Balance as of January 1						$	161					$	83
Impact of credit standard adoption						—						28
Provision for expected credit losses						37						40
Write-offs charged against the allowance for expected credit losses						(15)						(20)
Foreign exchange and other						(8)						30
Balance as of December 31						$	175					$	161

During 2020, there was approximately $26 million of previously reserved balances reclassified to allowance for credit losses. As a result, there was no impact to the Consolidated Statements of Operations for 2020.

Note 7: Inventories, Net

(dollars in millions)						2021						2020
Raw materials and work-in-process						$	140					$	113
Finished goods						482						546
Total						$	622					$	659

Raw materials and work-in-process and Finished goods are net of valuation reserves of $99 million and $112 million as of December 31, 2021 and 2020, respectively.

Note 8: Fixed Assets

(dollars in millions)						Estimated Useful Lives						2021						2020
Land												$	43					$	48
Buildings and improvements						20 - 40 Years						596						616
Machinery and equipment						3 - 12 Years						1,166						1,175
Assets under construction												125						132
												1,930						1,971
Less: Accumulated depreciation												(1,156)						(1,197)
												$	774					$	774

Depreciation expense was $116 million, $100 million and $85 million in 2021, 2020 and 2019, respectively.

In 2020, as a result of reviewing our technology strategies following the Separation, the Company recorded a pre-tax loss for the write-off of Assets under construction of approximately $71 million within Other income (expense), net in the Consolidated Statements of Operations.

Fixed assets acquired during the year that are accrued within Accounts payable at year end is considered to be a non-cash investing activity and is excluded from cash used for capital expenditures in the Consolidated Statements of Cash Flows. Capital expenditures of $2 million, $15 million and $8 million were accrued within Accounts payable in the Consolidated Balance Sheets as of December 31, 2021, 2020 and 2019, respectively.

Note 9: Business Acquisitions, Goodwill and Intangible Assets

Business Acquisitions. Our investments in businesses and intangible assets, net of cash acquired, totaled $80 million, $55 million (including debt assumed) and $47 million in 2021, 2020 and 2019, respectively. The acquisitions and investments consisted of a number of acquisitions primarily in our Service segment. Transaction costs incurred were not considered significant.

In 2019, the Company recorded a pre-tax loss on the sale of a business of $19 million within Other income (expense), net on the Consolidated Statement of Operations. There were no significant disposals of businesses for the years ended December 31, 2021 or 2020.

Goodwill. Changes in our Goodwill balances in 2021 were as follows:

(dollars in millions)						Balance as of January 1, 2021						Goodwill Resulting From Business Combinations												Foreign Currency Translation and Other						Balance as of December 31, 2021
New Equipment						$	357					$	—											$	(21)					$	336
Service						1,416						2												(87)						1,331
Total						$	1,773					$	2											$	(108)					$	1,667

Changes in our Goodwill balances in 2020 were as follows:

(dollars in millions)						Balance as of January 1, 2020						Goodwill Resulting From Business Combinations												Foreign Currency Translation and Other						Balance as of December 31, 2020
New Equipment						$	337					$	—											$	20					$	357
Service						1,310						30												76						1,416
Total						$	1,647					$	30											$	96					$	1,773

Intangible Assets. Identifiable intangible assets are comprised of the following:

						2021																		2020
(dollars in millions)						Gross Amount						Accumulated Amortization												Gross Amount						Accumulated Amortization
Amortized:
Purchased service portfolios						$	2,025					$	(1,638)											$	2,123					$	(1,661)
Patents, trademarks/trade names						21						(17)												22						(16)
Customer relationships and other						64						(43)												54						(45)
						2,110						(1,698)												2,199						(1,722)
Unamortized:
Trademarks and other						7						—												7						—
Total						$	2,117					$	(1,698)											$	2,206					$	(1,722)

Fully amortized service portfolios of $117 million were written off during 2020.

Amortization of intangible assets was $87 million, $91 million and $95 million in 2021, 2020 and 2019, respectively. Excluding the impact of currency translation adjustments, there were no other significant changes in our Intangible Assets during 2021, 2020 and 2019.

The estimated future amortization of intangible assets is as follows:

(dollars in millions)						2022						2023						2024						2025						2026
Future amortization						$	81					$	69					$	61					$	54					$	40

Note 10: Borrowings and Lines of Credit

(dollars in millions)						2021						2020
Commercial paper						$	—					$	664
Other borrowings						24						37
Total short-term borrowings						$	24					$	701

Commercial Paper. As of December 31, 2021, we had an aggregate $1.5 billion unsecured, unsubordinated commercial paper programs in place, and no borrowings outstanding under such programs. We 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.

In September 2020, we issued €420 million of Euro denominated commercial paper. The Euro denominated commercial paper, while outstanding, qualified as a net investment hedge against our investments in European businesses. During 2021, we fully repaid the Euro denominated commercial paper and there is no longer a related net investment hedge as of December 31, 2021. Refer to Note 18, "Financial Instruments" for further details on net investment hedges.

We also issued $150 million of U.S. Dollar commercial paper in November 2020, which was fully repaid during 2021. The commercial paper issued in 2020 was used to pay down the term loan described further below under "Long-term debt".

Long-term debt. As of December 31, 2021, we have a credit agreement, as amended, with various banks providing for a $1.5 billion unsecured, unsubordinated 5-year revolving credit facility, effective as of April 3, 2020, with an interest rate of LIBOR plus 125 basis points and a commitment fee rate of 12.5 basis points. As of December 31, 2021, 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.

On February 10, 2020, we entered into a term loan credit agreement, as amended, providing for a $1.0 billion unsecured, unsubordinated 3-year term loan credit facility (the "term loan"). The Company drew on the full amount of the term loan on March 27, 2020 and then prepaid the full amount during 2020, resulting in the termination of the term loan credit agreement. Additionally, on February 27, 2020, we issued $5.3 billion unsecured, unsubordinated notes. The net proceeds of the term loan and the notes of approximately $6.3 billion were distributed to our former parent, UTC, prior to the Separation.

On March 11, 2021, we issued ¥21.5 billion Japanese Yen denominated ($199 million), unsecured, unsubordinated 5-year notes due March 2026 (the "Yen Notes"). The net proceeds of the Yen Notes were used to repay a portion of our outstanding Euro denominated commercial paper. The Yen Notes qualify as a net investment hedge against our investments in Japanese businesses. As of December 31, 2021, the net investment hedge is deemed to be effective. Refer to Note 18, "Financial Instruments" for further details on net investment hedges.

On September 22, 2021, we entered into a €1.65 billion bridge loan credit agreement (the "Bridge Credit Facility") and related guarantees in connection with the Tender Offer, which was intended to be drawn only to the extent we did not obtain permanent debt financing prior to the settlement date of the Tender Offer. On November 12, 2021, we issued €1.6 billion Euro denominated ($1.8 billion), unsecured, unsubordinated notes (the "Euro Notes"). The net proceeds of the Euro Notes will be used to fund the Tender Offer. Upon issuing the Euro Notes, the Bridge Credit Facility and related guarantees were terminated.

The revolving credit agreement and indentures contain affirmative and negative covenants customary for financings of these types that, among other things, limit the Company's 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 requires that we maintain a maximum consolidated leverage ratio, as defined in the agreement. The revolving credit agreement and indentures also contain events of default customary for financings of these types. The Company is in compliance with all covenants in the revolving credit agreement and the indentures governing all notes as of December 31, 2021.

Long-term debt consisted of the following as of December 31:

(dollars in millions)						2021						2020
LIBOR plus 45 bps floating rate notes due 2023 1,2						$	500					$	500
0.000% notes due 2023 (€500 million principal value) 2						565						—
2.056% notes due 2025 2						1,300						1,300
0.37% notes due 2026 ( ¥21.5 billion principal value) 2						189						—
0.318% notes due 2026 (€600 million principal value) 2						677						—
2.293% notes due 2027 2						500						500
2.565% notes due 2030 2						1,500						1,500
0.934% notes due 2031 (€500 million principal value) 2						565						—
3.112% notes due 2040 2						750						750
3.362% notes due 2050 2						750						750
Other (including finance leases)						4						5
Total principal long-term debt						$	7,300					$	5,305
Other (premiums, discounts and debt issuance costs)						(51)						(43)
Total long-term debt						7,249						5,262
Less: current portion						—						—
Long-term debt, net of current portion						$	7,249					$	5,262

1 The three-month LIBOR rate as of December 31, 2021 was approximately 0.21%.

2 We may redeem these notes at our option pursuant to certain terms.

Debt issuance costs are presented as a reduction of debt on the Consolidated Balance Sheets and are amortized as a component of interest expense over the term of the related debt using the effective interest method. The Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 reflects the following:

(dollars in millions)						2021						2020						2019
Debt issuance costs amortization						$	6					$	5					$	—
Total interest expense on debt (including debt issuance costs amortization)						136						124						—

The unamortized debt issuance costs as of December 31, 2021 and 2020 were $51 million and $43 million, respectively. In addition to interest on debt, Interest expense (income), net on the Consolidated Statements of Operations in 2021 includes the write-off of $11 million in financing costs associated with the Bridge Credit Facility and related guarantees that were terminated.

The average maturity of our long-term debt as of December 31, 2021 is approximately 8.9 years. The average interest expense rate on our borrowings as of December 31, 2021 and 2020 was as follows:

						December 31,
						2021						2020
Short-term borrowings						—		%				(0.2)		%
Total long-term debt						1.9		%				2.4		%

The average interest expense rate on our borrowings for the years ended December 31, 2021 and 2020 was as follows:

						2021						2020
Short-term borrowings						(0.3)		%				(0.2)		%
Total long-term debt						2.3		%				2.3		%

The schedule of principal payments required on long-term debt for the next five years and thereafter is:

(dollars in millions)						Principal Payments
2022						$	—
2023						1,066
2024						1
2025						1,301
2026						867
Thereafter						4,065
Total						$	7,300

Note 11: Accrued Liabilities

(dollars in millions)						2021						2020
Accrued salaries, wages and employee benefits						$	603					$	556
Accrued interest						221						223
Operating lease liabilities						181						167
Accrued income taxes payable						142						182
VAT and other non-income tax payables						97						102
Other liabilities						749						747
Total						$	1,993					$	1,977

Accrued interest primarily consists of interest accrued for uncertain tax positions and the German tax litigation as described in Note 22, "Contingent Liabilities", as well as $46 million and $45 million of interest accrued for borrowings as of December 31, 2021 and 2020, respectively, as described in Note 10, "Borrowings and Lines of Credit".

Note 12: Other Long-term Liabilities

(dollars in millions)						2021						2020
Contractual indemnity obligation						$	220					$	239
General, product and auto liability						154						152
Employee benefits						105						113
Other liabilities						127						130
Total						$	606					$	634

The Contractual indemnity obligation consists of a payable to RTX, resulting from the TMA. See Note 5, "Related Parties" for further details.

Note 13: Employee Benefit Plans

The Company sponsors numerous single-employer domestic and international employee benefit plans and, prior to the Separation, certain of our employees participated in employee benefit plans (“Shared Plans”) sponsored by our former parent, UTC, that included participants of the other UTC businesses. We have accounted for our participation in the Shared Plans prior to the Separation as multiemployer benefit plans, as discussed below.

Employee Savings Plans. We sponsor various employee savings plans. Prior to the Separation, our former parent, UTC, also sponsored and contributed to defined contribution employee savings plans in which certain Otis employees participated. Our contributions to employer-sponsored defined contribution plans were $62 million, $54 million and $41 million for 2021, 2020, and 2019, respectively.

Pension Plans. We sponsor both funded and unfunded domestic and international defined benefit pension plans that cover a large number of our employees. While we sponsor domestic pension plans that provide retirement benefits to certain employees, they are not a material component of the projected benefit obligation. Our plans use a December 31 measurement date consistent with our fiscal year.

(dollars in millions)						2021						2020
Change in benefit obligation:
Beginning balance						$	1,225					$	1,092
Service cost						43						40
Interest cost						13						16
Actuarial (gain) loss						(50)						40
Benefits paid						(24)						(28)
Net settlement, curtailment and special termination benefits						(31)						(26)
Other						(50)						91
Ending balance						$	1,126					$	1,225
Change in plan assets:
Beginning balance						$	703					$	622
Actual return on plan assets						43						24
Employer contributions						37						64
Benefits paid						(24)						(28)
Settlements						(31)						(26)
Other						(38)						47
Ending balance						$	690					$	703
Funded status:
Fair value of plan assets						$	690					$	703
Benefit obligations						(1,126)						(1,225)
Funded status of plan						$	(436)					$	(522)
Amounts recognized in the Consolidated Balance Sheets consist of:
Noncurrent assets						$	106					$	87
Current liability						(23)						(21)
Noncurrent liability						(519)						(588)
Net amount recognized						$	(436)					$	(522)
Amounts recognized in Accumulated other comprehensive loss consist of:
Net actuarial loss						$	176					$	280
Prior service credit						2						(1)
Net amount recognized						$	178					$	279

The amounts included in "actuarial (gain) loss" in the above table primarily are due to changes in discount rate assumptions driven by changes in corporate bond yields. The amounts included in “Other” in the above table primarily reflect the impact of foreign exchange translation, primarily for plans in Australia, Canada, Germany, Japan, Spain, South Korea and Switzerland.

In 2021, 2020 and 2019 we made cash contributions to our defined benefit pension plans of $37 million, $64 million and $32 million, respectively.

Information for pension plans with accumulated benefit obligations in excess of plan assets:

(dollars in millions)						2021						2020
Projected benefit obligation						$	567					$	787
Accumulated benefit obligation						499						685
Fair value of plan assets						49						205

Information for pension plans with projected benefit obligations in excess of plan assets:

(dollars in millions)						2021						2020
Projected benefit obligation						$	806					$	991
Accumulated benefit obligation						694						846
Fair value of plan assets						263						383

The accumulated benefit obligation for all defined benefit pension plans was $1.0 billion and $1.1 billion as of December 31, 2021, and 2020, respectively.

The components of the net periodic pension cost are as follows:

(dollars in millions)						2021						2020						2019
Service cost						$	43					$	40					$	33
Interest cost						13						16						21
Expected return on plan assets						(23)						(25)						(24)
Amortization of prior service credit						—						(1)						(1)
Recognized actuarial net loss						18						16						10
Net settlement, curtailment and special termination benefits loss (gain)						2						5						2
Net periodic pension cost – employer						$	53					$	51					$	41

Other changes in plan assets and benefit obligations recognized in other comprehensive loss are as follows:

(dollars in millions)						2021						2020						2019
Current year actuarial (gain) loss						$	(70)					$	41					$	28
Amortization of actuarial loss						(18)						(16)						(10)
Amortization of prior service credit						—						1						1
Net settlement and curtailment (loss) gain						(2)						(5)						(2)
Other						(11)						24						27
Total recognized in other comprehensive (income) loss						$	(101)					$	45					$	44
Net recognized in net periodic pension cost and other comprehensive (income) loss						$	(48)					$	96					$	85

The amounts included in “Other” in the above table primarily reflect the impact of foreign exchange translation, primarily for plans in Australia, France, Germany, Canada and Switzerland.

Major assumptions used in determining the benefit obligation and net cost for pension plans are presented in the following table as weighted-averages:

						Benefit Obligation												Net Cost
						2021						2020						2021						2020						2019
Discount rate:
Projected benefit obligation						1.5		%				1.1		%				1.1		%				1.5		%				2.5		%
Salary scale						3.0		%				3.0		%				3.0		%				3.1		%				3.3		%
Expected return on plan assets						—						—						3.6		%				4.5		%				5.2		%
Interest crediting rate						1.0		%				0.6		%				0.6		%				0.7		%				1.5		%

The weighted-average discount rates used to measure pension benefit obligations and net costs are set by reference to specific analyses using each plan’s specific cash flows and are then comparing them to high-quality bond indices for reasonableness.

In determining the expected return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes, and economic and other indicators of future performance. In addition, we may consult with, and consider the opinions of, financial and other professionals in developing appropriate capital market assumptions. Return projections are also validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns.

The plans’ investment management objectives include providing the liquidity and asset levels needed to meet current and future benefit payments, while maintaining a prudent degree of portfolio diversification considering interest rate risk and market volatility. Globally, investment strategies target a mix of approximately 50% of growth-seeking assets and 50% of income-generating and hedging assets using a wide diversification of asset types, fund strategies and investment managers. The growth seeking allocation consists of global public equities in developed and emerging countries, and alternative-asset class strategies. Within the income-generating assets, the fixed income portfolio consists of mainly government and broadly diversified high-quality corporate bonds.

The fair values of pension plan assets as of December 31, 2021 and 2020 by asset category are as follows:

(dollars in millions)						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)						Not Subject to Leveling						Total
Asset category
Public equities:
Global Equity Commingled Funds (1)						$	70					$	2					$	—					$	—					$	72
Global Equity Funds at net asset value (5)						—						—						—						196						196
Fixed income securities:
Governments						19						—						—						—						19
Corporate Bonds						42						1						—						—						43
Fixed income securities at net asset value (5)						—						—						—						117						117
Real estate (2) (5)						11						14						—						11						36
Other (3) (5)						4						126						—						24						154
Cash and cash equivalents (4) (5)						4						1						—						44						49
Total						$	150					$	144					$	—					$	392					686
Other assets and liabilities (6)																														4
Total as of December 31, 2021																														$	690

(dollars in millions)						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)						Not Subject to Leveling						Total
Asset category
Public equities:
Global Equity Commingled Funds (1)						$	52					$	39					$	—					$	—					$	91
Global Equity Funds at net asset value (5)						—						—						—						154						154
Fixed income securities:
Governments						20						41						—						—						61
Corporate Bonds						49						4						—						—						53
Fixed income securities at net asset value (5)						—						—						—						90						90
Real estate (2) (5)						12						6						—						12						30
Other (3) (5)						2						129						—						25						156
Cash and cash equivalents (4) (5)						6						1						—						41						48
Total						$	141					$	220					$	—					$	322					$	683
Other assets and liabilities (6)																														20
Total as of December 31, 2020																														$	703

(1) Represents investments in mutual funds and investments in commingled funds that invest primarily in common stocks.

(2) Represents investments in real estate including commingled funds.

(3) Represents insurance contracts and global-balanced-risk commingled funds consisting mainly of equity, bonds and some commodities.

(4) Represents short-term commercial paper, bonds and other cash or cash-like instruments.

(5) In accordance with FASB ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension benefits plan assets.

(6) Represents trust receivables and payables that are not leveled.

Quoted market prices are used to value investments when available. Investments in securities traded on exchanges, including listed futures and options, are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Fixed income securities are primarily measured using a market approach pricing methodology, where observable prices are obtained by market transactions involving identical or comparable securities of issuers with similar credit ratings. Over-the-counter securities and government obligations are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes. Temporary cash investments are stated at cost, which approximates fair value.

We expect to make total contributions of approximately $34 million to our global defined benefit pension plans in 2022, including benefit payments to be paid directly from corporate assets.

Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $60 million in 2022, $65 million in 2023, $62 million in 2024, $66 million in 2025, $66 million in 2026, and $339 million from 2027 through 2031.

Postretirement Benefit Plans. We sponsor postretirement benefit plans that provide health benefits to eligible retirees. The postretirement plans are unfunded. The benefit obligation was $10 million and $11 million as of December 31, 2021, and 2020, respectively. The net periodic cost was $1 million for 2021, 2020 and 2019, respectively. Other comprehensive gain of $1 million was recognized during 2021 and other comprehensive loss of $2 million was recognized during 2020, related to changes in benefit obligations.

The projected benefit obligation discount rate was 5.0% and 4.3% as of December 31, 2021 and 2020, respectively. The Net Cost discount rate was 4.3%, 4.7% and 5.3% for 2021, 2020 and 2019, respectively.

Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $1 million each year from 2022 through 2026, and $3 million from 2027 through 2031.

Multiemployer Benefit Plans. We contribute to various domestic and international multiemployer defined benefit pension plans. The risks of participating in these multiemployer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. Lastly, if we choose to stop participating in some of our multiemployer plans, we may be required to pay those plans a withdrawal liability based on the underfunded status of the plan.

Our participation in these plans for the annual periods ended December 31 is outlined in the table below. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) zone status available in 2021 and 2020 is for the plan’s year-end at June 30, 2020 and June 30, 2019, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Our significant plan is in the green zone which represents a plan that is at least 80% funded and does not require a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”). An extended amortization provision of ten years was utilized to recognize investment gains or losses for our significant plan through June 30, 2019.

(dollars in millions)												PPA Zone Status												FIP/RP Status						Contributions																		Surcharge Imposed						Expiration Date of Collective-Bargaining Agreement
Pension Fund						EIN/Pension Plan Number						2021						2020						Pending/Implemented						2021						2020						2019
National Elevator Industry Pension Plan						23-2694291						Green						Green						No						$	128					$	131					$	127					No						7/8/2022
Other funds																														8						7						9
																														$	136					$	138					$	136

For the plan years ended June 30, 2020 and 2019, respectively, we were listed in the National Elevator Industry Pension Plan’s Forms 5500 as providing more than 5% of the total contributions for the plan. At the date these financial statements were

issued, the Form 5500 was not available for the plan year ending June 30, 2021.

In addition, we participate in multiemployer arrangements that provide postretirement benefits other than pensions, with the National Elevator Industry Health Benefit Plan being the most significant. These arrangements generally provide medical and life benefits for eligible active employees and retirees and their dependents. Contributions to multiemployer plans that provide postretirement benefits other than pensions were $20 million, $20 million and $21 million for 2021, 2020 and 2019, respectively.

UTC Sponsored Defined Benefit Plans. Defined benefit pension and postretirement benefit plans were sponsored by our former parent, UTC, and have been accounted for as multi-employer plans in these Consolidated 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. The Company's participation in the defined pension and postretirement benefit plans sponsored by our former parent, UTC, concluded upon the completion of the Separation. The amounts for pension and postretirement expenses for Service cost and Non-service pension benefit were $1 million and $5 million, respectively, in 2020, and $15 million and $42 million, respectively, in 2019.

Stock-based Compensation. In connection with the Separation, the Company adopted the 2020 Long-Term Incentive Plan (the "Plan"). The Plan became effective on April 3, 2020. A total of 45 million shares of common stock are authorized under the Plan. The Plan provides for the grant of various types of awards including restricted share unit awards, stock appreciation rights, stock options, and performance-based awards. Under the Plan, the exercise price of awards, if any, is set on the grant date and may not be less than the fair market value per share on that date. Generally, stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, annual stock appreciation rights, stock options, and restricted share units held for more than one year may become vested and exercisable (if applicable), subject to certain terms and conditions. Awards with performance-based vesting generally have a minimum three-year vesting period and vest based on actual performance against pre-established metrics. In the event of retirement, performance-based awards held for more than one year remain eligible to vest based on actual performance relative to target metrics. All other restricted awards generally have a three-year vesting period. We currently intend to issue new shares for share option exercises and conversions under our equity compensation arrangements, and will continue to evaluate this policy in connection with our share repurchase program. As of December 31, 2021, approximately 26 million shares remain available for awards under the 2020 Plan.

In connection with the Separation, and in accordance with the EMA, the Company's employees with outstanding former UTC stock-based awards received replacement stock-based awards under the Plan at Separation. The value of the replaced stock-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to Separation. The incremental expense incurred by the Company was not material.

Prior to the Separation, certain of the Company's employees participated in stock-based compensation plans sponsored by our former parent, UTC. The UTC stock-based compensation plans included various types of market and performance-based incentive awards, including stock options, stock appreciation rights, restricted stock units, and performance-based share units. All awards granted under the plans were based on UTC common shares, and only the activity attributable to Otis employees from these awards, as converted at the Separation, is reflected in the accompanying Consolidated Financial Statements for the years ended December 31, 2021 and 2020.

Stock-based Compensation Expense

We measure the cost of all share-based payments, including stock options, at fair value on the grant date and recognize this cost in the Consolidated Statements of Operations. A forfeiture rate assumption is applied on grant date to adjust the expense recognition for awards that are not expected to vest.

Stock-based compensation expense and the resulting tax benefits were as follows:

						Year Ended
(dollars in millions)						2021						2020						2019
Stock-based compensation expense (Share-based)						$	65					$	63					$	37
Stock-based compensation expense (Cash-based)						2						(4)						10
Total gross stock-based compensation expense						67						59						47
Less: future tax benefit						8						7						5
Stock-based compensation expense, net of tax						$	59					$	52					$	42

For periods prior to the Separation, stock-based compensation expense includes expense attributable to Otis, and the fair value assumptions are based on the awards and terms previously granted under the UTC incentive compensation plan to Otis employees. Accordingly, the amounts presented for the years ended December 31, 2020 and 2019 are not necessarily indicative of future awards and do not necessarily reflect the results that Otis would have experienced as an independent publicly-traded company.

For the years ended December 31, 2021, 2020 and 2019, the amount of cash received from the exercise of stock options was $4 million, $3 million and $10 million, respectively, with an associated tax benefit realized of $4 million, $2 million and $6 million, respectively. In addition, for the years ended December 31, 2021, 2020 and 2019, the associated tax benefit realized from the vesting of performance share units and other restricted awards was $4 million, $1 million and $4 million, respectively. The 2021 and 2020 amounts were computed using current U.S. federal and state tax rates.

As of December 31, 2021, there was approximately $57 million of total unrecognized compensation cost related to non-vested equity awards granted under the Plan. This cost is expected to be recognized ratably over a weighted-average period of 2.0 years.

A summary of the transactions under Otis' plans for the year ended December 31, 2021 follows:

						Stock Appreciation Rights												Restricted Share Units												Performance Share Units												Stock Options
(shares in thousands)						Shares						Average Price*						Shares						Average Price**						Shares						Average Price**						Shares						Average Price*
Outstanding at:
December 31, 2020						12,177						$	60.63					1,710						$	63.94					—						$	—					454						$	55.31
Granted (1)						1,344						64.81						483						68.67						334						67.58						19						71.93
Exercised / Earned (1)						(2,269)						51.67						(458)						68.31						—						—						(96)						46.41
Cancelled						(537)						66.72						(83)						67.60						(4)						67.71						(1)						80.97
December 31, 2021						10,715						$	62.74					1,652						$	63.91					330						$	67.58					376						$	58.31

• Weighted-average grant price

** Weighted-average grant fair value

(1) Includes annual retainer awards issued to the Board of Directors

The weighted-average grant date fair value of stock options and stock appreciation rights granted by Otis and our former parent, UTC, during 2021, 2020 and 2019 was $14.83, $10.38 and $20.92, respectively. The weighted-average grant date fair value of performance share units, which vest upon achieving certain performance metrics, and other restricted stock awards granted by Otis and UTC during 2021, 2020 and 2019 was $68.22, $54.29 and $109.17, respectively. The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of stock options and stock appreciation rights exercised during 2021, 2020 and 2019 was $74 million, $13 million and $53 million, respectively. The total fair value (which is the stock price at vesting) of performance share units and other restricted awards vested was $32 million, $10 million and $33 million during the years ended December 31, 2021, 2020 and 2019, respectively.

The following table summarizes information about equity awards outstanding that are vested and expected to vest and equity awards outstanding that are exercisable as of December 31, 2021:

						Equity Awards Vested and Expected to Vest																								Equity Awards That Are Exercisable
(shares in thousands; aggregate intrinsic value in millions)						Awards						Average Price*						Aggregate Intrinsic Value						Remaining Term**						Awards						Average Price*						Aggregate Intrinsic Value						Remaining Term**
Stock Options/Stock Appreciation Rights						11,027						$	62.53					$	271					5.4 years						6,846						$	57.62					$	202					3.9 years
Performance Share Units/Restricted Stock						1,921						—						$	167					1.4 years

• Weighted-average grant price per share

** Weighted-average contractual remaining term in years

The fair value of each option award is estimated on the date of grant using a binomial lattice model. The following table indicates the assumptions used in estimating fair value for the years ended December 31, 2021, 2020 and 2019. For periods prior to the Separation, these assumptions represent those utilized by our former parent, UTC, and are not necessarily indicative of assumptions that would be used by Otis as a standalone company. Lattice-based option models incorporate ranges of assumptions for inputs; those ranges are as follows:

						2021						2020						2019
Expected volatility						26.9%						25.5%						18.8% - 19.7%
Weighted-average volatility						26.9%						25.5%						19.5%
Expected term (in years)						6.3						6.8						6.5 - 6.6
Expected dividend yield						1.3%						1.8%						2.4%
Risk-free rate						0.7%						0.5%						2.3% - 2.7%

Due to the lack of trading history of Otis' stock at the time of valuation efforts, the expected volatility for Otis was calculated based on the average of the volatility of the peer group within the industry. UTC's historical data for Otis employees was used to estimate equity award exercise and employee termination behavior within the valuation model. The expected term represents an estimate of the period of time equity awards are expected to remain outstanding. The risk-free rate is based on the term structure of interest rates at the time of equity award grant.

The Company uses a Monte Carlo simulation approach based on a three-year measurement period to determine fair value of performance share units. This approach includes the use of assumptions regarding the future performance of the Company’s stock and those of a peer group. Those assumptions include expected volatility, risk-free interest rates, correlations and dividend yield.

Note 14: Stock

Preferred Stock. There are 125 million shares of $0.01 par value authorized Preferred Stock, of which none were issued or outstanding as of December 31, 2021 or 2020.

Common Stock. There are 2 billion shares of $0.01 par value Common Stock authorized. As of December 31, 2021, 434.7 million shares of Common Stock were issued, which includes 9.7 million shares of treasury stock. As of December 31, 2020, 433.4 million shares of Common Stock were issued and outstanding.

Share Repurchase Program. As of December 31, 2021, the Company was authorized by the Board of Directors to purchase up to $1 billion of Common Stock under a share repurchase program, of which $725 million had been utilized. During 2021, the Company repurchased 9.7 million shares of Common Stock for approximately $725 million. The Company's share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs or under plans complying with rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the increased debt incurred to fund the Tender Offer, we have temporarily suspended our share repurchases as we focus on deleveraging.

Note 15: Accumulated Other Comprehensive Income (Loss)

A summary of the changes in each component of Accumulated other comprehensive income (loss), net of tax for the years ended December 31, 2021, 2020 and 2019 is provided below:

(dollars in millions)						Foreign Currency Translation						Defined Benefit Pension and Postretirement Plans						Unrealized Hedging Gains (Losses)						Accumulated Other Comprehensive Income (Loss)
Balance as of December 31, 2018						$	(573)					$	(135)					$	—					$	(708)
Other comprehensive income (loss) before reclassifications, net						(15)						(50)						(3)						(68)
Amounts reclassified, pre-tax						—						9						—						9
Tax expense (benefit) reclassified						—						9						—						9
Balance as of December 31, 2019						$	(588)					$	(167)					$	(3)					$	(758)
Other comprehensive income (loss) before reclassifications, net						(28)						(47)						10						(65)
Amounts reclassified, pre-tax						—						15						(3)						12
Tax expense (benefit) reclassified						—						(4)						—						(4)
Balance as of December 31, 2020						$	(616)					$	(203)					$	4					$	(815)
Other comprehensive income (loss) before reclassifications, net						(26)						62						(1)						35
Amounts reclassified, pre-tax						—						18						4						22
Tax expense (benefit) reclassified						—						(5)						—						(5)
Balance as of December 31, 2021						$	(642)					$	(128)					$	7					$	(763)

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 13, "Employee Benefit Plans" for additional information.

Note 16: Income Taxes

Income Before Income Taxes. The sources of income from operations before income taxes are:

(dollars in millions)						2021						2020						2019
United States						$	420					$	105					$	470
Foreign						1,541						1,406						1,391
						$	1,961					$	1,511					$	1,861

Following enactment of the TCJA, and as part of the historical UTC assertion, the Company determined that it no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, in 2018 Otis recorded the international taxes associated with the future remittance of these earnings. As part of the Separation process, the Company re-assessed this position as a standalone company. The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. The international taxes recorded relative to this assertion differ from those recorded in 2018. As a result of the change in assertion and changes in planned debt repayments and in estimates related to Otis’ pre-Separation tax attributes, the Company recognized two benefits: one of $10 million during the year ended December 31, 2020, and one of $16 million during the year ended December 31, 2021. For the remainder of the Company's undistributed international earnings, unless tax effective to repatriate, Otis will continue to permanently reinvest these earnings. As of December 31, 2021, such undistributed earnings were approximately $5.1 billion, excluding other comprehensive income amounts. It is not practicable to estimate the amount of tax that might be payable on the remaining amounts.

Provision for Income Taxes. The income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 consisted of the following components:

(dollars in millions)						2021						2020						2019
Current:
United States:
Federal						$	77					$	42					$	103
State						32						26						38
Foreign						524						438						461
						633						506						602
Future:
United States:
Federal						(13)						8						11
State						(6)						(8)						—
Foreign						(73)						(51)						(19)
						(92)						(51)						(8)
Income tax expense						$	541					$	455					$	594
Attributable to items (charged) credited to (deficit) equity						$	(25)					$	(6)					$	(14)

Reconciliation of Effective Income Tax Rate. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows:

						2021						2020						2019
Statutory U.S. federal income tax rate						21.0		%				21.0		%				21.0		%
State income taxes						0.8		%				0.9		%				1.7		%
Tax on international activities						4.7		%				4.4		%				6.5		%
U.S. tax effect of foreign earnings						0.5		%				3.4		%				2.9		%
Other						0.6		%				0.4		%				(0.2)		%
Effective income tax rate						27.6		%				30.1		%				31.9		%

The 2021, 2020, and 2019 effective tax rates are higher than the statutory U.S. rate primarily due to higher international tax rates as compared to the lower U.S. federal statutory rate and foreign earnings subject to U.S. tax under the provisions of the TCJA.

The 2021 effective tax rate is lower than the 2020 effective tax rate primarily due to a $16 million tax benefit related to the repatriation of foreign earnings as a result of changes to planned debt repayments and in estimates related to Otis’ pre-Separation tax attributes and a decrease of $16 million in U.S. tax related to base erosion and anti-abuse tax in 2021. In addition, the lower effective tax rate is due to the absence of the tax cost resulting from Separation-related expenses and fixed asset impairment in 2020, and the net impact of income tax settlements related to the Separation, as discussed in Note 5, "Related Parties".

The 2020 effective tax rate is lower than the 2019 effective tax rate primarily due to a $10 million tax benefit related to our change in assertion of no longer intending to reinvest certain undistributed earnings of our international subsidiaries made during 2020 as compared to the liability previously recorded by UTC, a decrease as a result of tax regulations related to the TCJA that were enacted during 2020, as well as a recognition of a Separation-related foreign tax loss, all partially offset by incremental withholding taxes in 2020.

Deferred Tax Assets and Liabilities. Future income taxes represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Future income tax benefits and payables within the same tax paying component of a particular jurisdiction are offset for presentation in the Consolidated Balance Sheets.

The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and payables as of December 31, 2021 and 2020 are as follows:

(dollars in millions)						2021						2020
Future income tax benefits:
Insurance and employee benefits						$	185					$	201
Other asset basis differences						143						149
Other liability basis differences						320						299
Tax loss carryforwards						200						197
Tax credit carryforwards						46						38
Valuation allowances						(247)						(242)
						$	647					$	642
Future income taxes payable:
Intangible assets						$	168					$	182
Other assets basis differences						284						335
						$	452					$	517

Valuation allowances have been established primarily for tax credit carryforwards, tax loss carryforwards, and certain foreign temporary differences to reduce the future income tax benefits to expected realizable amounts.

Tax Credit and Loss Carryforwards. As of December 31, 2021, tax credit carryforwards, principally state and foreign, and tax loss carryforwards, principally state and foreign, were as follows:

(dollars in millions)						Tax Credit Carryforwards						Tax Loss Carryforwards
Expiration period:
2022-2026						$	1					$	53
2027-2031						14						20
2032-2041						1						71
Indefinite						30						668
						$	46					$	812

Unrecognized Tax Benefits. As of December 31, 2021, the Company had gross tax-effected unrecognized tax benefits of $392 million, all of which, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019 is as follows:

(dollars in millions)						2021						2020						2019
Balance at January 1						$	397					$	379					$	380
Additions for tax positions related to the current year						23						16						18
Additions for tax positions of prior years						1						41						15
Reductions for tax positions of prior years						(22)						(31)						(15)
Settlements						(7)						(8)						(19)
Balance at December 31						$	392					$	397					$	379
Gross interest expense related to unrecognized tax benefits						$	2					$	10					$	8
Total accrued interest balance at December 31						$	152					$	153					$	141

Otis conducts business globally and, as a result, Otis or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.

In the ordinary course of business, Otis could be subject to examination by taxing authorities throughout the world, including such major jurisdictions as Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Portugal, Russia, South Korea, Spain, Switzerland, the United Kingdom and the U.S. With few exceptions, Otis is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2010.

A subsidiary of Otis engaged in litigation in Belgium received a favorable appellate court decision in 2018. The Belgian Tax Authorities appealed the decision to the Court of Cassation (the equivalent of Supreme Court in Belgium). On December 4, 2020, the Court of Cassation overturned the decision of the appellate court and remanded the case to the appellate court for reconsideration. It is not known how much time will elapse prior to the issuance of the appellate court’s decision. The associated tax and interest have been fully reserved.

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 $20 million increase to a $360 million reduction of unrecognized tax benefits and a range of a $5 million increase to a $150 million reduction in associated interest 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 22, "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 17: Restructuring Costs

We initiate restructuring actions 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 office and manufacturing operations.

During the years ended December 31, 2021, 2020 and 2019, we recorded pre-tax restructuring costs totaling $56 million, $77 million and $54 million, respectively, for new and ongoing restructuring actions. We recorded restructuring charges in our operating segments as follows:

(dollars in millions)						2021						2020						2019
New Equipment						$	23					$	30					$	19
Service						33						47						35
Total						$	56					$	77					$	54

Restructuring charges incurred in the years ended December 31, 2021, 2020 and 2019 primarily relate to actions initiated during 2021, 2020 and 2019, and were recorded as follows:

(dollars in millions)						2021						2020						2019
Cost of products and services sold						$	22					$	22					$	19
Selling, general and administrative						34						55						35
Total						$	56					$	77					$	54

Restructuring Actions. During 2021, we recorded restructuring costs of $41 million for restructuring actions initiated in 2021, consisting of $13 million in Cost of products and services sold and $28 million in Selling, general and administrative expenses. During 2021, we recorded restructuring costs totaling $13 million for restructuring actions initiated in 2020, consisting of $9 million in Cost of products and services sold and $4 million in Selling, general and administrative expenses. During 2021, we also recorded restructuring costs totaling $2 million for restructuring actions initiated in 2019 and prior.

We are targeting to complete in 2022 the majority of remaining restructuring actions initiated in 2021 and 2020.

The following table summarizes the accrual balance and utilization for the 2021 and 2020 restructuring actions, which are primarily for severance costs:

(dollars in millions)						2021 Actions						2020 Actions
Restructuring accruals as of December 31, 2020						$	—					$	42
Restructuring costs						41						13
Utilization, foreign exchange and other costs						(19)						(30)
Balance as of December 31, 2021						$	22					$	25

The following table summarizes expected, incurred and remaining costs for the 2021 and 2020 restructuring actions by segment:

(dollars in millions)						Expected Costs						Cost Incurred During 2020						Costs Incurred During 2021																		Remaining Costs as of December 31, 2021
New Equipment						$	15					$	—					$	(14)																	$	1
Service						33						—						(27)																		6
Total 2021 Actions						$	48					$	—					$	(41)																	$	7
New Equipment						$	36					$	(29)					$	(7)																	$	—
Service						48						(42)						(6)																		—
Total 2020 Actions						$	84					$	(71)					$	(13)																	$	—

Note 18: Financial Instruments

We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under ASC 820, Fair Value Measurement. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, commodity prices and foreign exchange rates. These fluctuations can increase the costs of financing, investing in and operating the business. We may use derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, commodity price and interest rate exposures.

The average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $3.3 billion and $3.0 billion as of December 31, 2021 and 2020, respectively. The average of the notional amount of contracts hedging commodity purchases was $16 million and $0 million as of December 31, 2021 and 2020, respectively

The following table summarizes the fair value and presentation on the Consolidated Balance Sheets for derivative instruments as of December 31:

(dollars in millions)						Balance Sheet Classification						2021						2020
Derivatives designated as Cash flow hedging instruments:
						Asset Derivatives:
Foreign exchange contracts						Other current assets						$	7					$	9
Foreign exchange contracts						Other assets						1						4
						Total asset derivatives						$	8					$	13
						Liability Derivatives:
Foreign exchange contracts						Accrued liabilities						$	(3)					$	(7)
Foreign exchange contracts						Other long-term liabilities						—						(4)
						Total liability derivatives						$	(3)					$	(11)
Derivatives not designated as Cash flow hedging instruments:
						Asset Derivatives:
Foreign exchange contracts						Other current assets						$	23					$	23
Foreign exchange contracts						Other assets						5						10
						Total asset derivatives						$	28					$	33
						Liability Derivatives:
Foreign exchange contracts						Accrued liabilities						$	(11)					$	(24)
Foreign exchange contracts						Other long-term liabilities						(2)						(8)
						Total liability derivatives						$	(13)					$	(32)

Derivatives designated as Cash flow hedging instruments

The amount of gain or (loss) attributable to foreign exchange contract activity reclassified from Accumulated other comprehensive income (loss) was immaterial for the years ended December 31, 2021, 2020 and 2019, respectively.

The effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) as of December 31, 2021 and 2020 are presented in the table below.

												December 31,
(dollars in millions)																		2021						2020
Gain (loss) recorded in Accumulated other comprehensive income (loss)																		$	7					$	4

The Company utilizes the critical terms match method in assessing firm commitment derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.

Assuming current market conditions continue, a pre-tax gain of $4 million is expected to be reclassified from Accumulated other comprehensive income (loss) into Cost of product sold to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. All derivative contracts accounted for as cash flow hedges as of December 31, 2021 will mature by December 2024.

Net Investment Hedges

We have foreign-denominated long-term debt balances that qualify as net investment hedges. Changes in the value of these net investment hedges due to foreign currency gains or losses are deferred as foreign currency translation adjustments in Other comprehensive income (loss) on the Consolidated Statements of Comprehensive Income, and will remain in Accumulated other comprehensive income (loss) until the hedged investment is sold or substantially liquidated. We evaluate the effectiveness of the net investment hedges each quarter.

In September 2020, we issued €420 million of Euro denominated commercial paper. The Euro denominated commercial paper while outstanding qualified as a net investment hedge against our investments in European businesses and was deemed to be effective as of December 31, 2020. During 2021, we fully repaid the Euro denominated commercial paper and there is no longer a net investment hedge as of December 31, 2021. During 2021 and 2020, we recognized $16 million of gains and $18 million of losses, respectively, associated with this net investment hedge in Other comprehensive income (loss).

We have ¥21.5 billion of Japanese Yen denominated long-term debt, which qualifies as a net investment hedge against our investments in Japanese businesses. As of December 31, 2021, the net investment hedge is deemed to be effective. During 2021, we recognized $10 million of gains associated with this net investment hedge in Other comprehensive income (loss).

Derivatives not designated as Cash flow hedging instruments

The net effect of derivatives not designated as Cash flow hedging instruments within Other income (expense) net, on the Consolidated Statements of Operations was as follows:

												Year Ended December 31,
(dollars in millions)																		2021						2020						2019
Foreign exchange contracts																		$	9					$	(4)					$	(9)

Note 19: 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 Consolidated Balance Sheets as of December 31, 2021 and 2020:

						December 31, 2021
(dollars in millions)						Total						Level 1						Level 2						Level 3
Recurring fair value measurements:
Equity securities						$	25					$	25					$	—					$	—
Derivative assets						36						—						36						—
Derivative liabilities						(16)						—						(16)						—

						December 31, 2020
(dollars in millions)						Total						Level 1						Level 2						Level 3
Recurring fair value measurements:
Equity securities						$	59					$	59					$	—					$	—
Derivative assets						46						—						46						—
Derivative liabilities						(43)						—						(43)						—

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 and commodity 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.

As of December 31, 2021, 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 fair values of the current portion of the Company's financial instruments not carried at fair value approximated their carrying values because of the short-term nature of the current portion. The fair value of receivables, including customer financing notes receivable, net, that were issued long-term are based on the discounted values of their related cash flows at interest rates reflecting the attributes of the counterparties, including geographic location. Customer-specific risk, including credit risk, is already considered in the carrying value of those receivables. Our long-term debt, as described in Note 10, "Borrowings and Lines of Credit", are measured at fair value using closing bond prices from active markets.

The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Consolidated Balance Sheets as of December 31, 2021 and 2020:

						December 31, 2021												December 31, 2020
(dollars in millions)						Carrying Amount						Fair Value						Carrying Amount						Fair Value
Long-term receivables, net						$	65					$	63					$	65					$	62
Customer financing notes receivable, net						77						76						128						126
Short-term borrowings						(24)						(24)						(701)						(701)
Long-term debt (excluding leases and other)						(7,296)						(7,420)						(5,300)						(5,717)
Long-term liabilities (including current portion)						(253)						(240)						(263)						(234)

Long-term liabilities (including current portion) as of December 31, 2021 includes $239 million of payables to RTX for reimbursement of tax payments that RTX is responsible to pay after the Separation as a result of the TMA.

The following tables provide the valuation hierarchy classification of assets and liabilities that are not carried at fair value in the Consolidated Balance Sheets as of December 31, 2021 and 2020:

						December 31, 2021
(dollars in millions)						Total						Level 1						Level 2						Level 3
Long-term receivables, net						$	63					$	—					$	63					$	—
Customer financing notes receivable, net						76						—						76						—
Short-term borrowings						(24)						—						(24)						—
Long-term debt (excluding leases and other)						(7,420)						—						(7,420)						—
Long-term liabilities (including current portion)						(240)						—						(240)						—

						December 31, 2020
(dollars in millions)						Total						Level 1						Level 2						Level 3
Long-term receivables, net						$	62					$	—					$	62					$	—
Customer financing notes receivable, net						126						—						126						—
Short-term borrowings						(701)						—						(701)						—
Long-term debt (excluding leases and other)						$	(5,717)					—						(5,717)						—
Long-term liabilities (including current portion)						(234)						—						(234)						—

Note 20: Guarantees

The Company 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 years ended December 31, 2021 and 2020 are as follows:

(dollars in millions)						2021						2020
Balance as of January 1						$	25					$	27
Warranties						3						12
Settlements made						(9)						(14)
Other						1						—
Balance as of December 31						$	20					$	25

The Company provides certain financial guarantees to third parties. As of December 31, 2021, Otis has stand-by letters of credit with maximum potential payment totaling $154 million. We accrue costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued. In accordance with the FASB ASC Topic 460: Guarantees, we record these liabilities at fair value. As of December 31, 2021, Otis has determined there are no estimated costs probable under these guarantees.

In connection with the Tender Offer, the Company entered into certain arrangements whereby third party banks agreed to provide financial guarantees to the CNMV in an amount equal to the original total price of the Tender Offer of €1.63 billion, as required by the Spanish takeover code. On November 12, 2021, the financial guarantees to the CNMV were terminated upon deposit into escrow of an amount equal to the total price of the Tender Offer. See Note 10, "Borrowings and Lines of Credit" for additional discussion of the Euro Notes issued to fund the Tender Offer.

Note 21: Leases

ASU 2016-02, Leases (Topic 842) and its related amendments (collectively, "Lease Accounting Standard") establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the Consolidated Balance Sheets for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition on the Consolidated Statements of Operations.

We enter into lease agreements for the use of real estate space, vehicles and certain other equipment under operating and finance leases. We determine if an arrangement contains a lease at inception. Operating leases are included in Operating lease ROU assets, Accrued liabilities, and Operating lease liabilities in our Consolidated Balance Sheets. Finance leases are not considered significant to our Consolidated Balance Sheets or Consolidated Statements of Operations. We apply the practical expedient for short-term leases, whereby a lease ROU asset and liability is not recognized and the expense is recognized in a straight-line basis over the lease term.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. We determine our incremental borrowing rate through market sources including relevant industry rates. Our lease ROU assets also include any lease pre-payments and exclude lease incentives. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. We exclude variable payments from lease ROU assets and lease liabilities, to the extent not considered fixed, and instead, expense variable payments as incurred. Variable lease expense and lease expense for short duration contracts is not a material component of lease expense. Our leases generally have remaining lease terms of 1 to 20 years, some of which include options to extend leases. The majority of our leases with options to extend are up to five years with the ability to terminate the lease within one year. The exercise of lease renewal options is at our sole discretion and our lease ROU assets and liabilities reflect only the options we are reasonably certain that we will exercise. Lease expense is recognized on a straight-line basis over the lease term.

Operating lease expense for the years ended December 31, 2021, 2020 and 2019 as $147 million, $148 million and $152 million, respectively. The Company made immaterial adjustments to the prior year footnote disclosure of operating lease expense in 2020 and 2019, which did not impact the amounts recorded in the Consolidated Statements of Operations for the years ended December 31, 2020 and 2019.

Supplemental cash flow information related to operating leases for the years ended December 31, 2021, 2020 and 2019 were as follows:

(dollars in millions)						2021						2020						2019
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash outflows from operating leases						$	(154)					$	(162)					$	(134)
Non-cash operating lease activity:
ROU assets obtained in exchange for operating lease liabilities						135						126						157

Operating lease ROU assets and liabilities are reflected on our Consolidated Balance Sheets as follows:

						December 31,
(dollars in millions)						2021						2020
Operating lease ROU assets						$	526					$	542
Accrued liabilities						$	181					$	167
Operating lease liabilities						336						367
Total operating lease liabilities						$	517					$	534

Supplemental information related to operating leases was as follows:

						December 31,
						2021									2020
Weighted Average Remaining Lease Term (in years)						4.4									5.0
Weighted Average Discount Rate						2.6			%						2.9			%

Undiscounted maturities of operating lease liabilities, including options to extend lease terms that are reasonably certain of being exercised, as of December 31, 2021 are as follows:

(dollars in millions)						Total
2022						$	171
2023						136
2024						102
2025						52
2026						32
Thereafter						52
Total undiscounted lease payments						545
Less: imputed interest						(28)
Total discounted lease payments						$	517

Note 22: 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. In addition to the specific amounts noted below, where we have recorded loss contingency accruals for other matters described below, the amounts in aggregate are not material. Legal costs generally are expensed when incurred.

Environmental. As previously disclosed, the Company's operations are subject to environmental regulation by authorities with jurisdiction over its operations. The Company 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 as of December 31, 2021 and December 31, 2020, and is principally included in Other long-term liabilities on the Consolidated 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 $243 million as of December 31, 2021) 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 $134 million as of December 31, 2021).

On August 3, 2012, a suit was filed in the local German Tax Court (Berlin-Brandenburg). In 2015, our former parent UTC made tax and interest payments to German tax authorities of €275 million (approximately $300 million) in order to avoid additional interest accruals pending final resolution of this matter. 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. On December 7, 2020, the local Tax Court ruled against the Company. We have filed an appeal with the Federal Tax Court and expect a decision on our appeal in the first quarter of 2022. There is no assurance, however, that the German Federal Tax Court will agree to hear the appeal or, if it does, rule in the Company's favor, and the decision of the German Tax Office ultimately could be sustained.

Pursuant to the TMA, the Company retains the liability associated with the remaining interest, and has recorded an interest accrual of €45 million (approximately $50 million as of December 31, 2021), net of payments and other deductions, included within Accrued liabilities on the Consolidated Balance Sheets as of December 31, 2021. In the event that RTX and the Company prevail in this matter, any recoveries would be allocated between RTX and the Company pursuant to the terms of the TMA.

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 years ended, December 31, 2021 and December 31, 2020.

The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is $22 million to $45 million as of December 31, 2021, and $23 million to $45 million as of December 31, 2020. Because no amount within the range of estimates is more likely to occur than any other, we recorded the minimum amount of $22 million and $23 million as of December 31, 2021 and 2020, respectively, which is principally recorded in Other long-term liabilities on our Consolidated Balance Sheets. Amounts are on a pre-tax basis, not discounted, and excludes the Company's legal fees to defend the asbestos claims (which will continue to be expensed as they are incurred). In addition, the Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $5 million, which is principally recorded in Other assets on our Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020.

Putative Class Action Lawsuit

On August 12, 2020, a putative class action lawsuit, (Geraud Darnis et al. v. Raytheon Technologies Corporation et al.), was filed in the United States District Court for the District of Connecticut against Otis, Raytheon Technologies Corporation ("RTX"), Carrier, each of their directors, and various incentive and deferred compensation plans. On September 13, 2021, plaintiffs filed an amended complaint against the three company defendants only. The named plaintiffs are former employees of UTC and its current and former subsidiaries, including Otis and Carrier. They seek to recover monetary damages, as well as

related declaratory and equitable relief, based on claimed decreases in the value of long-term incentive awards and deferred compensation under nonqualified deferred compensation plans allegedly caused by the formula used to calculate the adjustments to such awards and deferred compensation from RTX, Carrier, and Otis following the spin-offs of Carrier and Otis and the subsequent combination of UTC and Raytheon Company. Otis believes that the claims against the Company are without merit. At this time, Otis is unable to predict the outcome, or reasonably estimate the possible loss or range of loss, if any, which could result from this action.

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 Company 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 Company 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 23: 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 Company, how management allocates resources, assesses performance and makes strategic and operational decisions.

Segment Information. Segment information for the years ended December 31 are as follows:

						Net Sales																		Operating Profit
(dollars in millions)						2021						2020						2019						2021						2020						2019
New Equipment						$	6,428					$	5,371					$	5,648					$	459					$	318					$	393
Service						7,870						7,385						7,470						1,762						1,611						1,603
Total segments						14,298						12,756						13,118						2,221						1,929						1,996
General corporate expenses and other (1)						—						—						—						(113)						(290)						(182)
Total						$	14,298					$	12,756					$	13,118					$	2,108					$	1,639					$	1,814

(1) The decrease in General corporate expenses and other during 2021 compared to 2020 is primarily driven by fixed asset impairment charges of $71 million and associated license costs of $14 million in 2020, as well as lower non-recurring Separation-related and shared costs of $106 million in 2021 compared with 2020.

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

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 years ended December 31, 2021, 2020 and 2019.

						External Net Sales																		Long Lived Assets
(dollars in millions)						2021						2020						2019						2021						2020						2019
United States Operations						$	3,700					$	3,462					$	3,594					$	336					$	309					$	295
International Operations
China						2,877						2,135						2,113						111						113						105
Other						7,721						7,159						7,411						327						352						321
Total						$	14,298					$	12,756					$	13,118					$	774					$	774					$	721

Segment Net sales disaggregated by product and service type for the years ended December 31, 2021, 2020 and 2019 are as follows:

(dollars in millions)						2021						2020						2019
Disaggregated Net sales by type
New Equipment						$	6,428					$	5,371					$	5,648
Maintenance and Repair						6,472						6,047						6,120
Modernization						1,398						1,338						1,350
Total Service						7,870						7,385						7,470
Total						$	14,298					$	12,756					$	13,118

Major Customers. There were no customers that individually accounted for 10% or more of the Company's consolidated Net sales for the years ended December 31, 2021, 2020 and 2019.

Note 24: Subsequent Events

On January 14, 2022, the Company redeemed its $500 million floating rate notes due in 2023, at par, using cash on hand and commercial paper borrowings. See Note 10, "Borrowings and Lines of Credit" for details of the long-term debt.

OTIS WORLDWIDE CORPORATION

SCHEDULE II - Valuation and Qualifying Accounts

Three years ended December 31, 2021

(Dollars in millions)

Allowance for Doubtful Accounts and Expected Credit Losses:
Balance, December 31, 2018			$	84
Provision charged to income			26
Doubtful accounts written off			(19)
Other			(8)
Balance, December 31, 2019			83
Impact of credit standard adoption			28
Provision for expected credit losses			40
Write-offs charged against the allowance for expected credit losses			(20)
Other			30
Balance, December 31, 2020			161
Provision for expected credit losses			37
Write-offs charged against the allowance for expected credit losses			(15)
Other			(8)
Balance, December 31, 2021			$	175
Future Income Tax Benefits - Valuation Allowance
Balance, December 31, 2018			$	29
Additions charged to income tax expense			28
Reductions credited to income tax expense			—
Other adjustments			(2)
Balance, December 31, 2019			55
Additions charged to income tax expense			63
Reductions credited to income tax expense			(13)
Other adjustments			137
Balance, December 31, 2020			242
Additions charged to income tax expense			30
Reductions credited to income tax expense			(10)
Other adjustments			(15)
Balance, December 31, 2021			$	247