Item 1. Financial Statements

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

						Quarter Ended September 30,
(amounts in millions, except per share amounts)						2021						2020
Net sales:
Product sales						$	1,681					$	1,423
Service sales						1,939						1,845
						3,620						3,268
Costs and expenses:
Cost of products sold						1,381						1,172
Cost of services sold						1,179						1,117
Research and development						39						37
Selling, general and administrative						479						481
						3,078						2,807
Other income (expense), net						—						(7)
Operating profit						542						454
Non-service pension cost (benefit)						2						2
Interest expense (income), net						33						39
Net income before income taxes						507						413
Income tax expense						128						103
Net income						379						310
Less: Noncontrolling interest in subsidiaries' earnings						48						44
Net income attributable to common shareholders						$	331					$	266
Earnings per share (Note 3):
Basic						$	0.78					$	0.61
Diluted						$	0.77					$	0.61
Weighted average number of shares outstanding
Basic shares						425.8						433.2
Diluted shares						430.6						435.1

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

						Nine Months Ended September 30,
(amounts in millions, except per share amounts)						2021						2020
Net sales:
Product sales						$	4,866					$	3,840
Service sales						5,863						5,423
						10,729						9,263
Costs and expenses:
Cost of products sold						3,986						3,158
Cost of services sold						3,589						3,338
Research and development						113						112
Selling, general and administrative						1,445						1,387
						9,133						7,995
Other income (expense), net						16						(69)
Operating profit						1,612						1,199
Non-service pension cost (benefit)						6						—
Interest expense (income), net						92						85
Net income before income taxes						1,514						1,114
Income tax expense						404						337
Net income						1,110						777
Less: Noncontrolling interest in subsidiaries' earnings						145						122
Net income attributable to common shareholders						$	965					$	655
Earnings per share (Note 3):
Basic						$	2.25					$	1.51
Diluted						$	2.23					$	1.51
Weighted average number of shares outstanding
Basic shares						428.5						433.1
Diluted shares						432.0						434.1

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Net income						$	379					$	310					$	1,110					$	777
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments						(37)						28						(39)						(56)
Pension and postretirement benefit plan adjustments						4						3						11						7
Change in unrealized cash flow hedging						4						6						1						5
Other comprehensive income (loss), net of tax						(29)						37						(27)						(44)
Comprehensive income (loss), net of tax						350						347						1,083						733
Less: Comprehensive income attributable to noncontrolling interest						(43)						(57)						(130)						(139)
Comprehensive income attributable to common shareholders						$	307					$	290					$	953					$	594

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in millions)						September 30, 2021						December 31, 2020
Assets
Cash and cash equivalents						$	1,553					$	1,782
Accounts receivable (net of allowance for expected credit losses of $177 and $161)						3,217						3,148
Contract assets						536						458
Inventories, net						628						659
Other current assets						441						446
Total Current Assets						6,375						6,493
Future income tax benefits						352						334
Fixed assets (net of accumulated depreciation of $1,173 and $1,197)						775						774
Operating lease right-of-use assets						553						542
Intangible assets, net						434						484
Goodwill						1,702						1,773
Other assets						281						310
Total Assets						$	10,472					$	10,710
Liabilities and (Deficit) Equity
Short-term borrowings						$	38					$	701
Accounts payable						1,662						1,453
Accrued liabilities						1,905						1,977
Contract liabilities						2,758						2,542
Total Current Liabilities						6,363						6,673
Long-term debt						5,458						5,262
Future pension and postretirement benefit obligations						635						654
Operating lease liabilities						364						367
Future income tax obligations						274						321
Other long-term liabilities						611						634
Total Liabilities						13,705						13,911
Commitments and contingent liabilities (Note 18)
Redeemable noncontrolling interest						62						83
Shareholders' (Deficit) Equity:
Common Stock and additional paid-in capital						102						59
Treasury Stock						(725)						—
Accumulated deficit						(2,404)						(3,076)
Accumulated other comprehensive income (loss)						(827)						(815)
Total Shareholders' (Deficit) Equity						(3,854)						(3,832)
Noncontrolling interest						559						548
Total (Deficit) Equity						(3,295)						(3,284)
Total Liabilities and (Deficit) Equity						$	10,472					$	10,710

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

												Common Stock and Additional Paid-In Capital						Treasury Stock						Accumulated Deficit												Accumulated Other Comprehensive Income (Loss)						Total Shareholders' (Deficit) Equity						Noncontrolling Interest						Total (Deficit) Equity						Redeemable Noncontrolling Interest
(dollars in millions, except per share amounts)
Quarter Ended September 30, 2021
Balance June 30, 2021																		$	86					$	(506)					$	(2,633)											$	(803)					$	(3,856)					$	539					$	(3,317)					$	63
Net income																		—						—						331												—						331						48						379						—
Other comprehensive income (loss), net of tax																		—						—						—												(24)						(24)						(5)						(29)						—
Stock-based compensation and Common Stock issued under employee plans																		18						—						(1)												—						17						—						17						—
Cash dividends declared ($0.24 per common share)																		—						—						(102)												—						(102)						—						(102)						—
Repurchase of Common Shares																		—						(219)						—												—						(219)						—						(219)						—
Dividends attributable to noncontrolling interest																		—						—						—												—						—						(24)						(24)						—
Acquisitions, disposals and other changes																		(2)						—						1												—						(1)						1						—						(1)
Balance at September 30, 2021																		$	102					$	(725)					$	(2,404)											$	(827)					$	(3,854)					$	559					$	(3,295)					$	62
Quarter Ended September 30, 2020
Balance June 30, 2020																		$	19					$	—					$	(3,418)											$	(843)					$	(4,242)					$	570					$	(3,672)					$	96
Net income																		—						—						266												—						266						44						310						—
Other comprehensive income (loss), net of tax																		—						—						—												24						24						14						38						(1)
Stock-based compensation																		17						—						—												—						17						—						17						—
Cash dividends declared ($0.20 per common share)																		—						—						(86)												—						(86)						—						(86)						—
Dividends attributable to noncontrolling interest																		—						—						—												—						—						(84)						(84)						—
Acquisitions, disposals and other changes																		—						—						(3)												—						(3)						(1)						(4)						3
Balance at September 30, 2020																		$	36					$	—					$	(3,241)											$	(819)					$	(4,024)					$	543					$	(3,481)					$	98

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

						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
(dollars in millions, except per share amounts)
Nine Months Ended September 30, 2021
Balance December 31, 2020						$	59					$	—					$	(3,076)					$	—					$	(815)					$	(3,832)					$	548					$	(3,284)					$	83
Net income						—						—						965						—						—						965						145						1,110						—
Other comprehensive income (loss), net of tax						—						—						—						—						(12)						(12)						(13)						(25)						(2)
Stock-based compensation and Common Stock issued under employee plans						45						—						(2)						—						—						43						—						43						—
Cash dividends declared ($0.68 per common share)						—						—						(291)						—						—						(291)						—						(291)						—
Repurchase of Common Shares						—						(725)						—						—						—						(725)						—						(725)						—
Dividends attributable to noncontrolling interest						—						—						—						—						—						—						(131)						(131)						(1)
Acquisitions, disposals and other changes						(2)						—						—						—						—						(2)						10						8						(18)
Balance at September 30, 2021						$	102					$	(725)					$	(2,404)					$	—					$	(827)					$	(3,854)					$	559					$	(3,295)					$	62
Nine Months Ended September 30, 2020
Balance December 31, 2019						$	—					$	—					$	—					$	2,458					$	(758)					$	1,700					$	531					$	2,231					$	95
Net transfers (to) from UTC						—						—						—						(6,150)						—						(6,150)						—						(6,150)						—
Issuance of common stock and reclassification of deficit						4						—						(3,556)						3,552						—						—						—						—						—
Net income						—						—						490						165						—						655						122						777						—
Other comprehensive income (loss), net of tax						—						—						—						—						(61)						(61)						21						(40)						(4)
Stock-based compensation						32						—						—						—						—						32						—						32						—
Cash dividends declared ($0.40 per common share)						—						—						(173)						—						—						(173)						—						(173)						—
Dividends attributable to noncontrolling interest						—						—						—						—						—						—						(123)						(123)						—
Acquisitions, disposals and other changes						—						—						(2)						—						—						(2)						(8)						(10)						7
Adoption of credit loss standard, net of tax (Note 6)						—						—						—						(25)						—						(25)						—						(25)						—
Balance at September 30, 2020						$	36					$	—					$	(3,241)					$	—					$	(819)					$	(4,024)					$	543					$	(3,481)					$	98

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

						Nine Months Ended September 30,
(dollars in millions)						2021						2020
Operating Activities:
Net income						$	1,110					$	777
Adjustments to reconcile net income to net cash flows provided by operating activities, net of acquisitions:
Depreciation and amortization						152						140
Deferred income tax expense (benefit)						(72)						(51)
Stock compensation cost						48						44
Loss on fixed asset impairment						—						55
Change in operating assets and liabilities:
Accounts receivable, net						(107)						(79)
Contract assets and liabilities, current						140						277
Inventories, net						18						(101)
Other current assets						12						57
Accounts payable						230						19
Accrued liabilities						(29)						(81)
Pension contributions						(23)						(28)
Other operating activities, net						(6)						142
Net cash flows provided by operating activities						1,473						1,171
Investing Activities:
Capital expenditures						(115)						(112)
Investments in businesses and intangible assets, net of cash acquired (Note 8)						(59)						(50)
Investments in equity securities						(18)						(51)
Proceeds from sale of equity securities						58						—
Receipts (payments) on settlements of derivative contracts						35						(63)
Other investing activities, net						30						(13)
Net cash flows used in investing activities						(69)						(289)
Financing Activities:
Net proceeds from (repayments of) borrowings (maturities of 90 days or less)						(294)						510
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						199						6,300
Payment of debt issuance costs						(11)						(43)
Repayment of long-term debt						—						(750)
Net transfers to UTC						—						(6,330)
Dividends paid on Common Stock						(291)						(173)
Repurchases of Common Stock						(725)						—
Dividends paid to noncontrolling interest						(130)						(125)
Other financing activities, net						(18)						22
Net cash flows used in financing activities						(1,621)						(589)
Effect of foreign exchange rate changes on cash and cash equivalents						(11)						—
Net increase (decrease) in cash and cash equivalents						(228)						293
Cash, cash equivalents and restricted cash, beginning of year						1,801						1,459
Cash, cash equivalents and restricted cash, end of period						1,573						1,752
Less: Restricted cash						20						19
Cash and cash equivalents, end of period						$	1,553					$	1,733

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Condensed Consolidated Financial Statements at September 30, 2021 and for the quarters and nine months ended September 30, 2021 and 2020 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The Condensed Consolidated Balance Sheet at December 31, 2020 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States ("U.S."). The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the Company's annual consolidated financial statements and accompanying notes included in our Annual Report to Shareholders ("2020 Annual Report") incorporated by reference in our Annual Report on Form 10-K for fiscal year 2020 ("2020 Form 10-K" or "Form 10-K").

Note 1: Description of Business and Separation from United Technologies Corporation

Otis (as defined below) is the world’s leading 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 September 23, 2021, the Company announced a tender offer 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"), and its intention to delist the shares of Zardoya Otis from the Madrid, Barcelona, Bilbao and Valencia stock exchanges subsequent to the Tender Offer. The price per share to be paid in the Tender Offer was adjusted to €6.93 as a result of the dividend paid by Zardoya Otis on October 11, 2021. The Tender Offer is subject to approval by the Comisión Nacional del Mercado de Valores (the "CNMV"), which is responsible for the regulation of Spanish securities markets. The value of the issued and outstanding shares of Zardoya Otis not owned by the Company is €1.63 billion based on the tender price of €6.93 after the adjustment for dividends paid on October 11, 2021. The Company owned a controlling interest and had operational control of Zardoya Otis as of and for the periods ended September 30, 2021 and 2020, and therefore its financial results are included in our Condensed Consolidated Financial Statements. As of September 30, 2021, the Company owned 50.02% of Zardoya Otis. See Note 9, "Borrowings and Lines of Credit" and Note 17, "Guarantees" for additional information regarding financing and guarantee agreements entered into by the Company in connection with the Tender Offer.

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 (the "Distribution"). Otis began to trade as a separate public company (New York Stock Exchange: 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 (the "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 Service 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".

Note 2: 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 "Condensed Consolidated Financial Statements" to reflect this change). They have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted.

Prior to the Separation on April 3, 2020, the Condensed 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 our former parent, UTC, in the period in which the cost was recorded on the Condensed 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.

All significant intracompany accounts and transactions within the Company have been eliminated in the preparation of the Condensed Consolidated Financial Statements. Prior to the Separation, the Condensed Consolidated Financial Statements of the Company include assets and liabilities that have been determined to be specifically or otherwise attributable to the Company.

U****se of Estimates. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially 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 COVID-19 at September 30, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of our goodwill and other long-lived assets, financial assets and revenue recognition. While there was not a material impact to our Condensed Consolidated Financial Statements as of September 30, 2021 and for the quarters and nine months ended September 30, 2021 and 2020, respectively, 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 Condensed Consolidated Financial Statements in future reporting periods.

Certain amounts presented in the prior period have been reclassified to conform to the current period presentation, which are immaterial.

Note 3: Earnings per Share

On April 3, 2020, the date of consummation of the Separation, 433,079,455 shares of the Company's common stock, par value $0.01 per share, were distributed to UTC shareholders of record as of March 19, 2020. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation as all common stock was owned by UTC prior to the Separation. For the quarter and nine months ended September 30, 2020, these shares are treated as issued and outstanding at January 1, 2020 for purposes of calculating historical basic and diluted earnings per share.

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions, except per share amounts; shares in millions)						2021						2020						2021						2020
Net income attributable to common shareholders						$	331					$	266					$	965					$	655
Basic weighted average number of shares outstanding						425.8						433.2						428.5						433.1
Stock awards and equity units (share equivalent)						4.8						1.9						3.5						1.0
Diluted weighted average number of shares outstanding						430.6						435.1						432.0						434.1
Earnings Per Share of Common Stock:
Basic:						$	0.78					$	0.61					$	2.25					$	1.51
Diluted:						$	0.77					$	0.61					$	2.23					$	1.51

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 5.0 million of anti-dilutive stock awards excluded from the computation for the quarters ended September 30, 2021 and 2020, respectively, and 0.1 million and 4.8 million for the nine months ended September 30, 2021 and 2020, respectively.

Note 4: Revenue Recognition

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

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

For new equipment and modernization transactions, equipment and installation are typically procured in a single contract providing the customer with a complete installed elevator or escalator unit. The combination of equipment and installation 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 in order to measure progress.

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

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

Total Contract assets and Contract liabilities at September 30, 2021 and December 31, 2020 are as follows:

(dollars in millions)						September 30, 2021						December 31, 2020
Contract assets, current						$	536					$	458
Total contract assets						536						458
Contract liabilities, current						2,758						2,542
Contract liabilities, non-current (included within Other long-term liabilities)						46						44
Total contract liabilities						2,804						2,586
Net contract liabilities						$	2,268					$	2,128

Contract assets increased by $78 million during the nine months ended September 30, 2021 as a result of the progression of current contracts and timing of billing on customer contracts. Contract liabilities increased by $218 million during the nine months ended September 30, 2021 primarily due to contract billings in excess of revenue earned. In the nine months ended September 30, 2021 and 2020, we recognized revenue of $1.9 billion and $1.5 billion related to contract liabilities as of January 1, 2021 and 2020, respectively.

Remaining Performance Obligations ("RPO"). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of September 30, 2021, our total RPO was $17.3 billion. Of the total RPO as of September 30, 2021, we expect 88% will be recognized as sales over the following 24 months.

Note 5: Related Parties

In connection with the Separation as further described in Note 1, the Company entered into several agreements with our former parent, UTC, and Carrier. These agreements include the Separation Agreement that sets forth certain agreements with UTC and Carrier regarding the principal actions to be taken in connection with the Separation, including identifying the assets transferred, the liabilities assumed and the contracts transferred to each of UTC, Carrier and Otis as part of the Separation, and when and how these transfers and assumptions occurred.

Other agreements that we entered into that govern aspects of our relationship with RTX and Carrier following the Separation include the TSA, TMA, EMA and Intellectual Property Agreement. Under the TSA, which is substantially completed as of September 30, 2021, RTX provided the Company certain services and we provided certain services to RTX. The TMA governs the parties' respective rights, responsibilities and obligations with respect to tax matters, and among other things 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. 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.

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 the quarter ended March 31, 2020, 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 Condensed Consolidated Statements of Changes in Equity through UTC Net Investment during the quarter ended March 31, 2020.

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 approximately $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 Tax Cuts and Jobs Act (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' future income tax obligations corresponding to the toll charge was reclassified as a contractual indemnity obligation within Other long-term liabilities on the Condensed Consolidated Balance Sheet. 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 has reflected this contractual indemnification asset within Other current assets and the related tax obligations within Accrued liabilities on the Condensed Consolidated Balance Sheet. 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 Condensed Consolidated Balance Sheet:

(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 Condensed Consolidated Balance Sheet.

Shared Costs. The Condensed 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 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 significant corporate costs such as treasury, tax, accounting, human resources, audit, legal, purchasing, information technology and other such services. The costs associated with these services generally 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, for periods prior to the Separation, shared costs of $16 million were allocated to the Company and reflected as expenses in Selling, general and administrative expense on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020. There were no allocated centralized costs for the periods after the Separation.

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

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Separation costs, net						$	15					$	29					$	24					$	82

Separation-related costs, net 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. These costs are recorded in Selling, general and administrative expense on the Condensed 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. These indemnification asset adjustments are fully offset by related impacts to the income tax provision.

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 Condensed Consolidated Balance Sheets in the historical periods presented. The total effect of the settlement of these related party transactions is reflected as a financing activity on the Condensed Consolidated Statements of Cash Flows.

Note 6: Accounts Receivable, Net

Accounts receivable, net consisted of the following at September 30, 2021 and December 31, 2020:

(dollars in millions)						September 30, 2021						December 31, 2020
Trade receivables						$	3,073					$	2,987
Unbilled receivables						120						104
Customer financing notes receivable						106						130
Miscellaneous receivables						95						88
						3,394						3,309
Less: allowance for expected credit losses						177						161
Accounts receivable, net						$	3,217					$	3,148

The changes in allowance for credit losses related to Accounts receivable, net for the nine months ended September 30, 2021 and 2020, respectively, are as follows:

						Nine Months Ended September 30,
(dollars in millions)						2021						2020
Balance as of January 1						$	161					$	83
Impact of credit standard adoption						—						28
Provision for expected credit losses						27						28
Write-offs charged against the allowance for expected credit losses						(8)						(9)
Foreign exchange and other						(3)						26
Balance as of September 30						$	177					$	156

The current period provision for expected credit losses for the nine months ended September 30, 2021 was primarily the result of reserves recorded on trade receivables and customer financing receivables in New Equipment.

For the nine months ended September 30, 2020, there was approximately $22 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 the nine months ended September 30, 2020.

Note 7: Inventories, net

(dollars in millions)						September 30, 2021						December 31, 2020
Raw materials and work-in-process						$	127					$	113
Finished goods						501						546
Total						$	628					$	659

Raw materials, work-in-process and finished goods are net of valuation reserves of $108 million and $112 million as of September 30, 2021 and December 31, 2020, respectively.

Note 8: Business Acquisitions, Dispositions, Goodwill and Intangible Assets

Business Acquisitions. Our investments in businesses and intangibles assets, net of cash acquired, totaled $59 million and $53 million in the nine months ended September 30, 2021 and 2020, respectively. The acquisitions and investments consisted of a number of acquisitions primarily in our Service segment. Transaction costs incurred were not considered significant.

Goodwill. Changes in our Goodwill balances during the nine months ended September 30, 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 September 30, 2021
New Equipment						$	357					$	—											$	(14)					$	343
Service						1,416						2												(59)						1,359
Total						$	1,773					$	2											$	(73)					$	1,702

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

						September 30, 2021																		December 31, 2020
(dollars in millions)						Gross Amount						Accumulated Amortization												Gross Amount						Accumulated Amortization
Amortized:
Purchased service portfolios						$	2,061					$	(1,661)											$	2,123					$	(1,661)
Patents, trademarks/trade names						22						(17)												22						(16)
Customer relationships and other						65						(43)												54						(45)
						2,148						(1,721)												2,199						(1,722)
Unamortized:
Trademarks and other						7						—												7						—
Total						$	2,155					$	(1,721)											$	2,206					$	(1,722)

Amortization of intangible assets for the quarter and nine months ended September 30, 2021 was $22 million and $67 million, respectively, consistent with the amounts for the same periods in 2020. Excluding the impact of currency translation adjustments, there were no other significant changes in our Intangible Assets during the quarter and nine months ended September 30, 2021.

Note 9: Borrowings and Lines of Credit

(dollars in millions)						September 30, 2021						December 31, 2020
Commercial paper						$	—					$	664
Other borrowings						38						37
Total short-term borrowings						$	38					$	701

Commercial Paper. As of September 30, 2021, we had an aggregate $1.5 billion unsecured, unsubordinated commercial paper programs in place. As of September 30, 2021, we had 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 the nine months ended September 30, 2021, we fully repaid the Euro denominated commercial paper and there is no longer a related net investment hedge as of September 30, 2021.

We also issued $150 million of U.S. Dollar commercial paper in November 2020, which was fully repaid during the nine months ended September 30, 2021. The commercial paper issued in 2020 was used to pay down the term loan described further below.

Long-term debt. As of September 30, 2021, we had 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 September 30, 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, during the quarter ended March 31, 2020.

On March 11, 2021, we issued ¥21.5 billion Japanese Yen denominated ($199 million), unsecured, unsubordinated 5-year notes due March 2026 ("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 September 30, 2021, the net investment hedge is deemed to be effective.

The Company is in compliance with all covenants in the revolving credit agreement and the indenture governing all notes as of September 30, 2021.

On September 22, 2021, we entered into a €1.65 billion bridge loan credit agreement (the "Bridge Credit Facility") in connection with the Tender Offer, which we expect to only be drawn to the extent we have not obtained permanent debt financing prior to the settlement date of the Tender Offer (the “Tender Offer Closing Date”). The Bridge Credit Facility is available for Euro denominated loans beginning on the Tender Offer Closing Date and matures 364 days thereafter. Borrowings under the Bridge Credit Facility will bear interest at a rate equal to the greater of (i) EURIBOR or (ii) zero, plus an applicable rate based on a ratings-based pricing grid. The Bridge Credit Facility contains various terms and conditions related to the Tender Offer and that are customary for financings of this type, including covenants that are substantially consistent with the revolving credit agreement.

Long-term debt consisted of the following:

(dollars in millions)						September 30, 2021						December 31, 2020
LIBOR plus 45 bps floating rate notes due 2023 1,2						$	500					$	500
2.056% notes due 2025 2						1,300						1,300
0.37% notes due 2026 (¥21.5 billion principal value) 2						194						—
2.293% notes due 2027 2						500						500
2.565% notes due 2030 2						1,500						1,500
3.112% notes due 2040 2						750						750
3.362% notes due 2050 2						750						750
Other (including finance leases)						5						5
Total principal long-term debt						5,499						5,305
Other (discounts and debt issuance costs)						(41)						(43)
Total long-term debt						5,458						5,262
Less: current portion						—						—
Long-term debt, net of current portion						$	5,458					$	5,262

1 The three-month LIBOR rate at September 30, 2021 was approximately 0.13%.

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 Condensed 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 Condensed Consolidated Statements of Operations for the quarters and nine months ended September 30, 2021 and 2020 reflects the following:

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Debt issuance costs amortization						$	1					$	1					$	4					$	4
Total interest expense on external debt						34						40						101						95

The unamortized debt issuance costs at September 30, 2021 and December 31, 2020 were $41 million and $43 million, respectively.

Costs to establish the Bridge Credit Facility are presented in Other current assets on the Condensed Consolidated Balance Sheets and are amortized as a component of interest expense ratably over the term of the facility. The unamortized balance was $10 million as of September 30, 2021.

The average maturity of our long-term debt at September 30, 2021 is approximately 10.3 years. The average interest expense rate on our borrowings for the quarters and nine months ended September 30, 2021 and 2020, and as of September 30, 2021 and December 31, 2020 was as follows:

						Quarter Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
Average interest rate - average outstanding during period:
Short-term borrowings						(0.2)		%				(0.3)		%				(0.3)		%				(0.3)		%
Total long-term debt						2.4		%				2.4		%				2.4		%				2.5		%
Average interest rate - average as of:						September 30, 2021												December 31, 2020
Short-term borrowings						—								%				(0.2)								%
Total long-term debt						2.4								%				2.4								%

Note 10: Employee Benefit Plans

Pension and Postretirement Plans. The Company sponsors both funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Defined benefit plans						$	5					$	8					$	23					$	28
Defined contribution plans						14						12						47						42
Multi-employer pension and postretirement plans						38						46						118						119

The following table illustrates the components of net periodic benefit cost for the Company's defined benefit pension plans:

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Service cost						$	11					$	10					$	33					$	30
Interest cost						3						4						10						12
Expected return on plan assets						(6)						(6)						(18)						(19)
Recognized actuarial net loss						5						4						14						11
Net settlement and curtailment (gain) loss						(1)						—						(1)						—
Total net periodic benefit cost						$	12					$	12					$	38					$	34

Postretirement Benefit Plans. The Company sponsors postretirement benefit plans that provide health benefits to eligible retirees. The postretirement plans are unfunded. The net periodic benefit cost was less than $1 million for the quarters and nine months ended September 30, 2021 and 2020, 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 Condensed Consolidated Financial Statements. 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 the nine months ended September 30, 2020 for Service cost and Non-service pension benefit were $1 million and $5 million, respectively, all prior to the Separation.

Stock-based Compensation. In conjunction with the Separation, the Company adopted the 2020 Long-Term Incentive Plan (the "Plan"). The Plan became effective on April 3, 2020. As of September 30, 2021, approximately 26 million shares remain available for awards under the Plan.

Stock-based Compensation Expense

The Company measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognize this cost in the Condensed 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. For the quarter and nine months ended September 30, 2020, stock-based compensation expense includes expense attributable to Otis, which is based on the awards and terms previously granted under the UTC incentive compensation plan to Otis employees. Accordingly, the amounts presented for the quarter and nine months ended September 30, 2020 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.

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

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Stock-based compensation expense (Share Based)						$	17					$	17					$	48					$	44
Stock-based compensation expense (Cash Based)						1						2						2						(6)
Total gross stock-based compensation expense						18						19						50						38
Less: future tax benefit						2						3						6						7
Stock-based compensation expense, net of tax						$	16					$	16					$	44					$	31

As of September 30, 2021, there was approximately $73 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.

Note 11: 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 September 30, 2021 and December 31, 2020.

Common Stock. There are 2 billion shares of $0.01 par value Common Stock authorized. As of September 30, 2021, 434.5 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 September 30, 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 the quarter and nine months ended September 30, 2021 the Company repurchased 2.4 million and 9.7 million shares of Common Stock, respectively, for approximately $219 million and $725 million, respectively. 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").

Note 12: Accumulated Other Comprehensive Income (Loss)

A summary of the changes in each component of Accumulated other comprehensive income (loss), net of tax for the quarters and nine months ended September 30, 2021 and 2020 is provided below:

(dollars in millions)						Foreign Currency Translation						Defined Benefit Pension and Postretirement Plans												Unrealized Hedging Gains (Losses)						Accumulated Other Comprehensive Income (Loss)
Quarter Ended September 30, 2021
Balance at June 30, 2021						$	(608)					$	(196)											$	1					$	(803)
Other comprehensive income (loss) before reclassifications, net						(32)						—												5						(27)
Amounts reclassified, pre-tax						—						5												(1)						4
Tax benefit reclassified						—						(1)												—						(1)
Balance at September 30, 2021						$	(640)					$	(192)											$	5					$	(827)
Nine Months Ended September 30, 2021
Balance at December 31, 2020						$	(616)					$	(203)											$	4					$	(815)
Other comprehensive income (loss) before reclassifications, net						(24)						—												(2)						(26)
Amounts reclassified, pre-tax						—						14												3						17
Tax benefit reclassified						—						(3)												—						(3)
Balance at September 30, 2021						$	(640)					$	(192)											$	5					$	(827)

(dollars in millions)						Foreign Currency Translation						Defined Benefit Pension and Postretirement Plans												Unrealized Hedging Gains (Losses)						Accumulated Other Comprehensive Income (Loss)
Quarter Ended September 30, 2020
Balance at June 30, 2020						$	(676)					$	(163)											$	(4)					$	(843)
Other comprehensive income (loss) before reclassifications, net						15						—												6						21
Amounts reclassified, pre-tax						—						4												—						4
Tax benefit reclassified						—						(1)												—						(1)
Balance at September 30, 2020						$	(661)					$	(160)											$	2					$	(819)
Nine Months Ended September 30, 2020
Balance at December 31, 2019						$	(588)					$	(167)											$	(3)					$	(758)
Other comprehensive income (loss) before reclassifications, net						(73)						(1)												5						(69)
Amounts reclassified, pre-tax						—						11												—						11
Tax benefit reclassified						—						(3)												—						(3)
Balance at September 30, 2020						$	(661)					$	(160)											$	2					$	(819)

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

Note 13: Income Taxes

The increase in the effective tax rate for the quarter ended September 30, 2021 is primarily due to the absence of a cumulative tax benefit related to the incorporation of TCJA tax regulations that was recorded in the third quarter of 2020, partially offset by an income tax settlement related to the Separation recorded in the third quarter of 2021, as discussed in Note 5, "Related Parties".

The decrease in the effective tax rate for the nine months ended September 30, 2021 is due to the absence of the tax cost relating to Separation-related expenses and a fixed asset impairment incurred in the first quarter of 2020, a reduction in the deferred tax liability related to repatriation of foreign earnings as a result of changes to the Company’s planned debt repayments and changes in estimates related to Otis’ pre-Separation tax attributes, as well as the net impact of income tax settlements related to the Separation as discussed in Note 5, "Related Parties".

The Company conducts business globally and, as a result, the Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is 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 United States. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2010.

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. The evaluation considers any additional worldwide uncertain tax positions, the closure of tax statutes or the re-valuation 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. Based on the preceding factors, it is reasonably possible that within the next 12 months unrecognized tax benefits could change within the range of a $10 million increase to a $370 million decrease and associated interest could change within the range of a $5 million increase to a $160 million decrease.

See Note 18, “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 14: Restructuring Costs

During the quarter and nine months ended September 30, 2021, we recorded restructuring costs totaling $9 million and $35 million, respectively, for new and ongoing restructuring actions, compared to $20 million and $46 million, respectively, for the same periods of 2020. We recorded these charges as follows:

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Cost of products and services sold						$	5					$	9					$	19					$	19
Selling, general and administrative						4						11						16						27
Total						$	9					$	20					$	35					$	46

Restructuring Actions. During the nine months ended September 30, 2021, we recorded restructuring costs of $24 million for restructuring actions initiated in 2021, consisting of $11 million in Cost of products and services sold and $13 million in Selling, general and administrative expenses. During the nine months ended September 30, 2021, we recorded pre-tax restructuring costs totaling $10 million for restructuring actions initiated in 2020, consisting of $8 million in Cost of products and services sold and $2 million in Selling, general and administrative expenses. During the nine months ended September 30, 2021, we also recorded restructuring costs totaling $1 million for restructuring actions initiated in 2019 and prior to 2019.

The 2021 and 2020, actions relate to ongoing cost-reduction efforts, including workforce reductions. We are targeting to complete in 2021 the majority of remaining restructuring actions initiated in 2021 and 2020, with certain utilization beyond 2021.

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
Quarter Ended September 30, 2021
Restructuring accruals at June 30, 2021						$	7					$	30
Net pre-tax restructuring costs						8						—
Utilization, foreign exchange and other costs						(3)						(4)
Balance at September 30, 2021						$	12					$	26
Nine Months Ended September 30, 2021
Restructuring accruals at December 31, 2020						$	—					$	42
Net pre-tax restructuring costs						24						10
Utilization, foreign exchange and other costs						(12)						(26)
Balance at September 30, 2021						$	12					$	26

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

(dollars in millions)						Expected Costs						Costs Incurred During 2020						Costs Incurred Quarter Ended March 31, 2021						Costs Incurred Quarter Ended June 30, 2021						Costs Incurred Quarter Ended September 30, 2021						Remaining Costs at September 30, 2021
Total 2021 Actions						$	30					$	—					$	(13)					$	(3)					$	(8)					$	6
Total 2020 Actions						$	86					$	(71)					$	(2)					$	(8)					$	—					$	5

Note 15: 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 $3.0 billion at September 30, 2021 and December 31, 2020. The average of the notional amount of contracts hedging commodity purchases was $21 million and $0 million at September 30, 2021 and December 31, 2020, respectively.

The following table summarizes the fair value and presentation on the Condensed Consolidated Balance Sheets for derivative instruments as of September 30, 2021 and December 31, 2020:

(dollars in millions)						Balance Sheet Classification						September 30, 2021						December 31, 2020
Derivatives designated as Cash flow hedging instruments:
						Asset Derivatives:
Foreign exchange contracts						Other current assets						$	9					$	9
Foreign exchange contracts						Other assets						3						4
						Total asset derivatives						$	12					$	13
						Liability Derivatives:
Foreign exchange contracts						Accrued liabilities						$	(7)					$	(7)
Foreign exchange contracts						Other long-term liabilities						(2)						(4)
						Total liability derivatives						$	(9)					$	(11)
Derivatives not designated as Cash flow hedging instruments:
						Asset Derivatives:
Foreign exchange contracts						Other current assets						$	15					$	23
Commodity contracts						Other current assets						1						—
Foreign exchange contracts						Other assets						3						10
						Total asset derivatives						$	19					$	33
						Liability Derivatives:
Foreign exchange contracts						Accrued liabilities						$	(5)					$	(24)
Foreign exchange contracts						Other long-term liabilities						—						(8)
						Total liability derivatives						$	(5)					$	(32)

Derivatives designated as Cash flow hedging instruments

The amounts of gain or (loss) attributable to foreign exchange contract activity reclassified from Accumulated other comprehensive income (loss) were immaterial for the quarters and nine months ended September 30, 2021 and 2020, respectively.

The effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) as of September 30, 2021 and December 31, 2020 are presented in the table below:

(dollars in millions)						September 30, 2021						December 31, 2020
Gain (loss) recorded in Accumulated other comprehensive income (loss)						$	5					$	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 $2 million is expected to be reclassified from Accumulated other comprehensive income (loss) into Cost of products 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 September 30, 2021 will mature by December 2024.

Net Investment Hedges

We have foreign-denominated long-term debt that qualifies as a net investment hedge. Changes in the value of this net investment hedge due to foreign currency gains or losses, are deferred as foreign currency translation adjustments in Other comprehensive income (loss) on the Condensed Consolidated Statements of Comprehensive Income, and will remain in Accumulated other comprehensive income (loss) until the hedged investment is sold or substantially liquidated.

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 the nine months ended September 30, 2021, we fully repaid the Euro denominated commercial paper and there is no longer a net investment hedge as of September 30, 2021. During the quarter and nine months ended September 30, 2021, we recognized gains of $4 million and $16 million, 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 September 30, 2021, the net investment hedge is deemed to be effective. During the quarter and nine months ended September 30, 2021, we recognized gains of $1 million and $5 million, respectively, associated with this net investment hedge in Other comprehensive income (loss).

Derivatives not designated as Cash flow hedging instruments

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

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Foreign exchange contracts						4						(10)						8						(8)

Note 16: Fair Value Measurements

In accordance with the provisions of ASC 820: Fair Value Measurements, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and non-recurring basis in our Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020:

						September 30, 2021
(dollars in millions)						Total						Level 1						Level 2						Level 3
Recurring fair value measurements:
Equity securities						$	24					$	24					$	—					$	—
Derivative assets						31						—						31						—
Derivative liabilities						(14)						—						(14)						—

						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 Other income (expense), net. Our derivative assets and liabilities include foreign exchange contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks.

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 notes, as described in Note 9, "Borrowings and Lines of Credit", are measured at fair value using closing bond prices from active markets.

As of September 30, 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 following table provides carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2021 and December 31, 2020:

						September 30, 2021												December 31, 2020
(dollars in millions)						Carrying Amount						Fair Value						Carrying Amount						Fair Value
Long-term receivables, net						$	69					$	68					$	65					$	62
Customer financing notes receivable, net						92						91						128						126
Short-term borrowings						(38)						(38)						(701)						(701)
Long-term debt (excluding leases and other)						(5,493)						(5,673)						(5,300)						(5,717)
Long-term liabilities (including current portion)						(262)						(245)						(263)						(234)

The following tables provide the valuation hierarchy classification of assets and liabilities that are not carried at fair value in the Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020:

						September 30, 2021
(dollars in millions)						Total						Level 1						Level 2						Level 3
Long-term receivables, net						$	68					$	—					$	68					$	—
Customer financing notes receivable, net						91						—						91						—
Short-term borrowings						(38)						—						(38)						—
Long-term debt (excluding leases and other)						(5,673)						—						(5,673)						—
Long-term liabilities (including current portion)						(245)						—						(245)						—

						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 17: 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 nine months ended September 30, 2021 and 2020 are as follows:

(dollars in millions)						2021						2020
Balance as of December 31						$	25					$	27
Warranties						3						8
Settlements made						(8)						(10)
Foreign exchange and other						1						(1)
Balance as of September 30						$	21					$	24

The Company provides certain financial guarantees to third parties. As of September 30, 2021, Otis has stand-by letters of credit with maximum potential payment totaling $146 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 September 30, 2021, Otis has determined there are no estimated costs probable under these guarantees.

In connection with the Tender Offer, the Company entered into certain agreements whereby third party banks have agreed to provide financial guarantees to the CNMV in an amount equal to the total purchase price of the Tender Offer, which is €1.65 billion as of September 30, 2021, as required by the Spanish takeover code. Any amounts required to be paid by the guarantees will be satisfied with cash on hand, commercial paper issuance, issuance of debt or borrowings under the Bridge Credit Facility discussed in Note 9, "Borrowings and Lines of Credit".

Note 18: 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 the other below matters, 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 September 30, 2021 and December 31, 2020, and is included in Accrued liabilities and Other long-term liabilities on the Condensed 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 $252 million as of September 30, 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 $139 million as of September 30, 2021).

On August 3, 2012, a suit was filed in the local German Tax Court (Berlin-Brandenburg). In 2015, our former parent, UTC, now RTX, 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 German Tax Court ruled against the Company. We have filed an appeal with the German Federal Tax Court. 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 $52 million as of September 30, 2021), net of payments and other deductions, included within Accrued liabilities on the Condensed Consolidated Balance Sheets at September 30, 2021. In the event that the Company prevails 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 periods ended September 30, 2021 and December 31, 2020.

The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $23 million to $45 million as of September 30, 2021 and December 31, 2020. Because no amount within the range of estimates is more likely to occur than any other, we have recorded the minimum amount of $23 million, which is principally recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020. 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 included in Other assets on our Condensed Consolidated Balance Sheets as of September 30, 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 19: 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 quarters ended September 30, 2021 and 2020 are as follows:

						Net Sales												Operating Profit												Operating Profit Margin
(dollars in millions)						2021						2020						2021						2020						2021						2020
New Equipment						$	1,681					$	1,423					$	131					$	95					7.8		%				6.7		%
Service						1,939						1,845						444						409						22.9		%				22.2		%
Total segments						3,620						3,268						575						504						15.9		%				15.4		%
General corporate expenses and other						—						—						(33)						(50)						—						—
Total						$	3,620					$	3,268					$	542					$	454					15.0		%				13.9		%

Segment information for the nine months ended September 30, 2021 and 2020 are as follows:

						Net Sales												Operating Profit												Operating Profit Margin
(dollars in millions)						2021						2020						2021						2020						2021						2020
New Equipment						$	4,866					$	3,840					$	382					$	238					7.9		%				6.2		%
Service						5,863						5,423						1,315						1,190						22.4		%				21.9		%
Total segments						10,729						9,263						1,697						1,428						15.8		%				15.4		%
General corporate expenses and other 1						—						—						(85)						(229)						—						—
Total						$	10,729					$	9,263					$	1,612					$	1,199					15.0		%				12.9		%

1 The decrease in General corporate expenses and other during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 is primarily driven by a fixed asset impairment charge and related costs of $67 million in the nine months ended September 30, 2020, as well as lower non-recurring Separation-related and shared costs of $74 million in the nine months ended September 30, 2021 compared to the same period in 2020. See Note 5 for further discussion on these Separation-related and shared costs.

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 quarters and nine months ended September 30, 2021 and 2020.

						External Net Sales
						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
United States Operations						$	927					$	855					$	2,802					$	2,550
International Operations
China						811						624						2,176						1,557
Other						1,882						1,789						5,751						5,156
Total						$	3,620					$	3,268					$	10,729					$	9,263

Segment Net sales disaggregated by product and service type for the quarters and nine months ended September 30, 2021 and 2020 are as follows:

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2021						2020						2021						2020
Disaggregated Net sales by type
New Equipment						$	1,681					$	1,423					$	4,866					$	3,840
Maintenance and Repair						1,608						1,515						4,828						4,448
Modernization						331						330						1,035						975
Total Service						1,939						1,845						5,863						5,423
Total						$	3,620					$	3,268					$	10,729					$	9,263

Major Customers. There were no customers that individually accounted for 10% or more of the Company's consolidated Net sales for the quarters and nine months ended September 30, 2021 and 2020.

Note 20: Accounting Pronouncements

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; and an 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 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 are 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 Condensed Consolidated Financial Statements.

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, 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 is currently effective 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 Condensed Consolidated Financial Statements.

Other new accounting pronouncements adopted and issued but not effective until after September 30, 2021 did not and are not expected to have a material impact on our financial position, results of operations or liquidity.

With respect to the unaudited condensed consolidated financial information of Otis Worldwide Corporation for the quarters and nine months ended September 30, 2021 and 2020, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated October 26, 2021, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Otis Worldwide Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Otis Worldwide Corporation and its subsidiaries (the “Company”) as of September 30, 2021, and the related condensed consolidated statements of operations, of comprehensive income and of changes in equity for the three-month and nine-month periods ended September 30, 2021 and 2020 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2021 and 2020, including the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 5, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

October 26, 2021