Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

68K characters. Original on sec.gov · Markdown

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

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

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

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

The current status of significant factors affecting our business environment in 2021 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K.

Separation from United Technologies Corporation

As previously disclosed, on April 3, 2020, Otis became an independent, publicly-traded company and its Common Stock is listed under the symbol "OTIS" on the New York Stock Exchange ("NYSE") as a result of the separation ("the Separation") of each of Otis and Carrier Global Corporation ("Carrier") from United Technologies Corporation, subsequently renamed Raytheon Technologies Corporation ("UTC" or "RTX", as applicable).

Prior to the Separation, 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. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

We entered into a transition services agreement ("TSA") and tax matters agreement ("TMA") with our former parent, UTC, and Carrier on April 2, 2020. We received services for information technology, technical and engineering support, application support for operations, general administrative services and other support services under the TSA. The TSA and the related trailing exit costs are substantially completed as of September 30, 2021. For additional discussion, see Note 5, "Related Parties" to the Condensed Consolidated Financial Statements.

Zardoya Otis Tender Offer

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 Otis 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. See Note 1, "Description of Business and Separation from United Technologies Corporation", Note 9, "Borrowings and Lines of Credit" and Note 17, "Guarantees" to the Condensed Consolidated Financial Statements, as well as the Liquidity and Financial Condition section below, for further details regarding this proposed transaction and financing arrangements entered into in connection with the Tender Offer.

Impact of COVID-19 on our Company

The results of our operations and overall financial performance were impacted due to the COVID-19 pandemic during the quarters and nine months ended September 30, 2021 and 2020. COVID-19 has had and could continue to have an impact on our business in the future, including impacts to overall financial performance during the remainder of 2021, as a result of the following, among other things:

Customer demand impacting our new equipment, maintenance and repair, and modernization businesses
Cancellations or delays of customer orders
Customer liquidity constraints and related credit reserves
Supplier capacity constraints, delays and related costs

We currently do not expect any significant impact to our capital and financial resources from the COVID-19 pandemic, including to our overall liquidity position based on our available cash and cash equivalents and our access to credit facilities and the capital markets.

See the Liquidity and Financial Condition section in this Form 10-Q for further detail and Item 1A. Risk Factors in our Form 10-K for additional risks related to COVID-19.

CRITICAL ACCOUNTING ESTIMATES

Preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the Condensed Consolidated Financial Statements, or are the most sensitive to change due to outside factors, are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" included in our Form 10-K. Except as disclosed in Note 20 to our Condensed Consolidated Financial Statements in this Form 10-Q, pertaining to adoption of new accounting pronouncements, there have been no material changes in these policies.

RESULTS OF OPERATIONS

Net Sales


	Quarter Ended September 30,					Nine Months Ended September 30,
(dollars in millions)	2021			2020		2021			2020
Net sales	$	3,620		$	3,268	$	10,729		$	9,263
Percentage change year-over-year	10.8		%			15.8		%

The factors contributing to the total percentage change year-over-year in total Net sales for the quarter and nine months ended September 30, 2021 are as follows:


	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Organic volume	8.1	%	11.2	%
Foreign currency translation	2.5	%	4.4	%
Acquisitions and divestitures, net	0.2	%	0.2	%


Total % change	10.8	%	15.8	%

The Organic volume increase of 8.1% for the quarter ended September 30, 2021 was driven by increases in organic sales of 14.1% in New Equipment and 3.6% in Service.

The Organic volume increase of 11.2% for the nine months ended September 30, 2021 was driven by increases in organic sales of 21.1% in New Equipment and 4.2% in Service.

See "Segment Review" section for a discussion of Net sales by segment.

Cost of Products and Services Sold


	Quarter Ended September 30,					Nine Months Ended September 30,
(dollars in millions)	2021			2020		2021			2020
Total cost of products and services sold	$	2,560		$	2,289	$	7,575		$	6,496
Percentage change year-over-year	11.8		%			16.6		%

The factors contributing to the percentage change year-over-year for the quarter and nine months ended September 30, 2021 in total cost of products and services sold are as follows:


	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Organic volume	9.0	%	11.7	%
Foreign currency translation	2.9	%	4.7	%
Acquisitions and divestitures, net	0.1	%	0.2	%
Restructuring	(0.2)	%	—	%

Total % change	11.8	%	16.6	%

The organic increase in total cost of products and services sold for the quarter and nine months ended September 30, 2021 was primarily driven by the organic sales increases noted above and overall segment mix between New Equipment and Service.

Gross Margin


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Gross margin	$	1,060		$	979		$	3,154		$	2,767
Gross margin percentage	29.3		%	30.0		%	29.4		%	29.9		%

Gross margin decreased 70 basis points for the quarter ended September 30, 2021 when compared to the same period for 2020, primarily driven by overall segment mix.

Gross margin decreased 50 basis points for the nine months ended September 30, 2021 when compared to the same period for 2020, as improvement in gross margins in New Equipment and Service was more than offset by overall segment mix.

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

Research and Development


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Research and development	$	39		$	37		$	113		$	112
Percentage of Net sales	1.1		%	1.1		%	1.1		%	1.2		%

Research and development was relatively flat for the quarter and nine months ended September 30, 2021, when compared to the same periods for 2020. We continue to fund our strategic investment projects, including investments in Internet of Things technologies.

Research and development expense as a percentage of net sales was relatively flat for the quarter and nine months ended September 30, 2021, when compared to the same periods in 2020.

Selling, General and Administrative


	Quarter Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Selling, general and administrative	$	479		$	481		$	1,445		$	1,387
Percentage of Net sales	13.2		%	14.7		%	13.5		%	15.0		%

Selling, general and administrative expenses were relatively flat for the quarter ended September 30, 2021, when compared to the same period in 2020, as higher employment costs, including incremental standalone public company costs, and the absence of cost containment actions taken during 2020 in response to COVID-19, were offset by lower non-recurring Separation-related costs.

Selling, general and administrative expenses increased $58 million for the nine months ended September 30, 2021, compared to the same periods in 2020. The primary drivers of the change are the following:

Higher employment costs and information technology costs, including incremental standalone public company costs, and the absence of cost containment actions taken during 2020 in response to COVID-19; and
Impact of unfavorable foreign exchange of $42 million; partially offset by
Lower non-recurring Separation-related costs and the absence of UTC allocations of $71 million.

Selling, general and administrative expenses as a percentage of Net sales decreased 150 basis points for the quarter and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, as Net sales increased while expenses were flat for the quarter. For the nine months ended September 30, 2021, Net sales increased at a faster rate than expenses.

Restructuring Cos****ts


	Nine Months Ended September 30,
(dollars in millions)	2021		2020
Restructuring costs	$	35	$	46

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 field and manufacturing operations. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

Total restructuring costs were $35 million for the nine months ended September 30, 2021 and included $24 million of costs related to 2021 actions, $10 million of costs related to 2020 actions and $1 million of costs related to pre-2020 actions.

All of the expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the nine months ended September 30, 2021, we had cash outflows of approximately $34 million related to the restructuring actions and expect to make cash payments of $49 million to complete the actions announced, comprised of $11 million of additional restructuring expenses and $38 million of existing restructuring accruals as of September 30, 2021.

We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $27 million for the 2021 actions and $58 million for the 2020 actions, of which approximately $47 million was realized for the 2021 and 2020 actions during the nine months ended September 30, 2021.

For additional discussion of restructuring, see Note 14 to the Condensed Consolidated Financial Statements.

Other Income (Expense), Net


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Other income (expense), net	$	—	$	(7)	$	16	$	(69)

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

The change in Other income (expense), net of $7 million for the quarter ended September 30, 2021, compared to the same period in 2020, was primarily driven by gains on sales of fixed assets recognized during the quarter ended September 30, 2021, the impact of changes in fair value and settlement of embedded derivatives and foreign exchange derivatives and the impact from settlements of certain TMA transactions.

The change in Other income (expense), net of $85 million in the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to the absence of a fixed asset impairment of $(55) million and related licensing costs of $(12) million recognized during the quarter ended March 31, 2020, as well as gains on sales of fixed assets during the nine months ended September 30, 2021, the impact of changes in fair value and settlement of embedded derivatives and foreign exchange derivatives and the impact from the settlements of certain TMA transactions.

Interest Expense (Income), Net


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020


Interest expense (income), net	$	33	$	39	$	92	$	85

Interest expense (income), net primarily relates to interest expense on our external debt, offset by interest income earned on cash balances, short-term investments and, in the prior year, related party activity between Otis and our former parent, UTC.

The decrease in Interest expense (income), net of $(6) million in the quarter ended September 30, 2021, compared to the same period in 2020, was primarily driven by lower interest expense as a result of the debt refinancings and debt repayments during 2021.

The increase in Interest expense (income), net of $7 million for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily driven by a full nine months impact of interest expense on the external debt associated with the Separation, which was not outstanding for the full nine months ended September 30, 2020, offset by the favorable activity noted above.

The average interest rate on our external debt for the quarter and nine months ended September 30, 2021 is 2.4% and for the same periods in 2020 was 2.4% and 2.5%, respectively.

For additional discussion of borrowings, see Note 9 to the Condensed Consolidated Financial Statements.

Income Taxes


	Quarter Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Effective tax rate	25.2	%	24.9	%	26.7	%	30.2	%

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.

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.

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

For additional discussion of income taxes and the effective income tax rate, see Note 13 to the Condensed Consolidated Financial Statements.

Noncontrolling Interest in Subsidiaries' Earnings


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020
Noncontrolling interest in subsidiaries' earnings	$	48	$	44	$	145	$	122

Noncontrolling interest in subsidiaries' earnings increased for the quarter and nine months ended September 30, 2021 in comparison to the same periods in 2020 due primarily to an increase in net income from non-wholly owned subsidiaries and the impact from foreign exchange.

Net Income Attributable to Common Shareholders


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions, except per share amounts)	2021		2020		2021		2020
Net income attributable to common shareholders	$	331	$	266	$	965	$	655
Diluted earnings per share from operations	$	0.77	$	0.61	$	2.23	$	1.51

Net income attributable to common shareholders increased for the quarter ended September 30, 2021, compared to the same period in 2020, primarily driven by higher operating profit.

Net income attributable to common shareholders increased for the nine months ended September 30, 2021, compared to the same period in 2020, primarily driven by higher operating profit and the benefit of a lower effective tax rate, partially offset by higher noncontrolling interest in subsidiaries' earnings and higher interest expense.

Segment Review

Summary performance for our operating segments for the quarters ended September 30, 2021 and 2020 was 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 segment	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	%

Summary performance for our operating segments for the nine months ended September 30, 2021 and 2020 was 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 segment	10,729		9,263		1,697		1,428		15.8	%	15.4	%
General corporate expenses and other	—		—		(85)		(229)		—		—
Total	$	10,729	$	9,263	$	1,612	$	1,199	15.0	%	12.9	%

New Equipment

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

Summary performance for New Equipment for the quarters and nine months ended September 30, 2021 and 2020 was as follows:



	Quarter Ended September 30,										Nine Months Ended September 30,
(dollars in millions)	2021			2020			Change		Change		2021			2020			Change		Change
Net sales	$	1,681		$	1,423		$	258	18.1	%	$	4,866		$	3,840		$	1,026	26.7	%
Cost of sales	1,381			1,172			209		17.8	%	3,986			3,158			828		26.2	%
	300			251			49		19.5	%	880			682			198		29.0	%
Operating expenses	169			156			13		8.3	%	498			444			54		12.2	%
Operating profit	$	131		$	95		$	36	37.9	%	$	382		$	238		$	144	60.5	%
Operating profit margin	7.8		%	6.7		%					7.9		%	6.2		%

Summary analysis of the New Equipment Net sales change for the quarter and nine months ended September 30, 2021 compared with the quarter and nine months ended September 30, 2020 was as follows:


Components of Net sales change:	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Organic	14.1	%	21.1	%
Foreign currency translation	3.9	%	5.4	%
Acquisitions/Divestitures, net	0.1	%	0.2	%


Total % change	18.1	%	26.7	%

Quarter Ended September 30, 2021

Net sales

The organic sales increase of 14.1% was driven by mid-teens growth in Americas, high-teens growth in Asia and low single digit growth in EMEA.

Operating profit

New Equipment operating profit increased $36 million, primarily due to higher volume of $30 million, with an operating margin increase of 110 basis points. Favorable field installation productivity was mostly offset by commodity headwinds and unfavorable price and mix. Foreign currency tailwinds of $10 million and lower restructuring costs of $5 million were partially offset by higher selling, general and administrative costs.

Nine Months Ended September 30, 2021

Net sales

The organic sales increase of 21.1% was driven by double digit growth in Asia and Americas and mid-teen growth in EMEA.

Operating profit

New Equipment operating profit increased $144 million, primarily due to higher volume of $150 million, with an operating margin increase of 170 basis points. Favorable field installation and material productivity, was partially offset by unfavorable price and mix and commodity headwinds. Foreign currency tailwinds of $25 million, were more than offset by higher selling, general and administrative costs of $35 million.

Service

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

Summary performance for Service for the quarters and nine months ended September 30, 2021 and 2020 was as follows:



	Quarter Ended September 30,										Nine Months Ended September 30,
(dollars in millions)	2021			2020			Change		Change		2021			2020			Change		Change
Net sales	$	1,939		$	1,845		$	94	5.1	%	$	5,863		$	5,423		$	440	8.1	%
Cost of sales	1,179			1,117			62		5.6	%	3,589			3,338			251		7.5	%
	760			728			32		4.4	%	2,274			2,085			189		9.1	%
Operating expenses	316			319			(3)		(0.9)	%	959			895			64		7.2	%
Operating profit	$	444		$	409		$	35	8.6	%	$	1,315		$	1,190		$	125	10.5	%
Operating profit margin	22.9		%	22.2		%					22.4		%	21.9		%

Summary analysis of Service Net sales change for the quarter and nine months ended September 30, 2021 compared with the quarter and nine months ended September 30, 2020 was as follows:




Components of Net sales change:	Quarter Ended September 30, 2021		Nine Months Ended September 30, 2021
Organic	3.6	%	4.2	%
Foreign currency translation	1.3	%	3.6	%
Acquisitions/Divestitures, net	0.2	%	0.3	%


Total % change	5.1	%	8.1	%

Quarter Ended September 30, 2021

Net sales

The organic sales increase of 3.6% is due to a sales increase in maintenance and repair of 4.7%, partially offset by a decrease in modernization of (1.2)%.




Components of Net sales change:	Maintenance and Repair		Modernization
Organic	4.7	%	(1.2)	%
Foreign currency translation	1.2	%	1.2	%
Acquisitions/Divestitures, net	0.3	%	—	%


Total % change	6.2	%	—	%

Operating profit

Service operating profit increased $35 million, with an operating margin increase of 70 basis points. Higher volume of $30 million and favorable pricing and mix were partially offset by headwinds from prior year cost containment and field actions in response to COVID-19. Service operating profit also benefited from lower restructuring costs of $10 million.

Nine Months Ended September 30, 2021

Net sales

The organic sales increase of 4.2% is due to sales increases in maintenance and repair of 4.5% and modernization of 2.7%.




Components of Net sales change:	Maintenance and Repair		Modernization
Organic	4.5	%	2.7	%
Foreign currency translation	3.8	%	3.3	%
Acquisitions/Divestitures, net	0.3	%	0.1	%


Total % change	8.6	%	6.1	%

Operating profit

Service operating profit increased $125 million, primarily due to higher volume of $90 million, with an operating margin increase of 50 basis points. Favorable pricing and mix and lower bad debt expense were partially offset by headwinds from prior year cost containment and field actions in response to COVID-19. Foreign exchange tailwinds of $50 million, were offset by higher selling general and administrative costs of $50 million.

General Corporate Expenses and Other


	Quarter Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2021		2020		2021		2020

General corporate expenses and other	$	(33)	$	(50)	$	(85)	$	(229)

General corporate expenses and other for the quarter ended September 30, 2021 decreased $(17) million primarily due to lower non-recurring Separation costs incurred when compared to the same quarter in 2020.

The decrease in General corporate expenses and other of $(144) million for the nine months ended September 30, 2021, when compared to the same period in 2020, is primarily due to the absence of a fixed asset impairment of $(55) million and related licensing costs of $(12) million recognized during the quarter ended March 31, 2020 and lower non-recurring Separation costs and the absence of UTC allocations of $(74) million when compared to the same period in 2020.

LIQUIDITY AND FINANCIAL CONDITION


(dollars in millions)	September 30, 2021			December 31, 2020
Cash and cash equivalents	$	1,553		$	1,782
Total debt	5,496			5,963
Net debt (total debt less cash and cash equivalents)	3,943			4,181
Total equity	(3,295)			(3,284)
Total capitalization (total debt plus total equity)	2,201			2,679
Net capitalization (total debt plus total equity less cash and cash equivalents)	648			897

Total debt to total capitalization	250		%	223		%
Net debt to net capitalization	608		%	466		%

At September 30, 2021, we had cash and cash equivalents of approximately $1.6 billion, of which approximately 97% was held by the Company's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost-effectiveness with which those funds can be accessed. On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions and divestitures or other legal obligations. As of September 30, 2021 and December 31, 2020, the amount of such restricted cash was approximately $20 million and $19 million, respectively.

From time-to-time we may need to access the capital markets to obtain financing. We may incur indebtedness or issue equity as needed. Although we believe that the arrangements in place as of September 30, 2021 permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future could be impacted by many factors, including (1) our credit ratings or absence of a credit rating, (2) the liquidity of the overall capital markets and (3) the current state of the economy, including the impact of COVID-19. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.

The following is a summary of the debt issuances for the nine months ended September 30, 2021:


(dollars in millions)
Issuance Date	Description of Debt	Aggregate Principal Balance
March 11, 2021	Japanese Yen Notes (¥21,500 million principal value)	$	199

The proceeds from the issuance of the Japanese Yen Notes were used to repay a portion of our outstanding Euro denominated commercial paper.

For additional discussion of borrowings, see Note 9 to the Condensed Consolidated Financial Statements.

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 be drawn only to the extent permanent debt financing has not been obtained prior to the Tender Offer Closing Date. For additional discussion of the Bridge Credit Facility, see Note 9, "Borrowings and Lines of Credit" to the Condensed Consolidated Financial Statements.

Following the enactment of the TCJA, and after reassessing as part of the Separation, the Company determined that it no longer intends to reinvest certain undistributed earnings of our international subsidiaries that have been previously taxed in the U.S. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, we will continue to permanently reinvest these earnings.

We expect to fund our ongoing operating, investing and financing requirements mainly through cash flows from operations, available liquidity through cash on hand and available bank lines of credit and access to capital markets.

On April 27, 2020, our Board of Directors authorized a share repurchase program for up to $1.0 billion of Common Stock, of which approximately $725 million has been utilized as of September 30, 2021. 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. During the nine months ended September 30, 2021 the Company repurchased 9.7 million shares of Common Stock for approximately $725 million. As a result of the increased debt we anticipate incurring to fund the Tender Offer, we expect to suspend share repurchases through 2022 as we focus on deleveraging.

Cash Flow - Operating Activities


	Nine Months Ended September 30,
(dollars in millions)	2021		2020
Net cash flows provided by operating activities	$	1,473	$	1,171

Cash generated from operating activities in the nine months ended September 30, 2021 was $302 million higher than the same period in 2020, primarily due to higher net income of $333 million and increased cash inflows related to current assets and current liabilities activity of $172 million, as described below. These were partially offset by $60 million lower non-cash adjustments from Net income, including the fixed asset impairment of $55 million in the nine months ended September 30, 2020, and $148 million lower Other operating activities, net, primarily due to long-term accruals and other activities in the nine months ended September 30, 2020.

Nine Months Ended September 30, 2021 Changes in Working Capital

The nine months ended September 30, 2021 cash inflows related to current assets and current liabilities operating activity were $264 million. These cash inflows were primarily driven by:

Accounts payable, which increased by $230 million, primarily due to increased volume;
Contract assets, current and Contract liabilities, current, net change of $140 million, driven by the timing of billings on contracts compared to the progression on current contracts; and
Inventories, net, which decreased $18 million, due to the timing of deliveries to construction sites.

The cash inflows were partially offset by cash outflows related to Accounts receivable, net, which increased $107 million, primarily due to increased volume.

Additionally, Other current assets decreased by $12 million due to prepaid income tax refunds and indemnification payments received pursuant to the TMA in order to pay foreign tax obligations, partially offset by advance payments to suppliers. Accrued liabilities decreased $29 million primarily due to the payment of $23 million in foreign tax obligations pursuant to the TMA described above and income tax liabilities in certain jurisdictions. The receipt and payment of indemnification assets and foreign tax obligations resulted in minimal cash flow for the nine months ended September 30, 2021. See Note 5 to the Condensed Consolidated Financial Statements for further discussion on transactions with our former parent, UTC.

Nine Months Ended September 30, 2020 Changes in Working Capital

The nine months ended September 30, 2020 cash inflows related to current assets and current liabilities operating activity were $92 million. These cash inflows were primarily driven by:

Contract assets, current and Contract liabilities, current, net change of $277 million, driven by the timing of billings on contracts compared to the progression on current contracts; and
Accounts payable, which increased $19 million, primarily due to the timing of payments to suppliers.

The cash inflows were partially offset by cash outflows related to:

Inventories, net, which increased $101 million, due to higher production inventory related to the timing of deliveries to construction sites; and
Accounts receivable, net, which increased $79 million, due to slower collections.

Additionally, Other current assets decreased $57 million, primarily due to the receipt of indemnification pursuant to the TMA in order to pay foreign tax obligations, partially offset by tax prepayments in certain tax jurisdictions. Accrued liabilities decreased $81 million, primarily due to the payment of foreign tax obligations pursuant to the TMA mentioned above and income tax liabilities in certain jurisdictions. The receipt and payment of indemnification assets and foreign tax obligations resulted in no net cash flow for the nine months ended September 30, 2020. See Note 5 to the Condensed Consolidated Financial Statements for further discussion on transactions with our former parent, UTC.

Cash Flow - Investing Activities

Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, and settlement of derivative contracts.

Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020


	Nine Months Ended September 30,
(dollars in millions)	2021		2020		Change
Investing Activities:
Capital expenditures	$	(115)	$	(112)	$	(3)
Investments in businesses and intangible assets, net of cash acquired	(59)		(50)		(9)
Investments in equity securities	(18)		(51)		33
Proceeds from sale of equity securities	58		—		58

Receipts (payments) on settlements of derivative contracts	35		(63)		98
Other investing activities, net	30		(13)		43
Net cash flows used in investing activities	$	(69)	$	(289)	$	220

Cash flows used in investing activities in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 decreased $220 million, including the following drivers:

$58 million of proceeds from the sale of equity securities in the nine months ended September 30, 2021;
$43 million of higher Other investing activities, net primarily due to property damage insurance proceeds received associated with the Germany fire matter discussed below under "Germany Fire", as well as proceeds from the sales of fixed assets; and
$33 million in lower investments in equity securities resulting from higher investments made in the nine months ended September 30, 2020.

Additionally, as discussed in Note 15 to the Condensed Consolidated Financial Statements, we enter into derivative instruments for risk management purposes. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We use derivative instruments, including forward contracts and options to manage certain foreign currency exposures. The settlement of these derivative instruments resulted in a net cash receipts of $35 million and payments of $63 million during the nine months ended September 30, 2021 and 2020, respectively.

Germany Fire

As previously disclosed, during 2020 there was a fire at the Company’s manufacturing facility in Germany. During the nine months ended September 30, 2021, the Company settled the related property damage claim with the insurance company, as reflected in Other investing activities, net in the Condensed Consolidated Statements of Cash Flows. During the quarter ended September 30, 2021, the Company reached a final agreement with the insurance company related to the business interruption claim to cover costs incurred as a result of the fire and expects to receive the final payment during the fourth quarter of 2021. We do not anticipate any material impact to our operations or financial results from this event.

For additional discussion, see “Business Overview" in section "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report, incorporated by reference in our 2020 Form 10-K.

Cash Flow - Financing Activities

Financing activities primarily include increases or decreases in short-term borrowings, issuance or repayment of long-term debt, dividends paid to common shareholders, repurchases of Common Stock and dividends paid to noncontrolling interests. The prior year activity includes transfers to and from our former parent, UTC, prior to the Separation, consisting of, among other things, cash transfers, distributions, cash investments and changes in receivables and payables. See Note 5 to the Condensed Consolidated Financial Statements for further discussion.


	Nine Months Ended September 30,
(dollars in millions)	2021		2020		Change
Financing Activities:

Increase (decrease) in short-term borrowings, net	$	(645)	$	510	$	(1,155)

Proceeds from issuance of long-term debt	199		6,300		(6,101)
Payment of debt issuance costs	(11)		(43)		32
Repayment of long-term debt	—		(750)		750
Net transfers to UTC	—		(6,330)		6,330

Dividends paid on Common Stock	(291)		(173)		(118)
Repurchases of Common Stock	(725)		—		(725)
Dividends paid to noncontrolling interest	(130)		(125)		(5)
Other financing activities, net	(18)		22		(40)
Net cash flows used in financing activities	$	(1,621)	$	(589)	$	(1,032)

Net cash used in financing activities increased $1.0 billion in the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to the following:

Repurchases of Common Stock of $725 million and higher dividends paid on Common Stock of $118 million during the nine months ended September 30, 2021; and
Higher net repayments on borrowings of $457 million during the nine months ended September 30, 2021 compared to $240 million during the same period in 2020, which were made with cash flow from operations. Net repayments comprised of the following activity:

◦Net repayments of short-term borrowings of $645 million, partially offset by net proceeds from the issuance of debt of $188 million during the nine months ended September 30, 2021; and

◦Repayments of long-term debt of $750 million, partially offset by net short-term borrowings of $510 million during the nine months ended September 30, 2020.

Net transfers to UTC related to the Separation of $6.3 billion during the nine months ended September 30, 2020 was primarily funded by the net proceeds from issuance of long-term debt of $6.3 billion during the same period.

For additional discussion of borrowings activity, see Note 9 to the Condensed Consolidated Financial Statements.

Off-Balance Sheet Arrangements and Contractual Obligations

The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Contractual Obligations" in our 2020 Annual Report, incorporated by reference in our 2020 Form 10-K, discloses our off-balance sheet arrangements and contractual obligations. As of September 30, 2021, there have been no material changes to these off-balance sheet arrangements and contractual obligations, outside the ordinary course of business except for those disclosed in the "Note 9, Borrowings and Lines of Credit" within Item 1 of this Form 10-Q.

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk