Otis Worldwide Corp (OTIS) FY 2021 MD&A

Item 7. 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 function under a centralized operating model whereby we pursue a global strategy set around New Equipment and Service, in large measure, 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.

For additional discussion of our business, refer to Item 1 in this Form 10-K.

Zardoya Otis Tender Offer

The Company announced a tender offer to acquire all of the issued and outstanding shares of Zardoya Otis not owned by Otis (the "Tender Offer"). The offer price is €7.07 per share in cash after adjusting for dividends. As of February 4, 2022, the Tender Offer remains outstanding and has not yet been completed. See "Note 1: Business Overview" and "Note 10: Borrowings and Lines of Credit" in Item 8 in this Form 10-K, as well as "Liquidity and Financial Condition" in this item, for further details regarding this pending transaction and financing arrangements entered into in connection with the Tender Offer and Item 1A in this Form 10-K for additional risks related to thereto.

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 years ended December 31, 2021 and 2020. COVID-19 has had, and could continue to have, an impact on our business, including impacts to overall financial performance in 2022, 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 and raw material 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 our overall liquidity position based on our available cash and cash equivalents and our access to credit facilities and the capital markets.

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See the "Liquidity and Financial Condition" section of this item of this Form 10-K for further detail and Item 1A in this Form 10-K for additional risks related to COVID-19.

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 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 periods subsequent to April 3, 2020, our financial statements are presented on a consolidated basis as the Company became a standalone public company.

We entered into a transition services agreement ("TSA") and tax matters agreement ("TMA") with our former parent, UTC, and Carrier on April 2, 2020. Under the TSA, we received services for information technology, technical and engineering support, application support for operations, general administrative services and other support services. The TSA and the related trailing exit costs are substantially completed as of December 31, 2021. For additional discussion, see "Note 5: Related Parties" in Item 8 in this Form 10-K.

The TMA governs the parties’ respective rights, responsibilities and obligations with respect to tax matters (including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other tax matters). For additional discussion, see "Note 5: Related Parties" in Item 8 in this Form 10-K.

See Item 1A in this Form 10-K for discussion on risks related to Separation.

RESULTS OF OPERATIONS

Net Sales

The factors contributing to the total percentage change year-over-year in total Net sales are as follows:

The Organic volume increase of 8.9% for 2021 was driven by increases in organic sales of 15.5% in New Equipment and 4.1% in Service.

The Organic volume decrease of (2.1)% for 2020 was driven by decreases in organic sales of (4.0)% in New Equipment and (0.7)% in Service.

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

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Cost of Products and Services Sold

The factors contributing to the percentage change year-over-year in total cost of products and services sold are as follows:

The organic increase in total cost of products and services sold in 2021 was driven primarily by the organic sales increases noted above.

The organic volume decrease in total cost of products and services sold in 2020 was driven by the organic sales decrease noted above, productivity and cost containment actions.

Gross Margin

Gross margin decreased 30 basis points in 2021 when compared to 2020, as improvements in gross margin in both New Equipment and Service were more than offset by overall segment mix.

Gross margin increased 40 basis points in 2020 when compared to 2019, primarily driven by improvement in the Service margin and overall segment mix, partially offset by a decrease in the New Equipment margin.

Research and Development

Research and development spending increased $7 million, or 4.6%, in 2021 compared to 2020. Research and development expense as a percentage of net sales has remained relatively flat year-over-year. Research and development includes product development and innovation, including for IoT and developing the next generation of connected elevators and escalators.

Research and development spending decreased approximately $11 million, or (6.7)%, in 2020 compared to 2019 primarily as a result of cost containment actions taken in 2020. Research and development expenses remained relatively consistent as a percentage of Net sales.

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Selling, General and Administrative

2021 Compared with 2020

Selling, general and administrative expenses increased $24 million, or 1.2%, in 2021. The primary drivers of the change are the following:

•Higher employment 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;

•Impact of unfavorable foreign exchange of $38 million compared to 2020;

•These increases were partially offset by lower non-recurring Separation-related costs and the absence of UTC allocations of $105 million.

Selling, general and administrative expenses as a percentage of Net sales decreased 150 basis points in 2021 compared to 2020, as Net sales increased at a faster rate than expenses.

2020 Compared with 2019

Selling, general and administrative expenses increased approximately $114 million, or 6.3%, in 2020, The primary drivers of the change are the following:

•Lower employment costs and lower discretionary spending, including cost containment actions taken in response to COVID-19, and the absence of corporate allocations from UTC, being more than offset by

•Higher non-recurring Separation-related costs and incremental standalone public company costs.

Selling, general and administrative expenses as a percentage of Net sales increased 130 basis points in 2020 compared to 2019, primarily driven by the increase in non-recurring Separation-related costs, incremental standalone public company costs and lower Net sales.

Restructuring Costs

We initiate restructuring actions to keep our cost structure competitive. Charges generally arise from severance related to workforce reductions, and to a lesser degree, facility exit and lease termination costs associated with the consolidation of office and manufacturing operations. 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 2021 restructuring costs include $41 million of costs related to 2021 actions, $13 million of costs related to 2020 actions and $2 million of costs related to pre-2020 actions.

Most of the expected charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During 2021, we had cash outflows of approximately $51 million related to the restructuring actions and expect to make cash payments of $47 million to complete the actions announced, which is comprised of $7 million of additional restructuring expenses and $40 million of existing restructuring accruals as of December 31, 2021.

We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $41 million for the 2021 actions and $55 million for the 2020 actions, of which approximately $66 million was realized for the 2021 and 2020 actions during the current year.

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For additional discussion of restructuring, see Note 17, "Restructuring Costs" in the Consolidated Financial Statements.

Other Income (Expense), Net

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

The change in Other income (expense), net of $86 million in 2021 compared to 2020, was primarily driven by the absence of a fixed asset impairment of $(71) million and related licensing costs of $(14) million recognized during 2020.

The change in Other income (expense), net of $(25) million in 2020 compared to 2019, was driven by fixed asset impairments of $(71) million and related license costs of $(14) million and non-recurring Separation-related expenses. These were partially offset by favorable mark-to-market adjustments on foreign currency derivatives of $46 million when compared to 2019, the absence of the loss on the sale of a business of $19 million included in the 2019 results and a non-recurring gain of $17 million related to an expected insurance recovery recognized for property damage as a result of the fire in our manufacturing facility in Germany in 2020.

See "Note 5: Related Parties" in Item 8 in this Form 10-K for further discussion on costs related to the Separation.

Interest Expense (Income), Net

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 2019 and prior, related party activity between Otis and our former parent, UTC.

The increase in Interest expense (income), net of $14 million in 2021 compared to 2020, was primarily driven by interest expense on the external debt associated with the Separation, which was not outstanding for the full year of 2020, as well as costs associated with the bridge financing and related guarantees and the interest expense related to the Tender Offer. This was partially offset by lower interest expense as a result of the debt refinancing and debt repayments during 2021. For additional discussion of debt refinancing and repayments, see the "Liquidity and Financial Condition" section below.

The increase in Interest expense (income), net in 2020 compared to 2019 was primarily driven by interest expense of $124 million on our external debt and debt issuance cost amortization of $5 million in 2020. These expenses were partially offset by interest income on short-term investments.

The average interest rate on our external debt for 2021 and 2020 was 2.3%.

For additional discussion of borrowings, see "Note 10: Borrowings and Lines of Credit" in Item 8 in this Form 10-K.

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Income Taxes

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

The 2021 effective tax rate is lower than the 2020 effective tax rate primarily due to the following:

•$16 million tax benefit related to repatriation of foreign earnings as a result of changes to planned debt repayments and in estimates related to Otis’ pre-Separation tax attributes;

•$16 million decrease in U.S. tax related to base erosion and anti-abuse tax in 2021;

•Absence of the tax cost resulting from Separation-related expenses and fixed asset impairment incurred in 2020; and

•The net impact of income tax settlements related to the Separation, as discussed in Note 5, "Related Parties".

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

For additional discussion of income taxes and the effective income tax rate, see "Note 16: Income Taxes" in Item 8 in this Form 10-K.

Noncontrolling Interest in Subsidiaries' Earnings

Noncontrolling interest in subsidiaries' earnings increased in 2021 in comparison to 2020, primarily driven by an increase in net income from non-wholly owned subsidiaries and the impact of foreign exchange rates. Ownership interest in the underlying non-wholly owned subsidiaries has remained generally consistent year-over-year.

For additional discussion of the Zardoya Otis Tender Offer, see "Note 1: Business Overview" in Item 8 in this Form 10-K.

Noncontrolling interest in subsidiaries' earnings remained consistent in 2020 in comparison to 2019.

Net Income Attributable to Otis Worldwide Corporation

Net income attributable to Otis Worldwide Corporation increased in 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.

Net income attributable to Otis Worldwide Corporation decreased in 2020, compared to the same period in 2019, primarily driven by non-recurring Separation-related costs, fixed asset impairments, non-recurring Separation-related tax

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benefits, the impact of non-recurring tax items, and incremental standalone public company costs incurred in 2020 after the Separation.

For additional discussion of the net income attributable to shareholders and earnings per share, see "Note 3: Earnings Per Share" in Item 8 in this Form 10-K.

Segment Review

As previously disclosed in our Quarterly Report on Form 10-Q for the quarter ending June 30, 2021, we changed how we present and discuss operating profit in our Segment Review of the Management’s Discussion and Analysis. Previously, we presented and discussed the percentage change in segment operating profit between periods using organic/operational profit, which excluded the impact of foreign currency translation, acquisitions and divestitures and restructuring costs. We are now presenting and discussing, including for the 2020 to 2019 comparison, the change in the total dollar amount of segment operating profit and the percentage change in operating profit margin between periods. There is no change in the amounts of operating profit that we have previously disclosed. We have continued to use the same key metrics to explain the changes in our operating performance that we previously used. For example, as discussed below, the drivers of the changes in 2021 relative to the prior year are volume, rate drivers, selling general and administrative expense, foreign exchange and restructuring which are consistent with the drivers we have disclosed in the past where applicable. In addition, we will discuss the impact of foreign currency translation, acquisitions and divestitures and restructuring to the extent they are meaningful to understanding our performance. We believe this changed approach aligns better with how we measure our performance.

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New Equipment

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

Summary performance for New Equipment for the years ended December 31, 2021, 2020 and 2019 was as follows:

Summary analysis of the Net sales change for New Equipment for the years ended December 31, 2021 and 2020 compared with the prior years was as follows:

2021 Compared with 2020

The organic sales increase of 15.5% was driven by mid-teens growth in the Americas, high teens growth in Asia and high single digit growth in EMEA.

New Equipment operating profit increased $141 million, primarily due to higher volume of $140 million, with an operating margin increase of 120 basis points. Favorable field installation and material productivity was partially offset by unfavorable price and mix and commodity headwinds. Foreign currency tailwinds of $30 million were more than offset by higher selling, general and administrative costs of $40 million.

2020 Compared with 2019

The organic sales decrease of (4.0)% was primarily driven by organic sales declines in all regions primarily due to impacts of the COVID-19 pandemic.

New Equipment operating profit decreased $(75) million, with an operating profit margin decrease of 110 basis points. Strong material productivity of $60 million and cost containment actions were more than offset by lower volume of $(35) million and unfavorable rate drivers of $(90) million due to under-absorption, field inefficiencies, price and mix and higher bad debt expense. New Equipment operating profit was also impacted by foreign currency headwinds of $(10) million, higher restructuring costs of $(10) million and incremental public company standalone costs.

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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 years ended December 31, 2021, 2020 and 2019 was as follows:

Summary analysis of the Net sales change for Service for the years ended December 31, 2021 and 2020 compared with the prior years was as follows:

2021 Compared with 2020

Net Sales

The organic sales increase of 4.1% is due to organic sales increases in maintenance and repair of 4.5% and modernization of 2.5%.

Operating profit

Service operating profit increased $151 million, primarily due to higher volume of $120 million, with an operating margin increase of 60 basis points. Favorable pricing and mix and lower bad debt expense were partially offset by the absence of the benefit from prior year field actions taken in response to COVID-19. Foreign exchange tailwinds of $35 million and lower restructuring expense of $15 million were more than offset by higher selling general and administrative costs of $60 million, including the impact from cost containment actions taken in the prior year.

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2020 Compared with 2019

Net Sales

The organic sales decrease of (0.7)% is due to a sales decrease in maintenance and repair of (0.9)%, with modernization sales remaining flat.

Operating Profit

Service operating profit increased $8 million, with an operating profit margin increase of 30 basis points. Favorable productivity, pricing and mix, and cost containment actions more than offset the combined impact of price concessions, lower volume and higher bad debt expense. Service operating profit was also favorably impacted by foreign currency, offset by higher restructuring costs and incremental public company standalone costs.

General Corporate Expenses and Other

General corporate expenses and other decreased $(177) million in 2021 compared to 2020, primarily due to the absence of a fixed asset impairment of $(71) million and related licensing costs of $(14) million recognized in 2020, as well as lower non-recurring Separation costs and the absence of UTC allocations of $(108) million.

General corporate expenses and other increased $108 million in 2020 compared to 2019, primarily driven by fixed asset impairments of $71 million and associated license costs of approximately $14 million, non-recurring Separation-related costs of $119 million and incremental standalone public company costs in 2020. These were partially offset by favorable mark-to-market adjustments on foreign currency derivatives of $46 million when compared to the prior period, the absence of losses on the sale of a business of $19 million that occurred during 2019 and a non-recurring gain of approximately $17 million related to an expected insurance recovery as a result of the fire in our manufacturing facility in Germany recognized in 2020.

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LIQUIDITY AND FINANCIAL CONDITION

As of December 31, 2021, we had cash and cash equivalents of approximately $1.6 billion, of which approximately 91% 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 December 31, 2021 and 2020, the amount of such restricted cash was approximately $1.9 billion and $19 million, respectively, including the proceeds from the issuance of debt that is restricted in order to fund the Tender Offer. See further discussion of debt issuances below.

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 December 31, 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 long-term debt issuances in 2021 and 2020:

The net proceeds from the February and March 2020 debt issuances listed above, totaling $6.3 billion, were used to distribute cash to UTC as part of the Separation in 2020. The proceeds from the March 2021 issuance of Japanese Yen notes listed above were used to repay a portion of our outstanding Euro denominated commercial paper. The proceeds from the November 2021 issuance of the Euro notes listed above are held in escrow to fund the Tender Offer, which is reflected as Restricted cash on the Consolidated Balance Sheet as of December 31, 2021.

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The following is a summary of the long-term debt repayments in 2021 and 2020:

In 2020, we repaid the $1.0 billion term loan in full, using cash from operations and proceeds from the issuance of Euro denominated and US Dollar denominated commercial paper. In 2021, the commercial paper was repaid in full, using cash from operations and proceeds from the issuance of the Japanese Yen notes. For additional discussion of borrowings, including commercial paper activity, see "Note 10: Borrowings and Lines of Credit" in Item 8 in this Form 10-K.

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 the 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 December 31, 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 2021, the Company repurchased 9.7 million shares of Common Stock for approximately $725 million. As a result of the increased debt incurred to fund the Tender Offer, we have temporarily suspended share repurchases as we focus on deleveraging.

Cash Flow - Operating Activities

2021 Compared with 2020

Cash generated from operating activities in 2021 was $270 million higher than in 2020, primarily due to higher net income of $364 million and increased cash inflows related to current assets and current liabilities activity of $83 million, as described below. These were partially offset by $98 million of lower non-cash adjustments from Net income, including the absence of fixed asset impairments of $71 million in 2020, as well as $106 million of lower Other operating activities, net, primarily due to long-term accruals in 2020.

2021 Changes in Working Capital

The 2021 cash inflows related to current assets and current liabilities operating activity were $160 million, including the following main drivers:

•Accounts payable, which increased by $130 million, primarily due to increased volume;

•Accrued liabilities, which increased by $72 million, primarily due to the timing of payments, which more than offset the payments of $56 million in foreign tax obligations pursuant to the TMA and income tax liabilities in certain jurisdictions;

•Contract assets, current and Contract liabilities, current, net change of $53 million, driven by the timing of billings on contracts compared to the progression on current contracts; and

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•Other current assets, which decreased by $43 million, primarily due to prepaid income tax utilization and indemnification payments received pursuant to the TMA in order to pay foreign tax obligations, partially offset by advanced payments to suppliers; partially offset by

•Accounts receivable, net, which increased by $152 million, primarily due to increased volume.

2020 Compared with 2019

Cash generated from operating activities in 2020 was $11 million higher than in 2019, primarily due to increased cash inflows related to current assets and current liabilities of $109 million, as described below. There were also increased Other operating activities of $106 million compared to the same period in 2019, primarily due to increased long-term accruals. These were partially offset by lower net income of $211 million, which includes the impact of interest expense on debt, incremental standalone public company costs and non-recurring Separation-related costs in 2020.

2020 Changes in Working Capital

The 2020 cash inflows related to current assets and current liabilities operating activity were $77 million. These cash inflows were primarily driven by:

•Net change in Contract assets, current and Contract liabilities, current of $282 million, driven by the timing of billings on contracts compared to the progression on current contracts; and

•Accounts payable, which increased by $20 million, primarily due to the timing of payments to suppliers; partially offset by

•Inventories, net, which increased by $76 million due to the impact of higher production inventory levels related to the timing of deliveries to construction sites; and

•Accounts receivable, net, which increased by $163 million due to slower collections and increased customer financing activity.

Additionally, Other current assets decreased by $28 million due to receipt of indemnification payments pursuant to the TMA in order to pay foreign tax obligations, partially offset by tax prepayments in certain jurisdictions, while Accrued liabilities decreased $14 million largely due to the payment of foreign tax obligations pursuant to the TMA described above and income tax liabilities in certain jurisdictions, partially offset by accruals for interest in excess of interest payments. The receipt and payment of indemnification assets and foreign tax obligations resulted in no net cash flow for 2020. See "Note 5: Related Parties" in Item 8 in this Form 10-K for further discussion on transactions with our former parent UTC.

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Cash Flow - Investing Activities

Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, proceeds received on the sale of fixed assets, and settlement of derivative contracts.

2021 compared to 2020

Cash flows used in investing activities in 2021 compared to 2020 decreased $264 million, including the following main drivers:

•$142 million higher net cash from the settlement of derivative instruments in 2021, with net cash receipts of $73 million and payments of $69 million in 2021 and 2020, respectively;

•$91 million higher net cash from equity securities, including $58 million of proceeds from the sale of equity securities in 2021, compared to $(51) million of investments made in equity securities in 2020; and

•$31 million higher Other investing activities, net primarily due to property damage insurance proceeds received and discussed below under "Germany Fire", as well as proceeds from the sales of fixed assets.

As discussed in Note 18, "Financial Instruments" to the 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, foreign exchange rates and commodity prices. 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 and commodity price exposures.

Germany Fire

As previously disclosed, during 2020 there was a fire at the Company’s manufacturing facility in Germany. During 2021, the Company settled the related property damage claim with the insurance company, as reflected in Other investing activities, net in the Consolidated Statements of Cash Flows. During 2021, the Company also 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 received the final payments during the year. The impact to our operations or financial results from this event was not material.

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2020 compared to 2019

Cash flows used in investing activities in 2020 compared to 2019 increased $150 million, including the following drivers:

•$64 million higher net cash payments from the settlement of derivative instruments in 2020, including $21 million of payments associated with the hedges of foreign-denominated TMA indemnification assets;

•$51 million of investments in 2020 related to equity securities;

•$38 million higher capital expenditures; and

•$6 million higher investments in business.

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Cash Flow - Financing Activities

Financing activities primarily include increases or decreases to short-term borrowings, issuance or repayment of long-term debt, dividends paid to common shareholders, repurchases of Common Stock and dividends paid to non-controlling interests. The activity in 2020 and 2019 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. For further discussion on these transfers, see "Note 5: Related Parties" in Item 8 in this Form 10-K.

2021 compared to 2020

Net cash provided by financing activities was $58 million in 2021 compared to net cash used by financing activities of $844 million in 2020, which changed primarily due to the following:

•Net borrowings of $1.4 billion during 2021 compared to net repayments on borrowings of $353 million during 2020. These were comprised of the following activities:

◦Net proceeds from the issuance of long-term debt of $2.0 billion, partially offset by net repayments of short-term borrowings of $655 million during 2021; and

◦Repayments of long-term debt of $1.0 billion, partially offset by net short-term borrowings of $647 million during 2020.

•Repurchases of Common Stock of $725 million and higher dividends paid on Common Stock of $133 million during 2021; and

•Net transfers to UTC related to the Separation of $6.3 billion during 2020, which were primarily funded by the net proceeds from issuance of long-term debt of $6.3 billion during 2020.

Net borrowings in 2021 include €1.6 billion in proceeds from the issuance of Euro denominated notes, which will be used to fund the Tender Offer. For additional discussion of borrowings activity, see "Note 10: Borrowings and Lines of Credit" in Item 8 in this Form 10-K.

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2020 compared to 2019

Net cash used in financing activities decreased $289 million in 2020 compared to 2019 primarily due to the net proceeds from the issuance of long-term debt of $6.3 billion in 2020, of which $1.0 billion was repaid with $641 million of proceeds from the issuance of short-term commercial paper in 2020 and cash from operations. These net inflows were partially offset by a $5.4 billion increase in net transfers to UTC related to the Separation, and a $260 million increase in dividends paid on Common Stock in 2020. See "Note 10: Borrowings and Lines of Credit" in Item 8 in this Form 10-K for further discussion on borrowings.

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Guaranteed Securities: Summarized Financial Information

The following information is provided in compliance with Rule 13-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended, with respect to the 2023 Euro Notes, the 2026 Euro Notes and the 2031 Euro Notes (together the "Euro Notes"), in each case issued by Highland Holdings S.à r.l. (“Highland”), a private limited liability company (société à responsabilité limitée) incorporated and existing under the laws of the Grand Duchy of Luxembourg ("Luxembourg"). The Euro Notes are fully and unconditionally guaranteed by Otis Worldwide Corporation ("OWC") on an unsecured, unsubordinated basis. Refer to "Note 10: Borrowings and Lines of Credit" in Item 8 in this Form 10-K for additional information.

Highland is a wholly-owned, indirect consolidated subsidiary of OWC. OWC is incorporated under the laws of Delaware. As a company incorporated and existing under the laws of Luxembourg, and with its registered office in Luxembourg, Highland is subject to Luxembourg insolvency and bankruptcy laws in the event any insolvency proceedings are initiated against it. Luxembourg bankruptcy law is significantly different from, and may be less favorable to creditors than, the bankruptcy law in effect in the United States and may make it more difficult for creditors to recover the amount they could expect to recover in liquidation under U.S. insolvency and bankruptcy rules.

The Euro Notes are not guaranteed by any of OWC's or Highland's subsidiaries (all OWC subsidiaries other than Highland are referred to herein as "non-guarantor subsidiaries"). Holders of the Euro Notes will have a direct claim only against Highland, as issuer, and OWC, as guarantor.

The following tables set forth the summarized financial information as of and for the years ended December 31, 2021 and 2020 of each of OWC and Highland on a standalone basis, which does not include the consolidated impact of the assets, liabilities, and financial results of their subsidiaries except as noted on the tables below, nor does it include any impact of intercompany eliminations as there were no intercompany transactions between OWC and Highland. This summarized financial information is not intended to present the financial position or results of operations of OWC or Highland in accordance with U.S. GAAP.

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CRITICAL ACCOUNTING ESTIMATES

Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. "Note 2: Summary of Significant Accounting Policies" in Item 8 in this Form 10-K describes the significant accounting policies used in preparation of the Consolidated Financial Statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management’s estimates.

Revenue Recognition from Contracts with Customers

We recognized revenue in accordance with FASB ASC Topic 606: Revenue from Contracts with Customers and its related amendments, (referred to, collectively, as "ASC 606”). For new equipment and modernization contracts, equipment and installation are typically procured in a single contract providing the customer with a complete installed elevator or escalator unit. The combination of equipment and installation promises are typically a single performance obligation. For these performance obligations, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress. Contract costs are usually incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. Contract costs included in the calculation are comprised of labor, materials, subcontractors’ costs or other direct costs and indirect costs, which include indirect labor costs.

The long-term nature of the contracts, the complexity of the products and the scale of the projects can affect our ability to estimate costs precisely. We review cost estimates on significant new equipment and modernization contracts on a quarterly basis and, for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method and we review changes in contract estimates for their impact on net sales or operating profit in the Consolidated Financial Statements. Modifications are recognized as a cumulative catch-up or treated as a separate accounting contract if the modification adds distinct goods or services and the modification is priced at its stand-alone selling price.

See "Note 2: Summary of Significant Accounting Policies" in Item 8 in this Form 10-K.

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Income Taxes

The future tax benefit arising from deductible temporary differences and tax carryforwards was $647 million as of December 31, 2021 and $642 million as of December 31, 2020. Management estimates that our earnings during the periods when the temporary differences become deductible will be generally sufficient to realize the related future income tax benefits, which may be realized over an extended period of time. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.

In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made.

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. See "Note 3: Earnings Per Share" and "Note 15: Accumulated Other Comprehensive Income (Loss)" in Item 8 in this Form 10-K for further discussion. Additionally, see "Note 22: Contingent Liabilities" in Item 8 in this Form 10-K for discussion of administrative review proceedings with the German Tax Office.

Goodwill

We have generated goodwill as a result of our acquisitions. At the time of acquisition, we account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

We review our goodwill for impairment on an annual basis at July 1 or more frequently if events or a change in circumstances indicate that the carrying amount may not be recoverable. We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is one level below the operating segment level. We have determined there to be three reporting units within each business segment.

In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, we initially perform a qualitative assessment (commonly known as “step zero”) to determine whether further impairment testing is necessary before performing the two-step test. The qualitative assessment requires judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required. If we determine, based on this assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative goodwill impairment test by comparing the reporting unit’s fair value with its carrying value. An impairment loss is recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment loss is recognized if the fair value of the reporting exceeds its carrying value.

We completed the annual goodwill impairment test for all of our reporting units as of July 1, 2021 and determined that no adjustment to goodwill was necessary as the fair value of each reporting unit was in excess of the carrying value of each reporting unit.

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Contingent Liabilities

Otis is party to litigation related to a number of matters as described in "Note 22: Contingent Liabilities" in Item 8 in this Form 10-K. In particular, they may include risks associated with contractual, regulatory and other matters, which may arise in the ordinary course of business. The outcome of these matters may have a material effect on the financial position, results of operations or cash flows. Management regularly analyzes current information about these matters and accrues for contingent losses that are probable and reasonably estimable. To assess the exposure to potential liability, we consult with relevant internal and external counsel. In making the decision regarding the need for loss accruals, management considers the degree of probability of an unfavorable outcome and the ability to make a sufficiently reliable estimate of the amount of loss. See Part I, Item 1A in this Form 10-K for further discussion.

Employee Benefit Plans

We sponsor domestic and international defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels and mortality rates. Assumptions are determined based on company data and appropriate market indicators, and are evaluated each year as of December 31. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the Consolidated Financial Statements.

In the following table, we show the sensitivity of our pension and other postretirement benefit plan liabilities and net periodic cost to a 25 basis point change in the discount rates for benefit obligations, as of December 31, 2021:

The impact on the accumulated postretirement benefit obligation and on the net periodic postretirement (benefit) cost is less than $1 million.

Pension expense is also sensitive to changes in the expected long-term rate of asset return. An increase or decrease of 25 basis points in the expected long-term rate of asset return would have decreased or increased 2021 pension expense by approximately $2 million.

The weighted-average discount rates used to measure pension liabilities and costs utilize each plan’s specific cash flows and are then compared to high-quality bond indices for reasonableness. Global market interest rates increased in 2021 as compared with 2020, and, as a result, the weighted-average discount rate used to measure pension liabilities was 1.5% in 2021 and 1.1% in 2020.

See "Note 13: Employee Benefit Plans" in Item 8 in this Form 10-K for further discussion.

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Off-Balance Sheet Arrangements and Contractual Obligations

We extend a variety of financial guarantees to third parties in support of our business. We also have obligations arising from environmental, health and safety, tax and employment matters. Circumstances that could cause the contingent obligations and liabilities arising from these arrangements to come to fruition include changes in the underlying transaction, non-performance under a contract or deterioration in the financial condition of the guaranteed party.

Otis' contractual obligations and commitments as of December 31, 2021 are discussed below. See also "Note 13: Employee Benefit Plans" in Item 8 of this Form 10-K for further discussion of our expected pension and postretirement contributions.

Long-term Debt

See "Note 10: Borrowings and Lines of Credit" in Item 8 of this Form 10-K for further discussion of our long-term debt principal payments as of December 31, 2021. In the following table, we show the timing of payments of interest on long-term debt as of December 31, 2021:

Purchase Obligations

Purchase obligations include amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders. Where it is not practically feasible to determine the legally enforceable portion of our obligation under certain of our long-term purchase agreements, we include additional expected purchase obligations beyond what may be legally enforceable. We enter into contractual purchase commitments with suppliers and service vendors to support our information technology that are either necessary to operate our business or are resulting from implementing strategic initiatives. In the following table, we show the timing of payments of total purchase obligations as of December 31, 2021:

Other Long-term Liabilities

Other long-term liabilities in the table below includes obligations relate to product service and warranty policies, estimated remediation costs and contractual indemnities, and are included in Other long-term liabilities on the "Consolidated Balance Sheets" in Item 8 of this Form 10-K. The timing of expected cash flows associated with these obligations is based upon management's estimates over the terms of these agreements and is largely based upon historical experience and were as follows as of December 31, 2021:

The balance above includes $220 million of long-term contractual payables due to RTX for reimbursement of tax payments that RTX is responsible to pay after the Separation pursuant to the TMA. Otis will reimburse RTX for those tax payments through 2027.

Unrecognized Tax Benefits

Otis has unrecognized tax benefits of $392 million as of December 31, 2021, the timing of which is uncertain to become payable. See "Note 16: Income Taxes" in Item 8 in this Form 10-K for additional discussion on unrecognized tax benefits.

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