Employee Benefit Plans

12 Months Ended

Dec. 31, 2020

Retirement Benefits [Abstract]

Employee Benefit Plans

Employee Benefit Plans

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

Employee Savings Plans. We sponsor various employee savings plans. Prior to the Separation, UTC also sponsored and contributed to defined contribution employee savings plans. Prior to the Separation, certain employees of Otis participated in these plans. Our contributions to employer-sponsored defined contribution plans were $54 million, $41 million and $38 million for 2020, 2019, and 2018, respectively.

Pension Plans. We sponsor both funded and unfunded domestic and international defined benefit pension plans that cover a large number of our employees. Our plans use a December 31 measurement date consistent with our fiscal year.

(dollars in millions)	2020		2019
Change in benefit obligation:
Beginning balance	$	1,092	$	869
Service cost	40		33
Interest cost	16		21
Actuarial (gain) loss	40		81
Benefits paid	(28)		(30)
Net settlement, curtailment and special termination benefits	(26)		(23)
Other	91		141
Ending balance	$	1,225	$	1,092
Change in plan assets:
Beginning balance	$	622	$	444
Actual return on plan assets	24		76
Employer contributions	64		32
Benefits paid	(28)		(30)
Settlements	(26)		(23)
Other	47		123
Ending balance	$	703	$	622
Funded status:
Fair value of plan assets	$	703	$	622
Benefit obligations	(1,225)		(1,092)
Funded status of plan	$	(522)	$	(470)
Amounts recognized in the Consolidated Balance Sheets consist of:
Noncurrent assets	$	87	$	83
Current liability	(21)		(20)
Noncurrent liability	(588)		(533)
Net amount recognized	$	(522)	$	(470)
Amounts recognized in Accumulated other comprehensive loss consist of:
Net actuarial loss	$	280	$	236
Prior service credit	(1)		(2)
Net amount recognized	$	279	$	234

The amounts included in "actuarial loss" in the above table primarily are due to changes in discount rate assumptions driven by decreases in corporate bond yields. The amounts included in “Other” in the above table primarily reflect the impact of foreign exchange translation, primarily for plans in Australia, Canada, Germany, Spain and Switzerland, and in 2019 an additional foreign defined benefit plan. Domestic pension plans provide retirement benefits to certain employees and are not a material component of the projected benefit obligation.

In 2020, 2019 and 2018 we made cash contributions to our defined benefit pension plans of $64 million, $32 million and $34 million, respectively.

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

(dollars in millions)	2020		2019
Projected benefit obligation	$	787	$	697
Accumulated benefit obligation	685		609
Fair value of plan assets	205		157

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

(dollars in millions)	2020		2019
Projected benefit obligation	$	991	$	966
Accumulated benefit obligation	846		846
Fair value of plan assets	383		413

The accumulated benefit obligation for all defined benefit pension plans was $1.1 billion and $1.0 billion at December 31, 2020, and 2019, respectively.

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

(dollars in millions)	2020		2019		2018
Pension benefits:
Service cost	$	40	$	33	$	33
Interest cost	16		21		21
Expected return on plan assets	(25)		(24)		(23)
Amortization of prior service credit	(1)		(1)		(1)
Recognized actuarial net loss	16		10		12
Net settlement, curtailment and special termination benefits loss (gain)	5		2		(3)
Net periodic pension cost – employer	$	51	$	41	$	39

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

(dollars in millions)	2020		2019		2018
Current year actuarial loss	$	41	$	28	$	37
Prior service credit arising during period	—		—		(1)
Amortization of actuarial loss	(16)		(10)		(12)
Amortization of prior service credit	1		1		1
Net settlement and curtailment (loss) gain	(5)		(2)		3
Other	24		27		(8)
Total recognized in other comprehensive loss	$	45	$	44	$	20
Net recognized in net periodic pension cost and other comprehensive loss	$	96	$	85	$	59

The amounts included in “Other” in the above table primarily reflect the impact of foreign exchange translation, primarily for plans in Australia, Germany, Canada and Switzerland, and in 2019, an additional foreign defined benefit plan.

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

	Benefit Obligation				Net Cost
(dollars in millions)	2020		2019		2020		2019		2018
Discount rate:
Projected benefit obligation	1.1	%	1.5	%	1.5	%	2.5	%	2.4	%
Salary scale	3.0	%	3.1	%	3.1	%	3.3	%	3.3	%
Expected return on plan assets	—		—		4.5	%	5.2	%	5.2	%
Interest crediting rate	0.6	%	0.7	%	0.7	%	1.5	%	1.5	%

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

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

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

The fair values of pension plan assets at December 31, 2020 and 2019 by asset category are as follows:

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

(dollars in millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Not Subject to Leveling		Total
Asset category
Public equities:
Global Equity Commingled Funds (1)	$	—	$	183	$	—	$	—	$	183
Global Equity Funds at net asset value (5)	—		—		—		78		78
Fixed income securities:
Governments	—		54		—		—		54
Corporate Bonds	—		87		—		—		87
Fixed income securities at net asset value (5)	—		—		—		47		47
Real estate(2) (5)	—		26		—		1		27
Other (3)	—		138		—		—		138
Cash and cash equivalents (4)(5)	—		8		—		—		8
Total at December 31, 2019	$	—	$	496	$	—	$	126	$	622

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

(2) Represents investments in real estate including commingled funds and directly-held properties.

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

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

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

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

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

We expect to make total contributions of approximately $30 million to our global defined benefit pension plans in 2021, including benefit payments to be paid directly from corporate assets.

Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $56 million in 2021, $59 million in 2022, $62 million in 2023, $59 million in 2024, $61 million in 2025, and $353 million from 2026 through 2030.

Postretirement Benefit Plans. We sponsor postretirement benefit plans that provide health and life benefits to eligible retirees. The postretirement plans are unfunded. The benefit obligation was $11 million and $9 million at December 31, 2020, and 2019, respectively. The net periodic cost was $1 million for 2020, 2019 and 2018, respectively. Other comprehensive loss of $2 million was recognized during 2020 related to changes in benefit obligations.

The projected benefit obligation discount rate was 4.3% and 4.7% at December 31, 2020 and 2019, respectively. The Net Cost discount rate was 4.7%, 5.3% and 5.3% for 2020, 2019 and 2018, respectively.

Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $1 million each year from 2021 through 2025, and $3 million from 2026 through 2030.

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

Our participation in these plans for the annual periods ended December 31 is outlined in the table below. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) zone status available in 2020 and 2019 is for the plan’s year-end at June 30, 2019 and June 30, 2018, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Our significant plan is in the green zone which represents a plan that is at least 80% funded and does not require a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”). An extended amortization provision of ten years was utilized to recognize investment gains or losses for our significant plan through June 30, 2019.

(dollars in millions)		PPA Zone Status		FIP/RP Status	Contributions						Surcharge Imposed	Expiration Date of Collective-Bargaining Agreement
Pension Fund	EIN/Pension Plan Number	2020	2019	Pending/Implemented	2020		2019		2018
National Elevator Industry Pension Plan	23-2694291	Green	Green	No	$	131	$	127	$	120	No	7/8/2022
Other funds					7		9		8
					$	138	$	136	$	128

For the plan years ended June 30, 2019 and 2018, respectively, we were listed in the National Elevator Industry Pension Plan’s Forms 5500 as providing more than 5% of the total contributions for the plan. At the date these financial statements were issued, the Form 5500 was not available for the plan year ending June 30, 2020.

In addition, we participate in multiemployer arrangements that provide postretirement benefits other than pensions, with the National Elevator Industry Health Benefit Plan being the most significant. These arrangements generally provide medical and life benefits for eligible active employees and retirees and their dependents. Contributions to multiemployer plans that provide postretirement benefits other than pensions were $20 million, $21 million and $20 million for 2020, 2019 and 2018, respectively.

UTC Sponsored Defined Benefit Plans. Defined benefit pension and postretirement benefit plans that were sponsored by our former parent UTC have been accounted for as multi-employer plans in these Consolidated Financial Statements pre-Separation, in accordance with FASB ASC Topic 715-30: Defined Benefit Plans – Pension and FASB ASC Topic 715-60: Defined Benefit Plans – Other Postretirement. FASB ASC Topic 715: Compensation-Retirement Benefits provides that an employer that participates in a multi-employer defined benefit plan is not required to report a liability beyond the contributions currently due and unpaid to the plan. Therefore, no assets or liabilities related to these plans have been included on the Consolidated Balance Sheets.

These pension and post retirement expenses were allocated to the Company and reported in Cost of products and services sold, Selling, general and administrative and Non-service pension cost (benefit) on the Consolidated Statements of Operations. The Company's participation in the defined pension and postretirement benefit plans sponsored by our former parent UTC concluded upon the completion of the Separation on April 3, 2020. The amounts for pension and postretirement expenses for the years ended December 31 were as follows:

(dollars in millions)	2020		2019		2018
Service cost	$	1	$	15	$	18
Non-service pension benefit	(5)		(42)		(49)
	$	(4)	$	(27)	$	(31)

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

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

In connection with the Separation, and in accordance with the EMA, the Company's employees with outstanding former UTC stock-based awards received replacement stock-based awards under the Plan at Separation. The value of the replaced stock-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to Separation. The incremental expense incurred by the Company was not material. As of December 31, 2020, approximately 28 million shares remain available for awards under the 2020 Plan.

Stock-based Compensation Expense

We measure the cost of all share-based payments, including stock options, at fair value on the grant date and recognize this cost in the Consolidated Statements of Operations. A forfeiture rate assumption is applied on grant date to adjust the expense recognition for awards that are not expected to vest. For periods prior to the Separation, stock-based compensation expense includes expense attributable to Otis, and the fair value assumptions are based on the awards and terms previously granted under the UTC incentive compensation plan to Otis employees. Accordingly, the amounts presented for the years ended December 31, 2020, 2019 and 2018 are not necessarily indicative of future awards and do not necessarily reflect the results that Otis would have experienced as an independent publicly-traded company.

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

	Year Ended
(dollars in millions)	2020		2019		2018
Stock-based compensation expense (Share-based)	$	63	$	37	$	38
Stock-based compensation expense (Cash-based)	(4)		10		(1)
Total gross stock-based compensation expense	$	59	$	47	$	37
Less: future tax benefit	7		5		4
Stock-based compensation expense, net of tax	$	52	$	42	$	33

For the years ended December 31, 2020, 2019 and 2018, the amount of cash received from the exercise of stock options was $3 million, $10 million and $25 million, respectively, with an associated tax benefit realized of $2 million, $6 million and $5 million, respectively. In addition, for the years ended December 31, 2020, 2019 and 2018, the associated tax benefit realized from the vesting of performance share units and other restricted awards was $1 million, $4 million and $1 million, respectively. The 2020 amount was computed using current U.S. federal and state tax rates.

As of December 31, 2020, there was approximately $60 million of total unrecognized compensation cost related to non-vested equity awards granted under the Plan. This cost is expected to be recognized ratably over a weighted-average period of 2.3 years.

A summary of the transactions under the new Otis Plan for the year ended December 31, 2020 follows:

	Stock Appreciation Rights			Restricted Share Units			Performance Share Units			Stock Options
(shares in thousands)	Shares	Average Price*		Shares	Average Price**		Shares	Average Price**		Shares	Average Price**
Outstanding at:
December 31, 2019	—	$	—	—	$	—	—	$	—	—	$	—
Converted from UTC (1)	12,782	60.16		1,376	68.14		38	67.53		520	53.99
Granted (2)	179	53.25		607	54.21		5	65.45		—	—
Exercised / Earned (2)	(609)	45.19		(201)	61.89		(43)	67.29		(57)	45.39
Cancelled	(175)	72.82		(72)	67.56		—	69.79		(9)	41.42
December 31, 2020	12,177	$	60.63	1,710	$	63.94	—	$	—	454	$	55.31

* Weighted-average grant price

** Weighted-average grant fair value

(1) Converted shares as of April 3, 2020 include Carrier and Legacy UTC employees receiving Otis awards on Separation

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

The weighted-average grant date fair value of stock options and stock appreciation rights granted by Otis and UTC during 2020, 2019 and 2018 was $10.38, $20.92 and $20.18, respectively. The weighted-average grant date fair value of performance share units, which vest upon achieving certain performance metrics, and other restricted stock awards granted by Otis and UTC during 2020, 2019 and 2018 was $54.29, $109.17 and $131.47, respectively. The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of stock options and stock appreciation rights exercised during 2020, 2019 and 2018 was $13 million, $53 million and $36 million, respectively. The total fair value (which is the stock price at vesting) of performance share units and other restricted awards vested was $10 million, $33 million and $11 million during the years ended December 31, 2020, 2019 and 2018, respectively.

The following table summarizes information about equity awards outstanding that are vested and expected to vest and equity awards outstanding that are exercisable at December 31, 2020:

	Equity Awards Vested and Expected to Vest						Equity Awards That Are Exercisable
(shares in thousands; aggregate intrinsic value in millions)	Awards	Average Price*		Aggregate Intrinsic Value		Remaining Term**	Awards	Average Price*		Aggregate Intrinsic Value		Remaining Term**
Stock Options/Stock Appreciation Rights	12,506	$	60.30	$	115	5.6 years	7,964	$	54.16	$	107	4.1 years
Performance Share Units/Restricted Stock	1,639	—		$	111	1.7 years

* Weighted-average grant price per share

** Weighted-average contractual remaining term in years

The fair value of each option award is estimated on the date of grant using a binomial lattice model. The following table indicates the assumptions used in estimating fair value for the years ended December 31, 2020, 2019 and 2018. For periods prior to the Separation, these assumptions represent those utilized by UTC and are not necessarily indicative of assumptions that would be used by Otis as a standalone company. Lattice-based option models incorporate ranges of assumptions for inputs; those ranges are as follows:

	2020	2019	2018
Expected volatility	25.5%	18.8% - 19.7%	17.5% - 21.1%
Weighted-average volatility	25.5%	19.5%	18.0%
Expected term (in years)	6.8	6.5 - 6.6	6.5 - 6.6
Expected dividend yield	1.8%	2.4%	2.2%
Risk-free rate	0.5%	2.3% - 2.7%	1.3% - 2.7%

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