OTIS WORLDWIDE CORPORATION BUSINESS OVERVIEW
Business Summary
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 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 2022 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 .
Recent Developments
Sale of
The ongoing conflict betweenRussia andUkraine has resulted in worldwide geopolitical and macroeconomic uncertainty, including volatile commodity markets, foreign exchange fluctuations, supply chain disruptions, increased risk of cyber incidents, reputational risk, increased operating costs (including fuel and other input costs), environmental, health and safety risks related to securing and maintaining facilities, additional sanctions and other regulations (including restrictions on the transfer of funds to and fromRussia ).
To the extent possible, we continue to operate our business in
As previously disclosed, inMarch 2022 we stopped taking new equipment orders inRussia and making new investments in the country, and reassessed our operations inRussia , which represented approximately 2% of our 2021 revenue and operating profit and approximately 1% of our six months endedJune 30, 2022 revenue and operating profit, comprised mostly of New Equipment. InJune 2022 , we entered into an agreement to sell our business inRussia to a third party, resulting in classification of the business' assets and liabilities as held for sale as ofJune 30, 2022 and recording an impairment loss of$18 million . OnJuly 27, 2022 , we completed the sale of our business inRussia to the third party. We recorded an impairment from the sale and conflict-related charges totaling$10 million and$28 million , primarily in Other expense (income), net in the Condensed Consolidated Statements of Operations for the quarter and nine months endedSeptember 30, 2022 , respectively. See Note 6, "Business Acquisitions, Dispositions,Goodwill and Intangible Assets" for further details. 30 -------------------------------------------------------------------------------- Table of Contents We cannot predict how the conflict will evolve. If the conflict continues for a significant time or expands to other countries, it could heighten certain risks disclosed in Item 1A "Risk Factors" in our 2021 Form 10-K , including but not limited to, adverse effects on macroeconomic conditions, including increased inflation, constraints on the availability of commodities, supply chain disruption and decreased business spending; cyber-incidents; disruptions to our or our business partners' global technology infrastructure, including through cyber-attack or cyber-intrusion; adverse changes in international trade policies and relations; claims, litigation and regulatory enforcement; our ability to implement and execute our business strategy; terrorist activities; our exposure to foreign currency fluctuations; reputational risk; and constraints, volatility, or disruption in the capital markets, any of which could have a material adverse effect on our business, results of operations, cash flows and financial condition. Consistent with our risk management process, the Otis Board of Directors and its Audit Committee have received numerous updates on the ongoing conflict betweenRussia andUkraine and have reviewed, and continue to review, with management the financial, operational, compliance, reputational and cyber risks associated therewith and related mitigation actions. The Otis Board of Directors oversaw the process of selling our business inRussia , including reviewing the terms and conditions thereof, and the Audit Committee approved the sale. The Otis Board of Directors continued to receive updates on the sale process until the completion of the sale, including with respect to the satisfaction of the closing conditions.
Zardoya Otis Tender Offer
As previously disclosed, the Company announced the Tender Offer to acquire all issued and outstanding shares ofZardoya Otis not owned by Otis, at an offer price of €7.07 per share in cash, after adjusting for dividends. The results of the Tender Offer were announced onApril 7, 2022 , with tenders of 45.49% of the shares outstanding accepted. The shares tendered to the Company were settled in cash onApril 12, 2022 for approximately €1.5 billion from the Company's restricted cash held in escrow, resulting in the Company owning 95.51% ofZardoya Otis . The acquisition and settlement of the remaining issued and outstanding shares not owned by the Company for approximately €150 million (based on the adjusted tender price of €7.07 per share) and the automatic delisting ofZardoya Otis shares occurred during the second quarter of 2022. See Note 1, "General" to the Condensed Consolidated Financial Statements, for further details regarding this 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 endedSeptember 30, 2022 and 2021. 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 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; and
•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 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.
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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 18 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.
As a result of our business in Russia being sold during the third quarter of
2022, the results of the operations in Russia are excluded from the organic
volume changes and are reflected in Acquisitions and divestitures. See Note 6,
"Business Acquisitions, Dispositions, Goodwill and Intangible Assets" to the
Condensed Consolidated Financial Statements, for further details.
RESULTS OF OPERATIONS
Net Sales
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Net sales $ 3,344 $ 3,620 $ 10,246 $ 10,729
Percentage change year-over-year (7.6) % (4.5) %
The factors contributing to the total percentage change year-over-year in total
Net sales for the quarter and nine months ended
Quarter Ended Nine Months Ended
Components of Net sales change: September 30, 2022 September 30, 2022
Organic volume 0.8 % 1.4 %
Foreign currency translation (7.2) % (5.2) %
Acquisitions and divestitures, net (1.2) % (0.7) %
Total % change (7.6) % (4.5) %
The Organic volume increase of 0.8% for the quarter ended September 30, 2022 was
driven by an increase in organic sales of 6.2% in Service, largely offset by a
decrease of (5.4)% in New Equipment organic sales.
The Organic volume increase of 1.4% for the nine months ended September 30, 2022
was driven by an increase in organic sales of 5.7% in Service, partially offset
by a decrease of (3.9)% in New Equipment organic sales.
See the "Segment Review" section for a discussion of Net sales by segment.
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Cost of Products and Services Sold
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Total cost of products and services sold $ 2,373 $ 2,560 $ 7,286 $ 7,575
Percentage change year-over-year (7.3) % (3.8) % The factors contributing to the percentage change year-over-year for the quarter and nine months endedSeptember 30, 2022 in total cost of products and services sold are as follows: Quarter Ended Nine Months Ended Components of Cost of Products and Services Sold change: September 30, 2022 September 30, 2022 Organic volume 1.4 % 2.1 % Foreign currency translation (7.5) % (5.3) % Acquisitions and divestitures, net (1.2) % (0.6) % Total % change (7.3) % (3.8) % The organic increase in total cost of products and services sold for the quarter and nine months endedSeptember 30, 2022 was primarily driven by the organic sales increases noted above and inflationary pressures, including higher commodity prices of$18 million and$89 million , respectively, primarily driven by steel, in addition to higher freight and fuel costs and annual wage increases, partially mitigated by productivity. Gross Margin Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 2022 2021 Gross margin$ 971 $ 1,060 $ 2,960 $ 3,154 Gross margin percentage 29.0 % 29.3 % 28.9 % 29.4 % Gross margin percentage decreased 30 and 50 basis points for the quarter and nine months endedSeptember 30, 2022 , respectively, when compared to the same periods for 2021, due to the inflationary pressures described above, partially offset by favorable service pricing, productivity and the benefit from Service sales growing faster than New Equipment sales. 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) 2022 2021 2022 2021 Research and development $ 37$ 39 $ 112$ 113 Percentage of Net sales 1.1 % 1.1 % 1.1 % 1.1 %
Research and development was relatively flat for the quarter and nine months
ended
Selling, General and Administrative
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Selling, general and administrative $ 417 $ 479 $ 1,315 $ 1,445
Percentage of Net sales 12.5 % 13.2 % 12.8 % 13.5 %
Selling, general and administrative expenses decreased $62 million and $130
million for the quarter and nine months ended September 30, 2022 , respectively,
when compared to the same periods in 2021, as cost containment actions, other
employment related cost reductions, lower credit loss reserves, as well as the
impact from foreign exchange of $35 million and $69 million for the quarter and
nine months ended September 30, 2022 , respectively, were partially offset by
annual wage
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increases and higher restructuring costs.
Selling, general and administrative expenses as a percentage of Net sales
decreased 70 basis points for the quarter and nine months ended
Restructuring Costs
Nine Months Ended September 30,
(dollars in millions) 2022 2021
Restructuring costs $ 45 $ 35
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 restructuring costs were
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 the nine months endedSeptember 30, 2022 , we had cash outflows of approximately$47 million related to the restructuring actions and expect to make cash payments of$58 million to complete the actions announced, which will be comprised of the utilization of existing restructuring accruals and$22 million of additional restructuring expenses to be recognized. We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including$65 million for the 2022 actions and$40 million for the 2021 actions, of which approximately$43 million was realized for the 2022 and 2021 actions during the nine months endedSeptember 30, 2022 .
For additional discussion of restructuring, see Note 12 to the Condensed Consolidated Financial Statements.
Other Income (Expense), Net
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Other income (expense), net $ 12 $ - $ 9 $ 16
The change in Net Other Income (Expense), of $12 million for the quarter ended
September 30, 2022 , compared to the same period in 2021, was primarily driven by
favorable foreign currency mark-to-market adjustments and the absence of the
impact of settlements of certain TMA transactions recognized during the quarter
ended September 30, 2021 , partially offset by the loss on the sale of our Russia
business and related charges.
The change in Other Income (Expense), Net of $(7) million for the nine months
ended September 30, 2022 , compared to the same period in 2021, was primarily
driven by a loss on the sale of our Russia business and related charges,
partially offset by favorable foreign currency mark-to-market adjustments and
lower non-recurring Separation-related costs.
For additional discussion of the sale of our
Interest Expense (Income), Net
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Interest expense (income), net $ 35 $ 33 $ 107 $ 92
Net Interest Expense (Income) was relatively flat in the quarter ended
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The increase in Interest Expense (Income), Net of $15 million in the nine months
ended September 30, 2022 , compared to the same period in 2021, was primarily
driven by interest expense related to the Tender Offer for Zardoya Otis and
lower interest income year-over-year.
The average interest rate on our long-term debt for the quarter and nine months
ended
For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.
Income Taxes
Quarter Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Effective tax rate 29.0 % 25.2 % 26.7 % 26.7 %
The increase in the effective tax rate for the quarter ended September 30, 2022 ,
is primarily due to the absence of a favorable income tax settlement related to
the Separation recorded in the quarter ended September 30, 2021 , partially
offset by a reduction in tax liability as a result of finalizing the 2021 U.S.
federal income tax return.
The effective tax rate for the nine months ended September 30, 2022 , is
unchanged as a result of offsetting items, including the elimination of Base
Erosion Anti Abuse Tax ("BEAT") in the U.S. , the release of a tax reserve
related to a forward transfer pricing agreement with a European tax authority,
the absence of a reduction in the deferred tax liability related to repatriation
of foreign earnings recorded in the quarter ended March 31, 2021 , and the
absence of a favorable income tax settlement as described above.
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 11 to the Condensed Consolidated Financial Statements.
Noncontrolling Interest in Subsidiaries' Earnings and Net Income Attributable toOtis Worldwide Corporation Quarter Ended September 30, Nine Months Ended September 30, (dollars in millions) 2022 2021 2022 2021 Noncontrolling interest in subsidiaries' earnings $ 26 $ 48 $ 95 $ 145 Net income attributable toOtis Worldwide Corporation $ 324 $ 331 $ 956 $ 965 Noncontrolling interest in subsidiaries' earnings were lower for the quarter and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021 primarily due to Otis' increased ownership inZardoya Otis in the second quarter of 2022. For details on the results of the Tender Offer and purchases of shares ofZardoya Otis not previously owned by the Company, see Note 1 to the Condensed Consolidated Financial Statements. Net income attributable toOtis Worldwide Corporation was relatively flat for the quarter and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. 35 -------------------------------------------------------------------------------- Table of Contents Segment Review
Summary performance for our operating segments for the quarters ended
Net Sales Operating Profit Operating Profit Margin
(dollars in millions) 2022 2021 2022 2021 2022 2021
New Equipment $ 1,447 $ 1,681 $ 100 $ 131 6.9 % 7.8 %
Service 1,897 1,939 446 444 23.5 % 22.9 %
Total segment 3,344 3,620 546 575 16.3 % 15.9 %
General corporate expenses and
other - - (17) (33) - -
Total $ 3,344 $ 3,620 $ 529 $ 542 15.8 % 15.0 %
Summary performance for our operating segments for the nine months ended
Net Sales Operating Profit Operating Profit Margin
(dollars in millions) 2022 2021 2022 2021 2022 2021
New Equipment $ 4,403 $ 4,866 $ 292 $ 382 6.6 % 7.9 %
Service 5,843 5,863 1,328 1,315 22.7 % 22.4 %
Total segment 10,246 10,729 1,620 1,697 15.8 % 15.8 %
General corporate expenses and
other - - (78) (85) - -
Total $ 10,246 $ 10,729 $ 1,542 $ 1,612 15.0 % 15.0 %
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 that 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. 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 quarters and nine months ended
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 Change Change 2022 2021 Change Change
Net sales $ 1,447 $ 1,681 $ (234) (13.9) % $ 4,403 $ 4,866 $ (463) (9.5) %
Cost of sales 1,208 1,381 (173) (12.5) % 3,689 3,986 (297) (7.5) %
239 300 (61) (20.3) % 714 880 (166) (18.9) %
Operating expenses 139 169 (30) (17.8) % 422 498 (76) (15.3) %
Operating profit $ 100 $ 131 $ (31) (23.7) % $ 292 $ 382 $ (90) (23.6) %
Operating profit margin 6.9 % 7.8 % 6.6 % 7.9 %
36-------------------------------------------------------------------------------- Table of Contents Summary analysis of the Net sales change for New Equipment for the quarter and nine months endedSeptember 30, 2022 compared with the quarter and nine months endedSeptember 30, 2021 was as follows: Quarter Ended Nine Months Ended Components of Net sales change: September 30, 2022 September 30, 2022 Organic volume (5.4) % (3.9) % Foreign currency translation (5.8) % (3.9) % Acquisitions/Divestitures, net and Other (2.7) % (1.7) % Total % change (13.9) % (9.5) %
Quarter Ended
Net sales
Organic sales declined (5.4)% as low teens growth in
Operating profit
New Equipment operating profit decreased$(31) million primarily driven by lower volume of$(28) million and the related under absorption. Favorable productivity and lower selling, general and administrative costs more than offset commodity costs of$(18) million , primarily steel, in addition to other inflationary increases, including freight costs. Operating profit was also impacted by operations inRussia of$(10) million . Operating margin decreased 90 basis points.
Nine Months Ended
Net sales
Organic sales declined (3.9)% as high single digit growth inAsia Pacific and low single digit growth in EMEA was more than offset by declines inChina and theAmericas . Operating profit New Equipment operating profit decreased$(90) million . Lower volume of$(38) million , under absorption from lower volume, higher commodity costs of($89) million , primarily steel, and increased freight costs were partially mitigated by favorable productivity and lower selling, general and administrative costs. Operating profit was also impacted by operations inRussia of$(32) million . Operating margin decreased 130 basis points.
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.
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Summary performance for Service for the quarters and nine months ended
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 Change Change 2022 2021 Change Change
Net sales $ 1,897 $ 1,939 $ (42) (2.2) % $ 5,843 $ 5,863 $ (20) (0.3) %
Cost of sales 1,165 1,179 (14) (1.2) % 3,597 3,589 8 0.2 %
732 760 (28) (3.7) % 2,246 2,274 (28) (1.2) %
Operating expenses 286 316 (30) (9.5) % 918 959 (41) (4.3) %
Operating profit $ 446 $ 444 $ 2 0.5 % $ 1,328 $ 1,315 $ 13 1.0 %Operating profit margin 23.5 % 22.9 % 22.7 % 22.4 %
Summary analysis of Service Net sales change for the quarter and nine months
ended
Quarter Ended Nine Months Ended
Components of Net sales change: September 30, 2022 September 30, 2022
Organic volume 6.2 % 5.7 %
Foreign currency translation (8.5) % (6.1) %
Acquisitions/Divestitures, net 0.1 % 0.1 %
Total % change (2.2) % (0.3) %
Quarter Ended
Net sales
The organic sales increase of 6.2% is due to organic sales increases in maintenance and repair of 5.4% and modernization of 10.3%.
Components of Net sales change: Maintenance and Repair Modernization Organic volume 5.4 % 10.3 % Foreign currency translation (8.8) % (7.6) % Acquisitions/Divestitures, net - % 0.9 % Total % change (3.4) % 3.6 % Operating profit Service operating profit increased$2 million with higher volume of$41 million offset by foreign exchange headwinds of$(47) million . Improved pricing on maintenance contracts, productivity, and other employment related cost reductions more than offset annual wage increases and other inflationary pressures, including higher fuel and material costs. Operating margin increased 60 basis points. 38 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2022
Net sales
The organic sales increase of 5.7% is due to organic sales increases in maintenance and repair of 5.3% and modernization of 7.8%.
Components of Net sales change: Maintenance and Repair Modernization Organic volume 5.3 % 7.8 % Foreign currency translation (6.3) % (5.7) % Acquisitions/Divestitures, net 0.1 % 0.3 % Total % change (0.9) % 2.4 % Operating profit Service operating profit increased$13 million due to higher volume of$104 million , favorable pricing on maintenance contracts and productivity, partially offset by foreign exchange headwinds of$(103) million , annual wage increases and other inflationary pressures, including higher fuel costs. Operating margin increased 30 basis points.
General Corporate Expenses and Other
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
General corporate expenses and other $ (17) $ (33) $ (78) $ (85)
General corporate expenses and other for the quarter ended September 30, 2022
decreased $16 million compared to the same quarter in 2021, primarily due to
favorable foreign currency mark-to-market adjustments and the absence of the
impact of settlements of certain TMA transactions recognized during the quarter
ended September 30, 2021 , partially offset by the loss on the sale of our Russia
business and related charges.
General corporate expenses and other for the nine months ended September 30,
2022 decreased $7 million compared to the same period in 2021, primarily due to
favorable foreign currency mark-to-market adjustments and lower non-recurring
Separation related costs, partially offset by the loss on the sale of our Russia
business and related charges.
LIQUIDITY AND FINANCIAL CONDITION(dollars in millions) September 30, 2022 December 31, 2021 Cash and cash equivalents $ 1,034 $ 1,565 Total debt 6,562 7,273 Net debt (total debt less cash and cash equivalents) 5,528 5,708 Total equity 1 (4,861) (3,144) Total capitalization (total debt plus total equity) 1,701 4,129
Net capitalization (total debt plus total equity less cash and cash equivalents)
667 2,564
Total debt to total capitalization 1 386 % 176 %
Net debt to net capitalization 1 829 % 223 %
1 Our total debt to total capitalization ratio and net debt to net
capitalization ratio increased in the nine months ended September 30, 2022 due
to the $1.5 billion reduction in equity as a result of the Tender Offer. For
more information on the impact of the Zardoya Otis noncontrolling interest
reclassification, see Note 1 to the Condensed Consolidated Financial Statements.
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As of September 30, 2022 , we had cash and cash equivalents of approximately
$1.0 billion , of which approximately 96% 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, 2022 and December 31, 2021 , the amount of such
restricted cash was approximately $8 million and $1.9 billion , respectively,
including cash held in escrow to fund the Tender Offer as of December 31, 2021 .
For information on the results of the Tender Offer and use of the cash held in
escrow for the Tender Offer, see Note 1 to the Condensed Consolidated Financial
Statements.
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, 2022 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. There can be no assurance that we will continue to
have access to the capital markets on terms acceptable to us.
There were no long-term debt issuances for the nine months ended September 30,
2022 . The Company redeemed the $500 million floating notes originally due in
2023 during the nine months ended September 30, 2022 . For additional discussion
of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.
The Company does not intend 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 March 9, 2022 , our Board of Directors revoked any remaining share repurchase
authority under the prior share repurchase program and approved a new share
repurchase program for up to $1 billion of Common Stock, of which $500 million
had been utilized as of September 30, 2022 . 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.
Cash Flow - Operating Activities
Nine Months Ended September 30,
(dollars in millions) 2022 2021
Net cash flows provided by operating activities $ 1,096 $ 1,473
Cash generated from operating activities in the nine months ended September 30,
2022 was $377 million lower than the same period in 2021, primarily due to lower
cash flow related to current assets and current liabilities activity of $415
million , as described below. These were partially offset by $64 million of
higher non-cash adjustments from Net income and $38 million of higher Other
operating activities, net, primarily due to long-term accruals and other
activities in the nine months ended September 30, 2022 .
Nine Months Ended
Cash outflows related to current assets and current liabilities operating
activity for the nine months ended
•Accounts receivable, net, which increased
•Accrued liabilities, which decreased
•Inventories, which increased
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•Contract assets, current and Contract liabilities, current, net change of $143
million , driven by the timing of billings on contracts compared to the
progression on current contracts; and
•Accounts payable, which increased by
Nine Months Ended
Cash inflows related to current assets and current liabilities operating
activity for the nine months ended
•Accounts payable, which increased
•Contract assets, current and Contract liabilities, current, net change of
•Inventories, which decreased
•Other current assets, which decreased
•Accounts receivable, net, which increased
•Accrued liabilities, which decreased$29 million , primarily due to the timing of payments of income taxes, including the payment of foreign tax obligations pursuant to the TMA. Cash Flow - Investing Activities Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, proceeds from the sale of fixed assets and settlement of derivative contracts. Nine Months EndedSeptember 30, 2022 compared to Nine Months EndedSeptember 30, 2021 Nine Months Ended September 30, (dollars in millions) 2022 2021 Change Investing Activities: Capital expenditures $ (81) $ (115) $ 34
Acquisitions of businesses and intangible assets, net of cash
(38) (59) 21
Dispositions of businesses, net of cash 61 - 61
Proceeds from the sale of (investments in) marketable securities
(7) 40 (47)
Receipts (payments) on settlements of derivative
contracts 121 35 86
Other investing activities, net 6 30 (24)
Net cash flows provided by (used in) investing
activities $ 62 $ (69) $ 131
Cash flows provided by (used in) investing activities in the nine months ended
September 30, 2022 was a cash inflow of $62 million compared to a cash outflow
of $69 million during the same period in 2021. The higher cash of $131 million
was the result of the following drivers:
•$86 million higher net cash receipts from the settlement of derivative
instruments, with net cash receipts of
•$61 million of net proceeds from the sale of our business in
•$34 million lower capital expenditures and$21 million lower investments in businesses and intangible assets in the nine months endedSeptember 30, 2022 ; partially offset by 41
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•$47 million less cash from marketable securities, resulting from$7 million of investments in marketable securities in the nine months endedSeptember 30, 2022 compared to$40 million of net proceeds from sale of and investments in marketable securities in the nine months endedSeptember 30, 2021 . As discussed in Note 13 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, 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 exposures and commodity prices.
See Note 6 to the Condensed Consolidated Financial Statements for further
details regarding the sale of our business in
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 or other payments to
noncontrolling interests.
Nine Months Ended September 30,
(dollars in millions) 2022 2021 Change
Financing Activities:
Increase (decrease) in short-term borrowings, net $ 80 $ (645) $ 725
Proceeds from issuance of long-term debt - 199 (199)
Payment of debt issuance costs - (11) 11
Repayment of long-term debt (500) - (500)
Dividends paid on Common Stock (345) (291) (54)
Repurchases of Common Stock (700) (725) 25
Dividends paid to noncontrolling interest (107) (130) 23
Acquisition of Zardoya Otis shares (1,802) - (1,802)
Other financing activities, net (28) (18) (10)
Net cash flows provided by (used in) financing
activities $ (3,402) $ (1,621) $ (1,781)
Net cash used in financing activities increased $1.8 billion in the nine months
ended September 30, 2022 compared to the same period in 2021, primarily due to
the settlement in cash of the Tender Offer for $1,802 million (€1,663 million)
during the second quarter of 2022. For additional discussion of the Tender
Offer, see Note 1 to the Condensed Consolidated Financial Statements.
Net repayments on borrowings were $420 million during the nine months ended
September 30, 2022 , compared to $457 million during the same period in 2021,
which were made with cash flow from operations and existing cash balances. Net
repayments on borrowings are comprised of the following activity:
•Repayments of long-term debt of
•Net repayments of short-term borrowings of$645 million , partially offset by net proceeds from the issuance of long-term debt of$188 million , during the nine months endedSeptember 30, 2021 .
For additional discussion of borrowings activity, see Note 7 to the Condensed Consolidated Financial Statements.
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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 byOtis Worldwide Corporation ("OWC") on an unsecured, unsubordinated basis. Refer to "Note 10: Borrowings and Lines of Credit" in Item 8 in our 2021
Form 10-K , for additional information.
Highland is a wholly-owned, indirect consolidated subsidiary of OWC. OWC is incorporated under the laws ofDelaware . 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 inthe United States and may make it more difficult for creditors to recover the amount they could expect to recover in liquidation underU.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 nine months endedSeptember 30, 2022 and as ofDecember 31, 2021 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 withU.S. GAAP. Nine Months Ended (dollars in millions) September 30, 2022 OWC Statement of Operations - Standalone and Unconsolidated Revenue $ - Cost of revenue - Operating expenses (3) Income from consolidated subsidiaries 70
Income (loss) from operations excluding income from consolidated subsidiaries
3
Net income (loss) excluding income from consolidated subsidiaries
(76)
(dollars in millions) September 30, 2022 December 31, 2021OWC Balance Sheet - Standalone and Unconsolidated Current assets (excluding intercompany receivables from non-guarantor subsidiaries)
$ 99 $ 197
Current assets (intercompany receivables from
non-guarantor subsidiaries) - -
Noncurrent assets, investments in consolidated
subsidiaries 1,271 1,271
Noncurrent assets (excluding investments in consolidated subsidiaries)
44 48
Current liabilities (intercompany payables to
non-guarantor subsidiaries) 2,892 1,516
Current liabilities (excluding intercompany payables to
non-guarantor subsidiaries) 132 73
Noncurrent liabilities 5,174 5,725
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Nine Months Ended
(dollars in millions) September 30, 2022
Highland Statement of Operations - Standalone and Unconsolidated
Revenue $ -
Cost of revenue -
Operating expenses -
Income from consolidated subsidiaries 740
Income (loss) from operations excluding income from consolidated subsidiaries
-
Net income (loss) excluding income from consolidated subsidiaries
(7)
(dollars in millions) September 30, 2022 December 31, 2021Highland Balance Sheet - Standalone and Unconsolidated Current assets (excluding intercompany receivables from non-guarantor subsidiaries)
$ - $ -
Current assets (intercompany receivables from
non-guarantor subsidiaries) 1 2
Noncurrent assets (investments in consolidated
subsidiaries) 12,524 12,524
Noncurrent assets (intercompany receivables from
non-guarantor subsidiaries) 538 666
Noncurrent assets (excluding investments in consolidated subsidiaries)
- -
Current liabilities (intercompany payables to
non-guarantor subsidiaries) 304 171
Current liabilities (excluding intercompany payables to
non-guarantor subsidiaries) 6 2
Noncurrent liabilities 1,539 1,795
Off-Balance Sheet Arrangements and Contractual Obligations
Item 5 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K discloses our off-balance sheet arrangements and contractual obligations. As ofSeptember 30, 2022 , 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 "Note 7, Borrowings and Lines of Credit" within Item 1 of this Form 10-Q.
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