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 2023 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
Impact of Macroeconomic Developments on Our Company
Macroeconomic developments have impacted, and continue to impact, aspects of the Company's operations and overall financial performance during the quarters endedMarch 31, 2023 and 2022. These macroeconomic developments include, among others, inflationary pressures, higher interest rates and most recently tighter credit conditions. These macroeconomic trends could continue to impact our business, including impacts to overall financial performance during the remainder of 2023, as a result of the following, among other things: •Supplier liquidity, as well as supplier and raw material capacity constraints, delays and related costs; •Customer demand impacting our new equipment, maintenance and repair, and modernization businesses; •Customer liquidity constraints and related credit reserves; and •Cancellations or delays of customer orders.
We currently do not expect any significant impact to our capital and financial resources from these macroeconomic developments, 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 the COVID-19 pandemic, including macroeconomic risks associated
therewith, and global economic, capital market and political conditions in
general, and conditions in the construction and infrastructure industries in
particular.
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Risks associated with the ongoing conflict between Russia and Ukraine
The ongoing conflict between Russia and Ukraine 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 from Russia ).
To the extent possible, we continue to operate our business in Ukraine , which
represented less than 1% of our full year 2022 and quarter ended March 31, 2023
revenue and operating profit. As previously disclosed, we sold our business in
Russia to a third party on July 27, 2022 , which represented approximately 1% of
both our revenue and operating profit in 2022.
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 2022 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.
Environmental, Social and Governance ("ESG")
There have been no, and we do not expect there to be in the near term, material impacts on our business, financial condition or results of operations as a result of compliance with legislation or regulatory rules regarding climate change, from the known physical effects of climate change or as a result of implementing our ESG initiatives. Increased regulation (including pendingSEC andEuropean Union requirements) and other climate change concerns, however, could subject us to additional costs and restrictions, and we are not able to predict how such regulations or concerns would affect our business, operations or financial results.
For additional discussion of Otis' ESG goals, see the discussion under "Environmental, Social and Governance ("ESG")" in Item 1 in our 2022 Form 10-K .
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.
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RESULTS OF OPERATIONS
Net Sales
Quarter Ended March 31,
(dollars in millions) 2023 2022
Net sales $ 3,346 $ 3,414
Percentage change year-over-year (2.0) %
The factors contributing to the total percentage change year-over-year in total
Net sales for the quarter ended
Components of Net sales change: Quarter Ended
3.6 %
Foreign currency translation (4.4) %
Acquisitions and divestitures, net (1.2) %
Total % change (2.0) %
The Organic volume increase of 3.6% for the quarter ended March 31, 2023 was
driven by an increase in organic sales of 6.3% in Service, slightly offset by a
decrease of (0.1)% in New Equipment organic sales.
The decrease in Net sales due to Acquisitions and divestitures, net is primarily
the result of the sale of our
See the "Segment Review" section for a discussion of Net sales by segment.
Cost of Products and Services Sold
Quarter Ended March 31 ,
(dollars in millions) 2023 2022
Total cost of products and services sold $ 2,350$ 2,408 Percentage change year-over-year (2.4) %
The factors contributing to the percentage change year-over-year for the quarter
ended
Quarter Ended March 31 ,
Components of Cost of Products and Services Sold change: 2023
Organic volume 3.9 %
Foreign currency translation (4.7) %
Acquisitions and divestitures, net and other (1.6) %
Total % change (2.4) %
The organic increase in Total cost of products and services sold for the quarter
ended March 31, 2023 was primarily driven by the organic sales increases noted
above and inflationary pressures, including annual wage increases and higher
Service related material costs, partially mitigated by productivity.
The decrease in Total cost of products and services sold due to Acquisitions and
divestitures, net is primarily the result of the sale of our Russia business in
the third quarter of 2022.
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Gross Margin
Quarter Ended March 31,
(dollars in millions) 2023 2022
Gross margin $ 996 $ 1,006
Gross margin percentage 29.8 % 29.5 %
Gross margin percentage increased 30 basis points for the quarter ended March
31, 2023 , when compared to the same period for 2022, due to the benefit from
Service sales growing faster than New Equipment sales, favorable service
pricing, and the benefits from productivity, partially offset by the
inflationary pressures described above.
See the "Segment Review" section for discussion of operating results by segment.
Research and Development
Quarter Ended March 31,
(dollars in millions) 2023 2022
Research and development $ 35 $ 37
Percentage of Net sales 1.0 % 1.1 %
Research and development was relatively flat for the quarter ended
Selling, General and Administrative
Quarter Ended March 31 ,
(dollars in millions) 2023 2022
Selling, general and administrative$ 455 $ 459 Percentage of Net sales 13.6 % 13.4 % Selling, general and administrative expenses decreased$4 million for the quarter endedMarch 31, 2023 , when compared to the same period in 2022, as cost containment actions, lower restructuring costs, as well as the impact from foreign exchange of$14 million for the quarter endedMarch 31, 2023 , were partially offset by annual wage increases and higher other employment related costs. Selling, general and administrative expenses as a percentage of Net sales increased 20 basis points for the quarter endedMarch 31, 2023 , compared to the same period in 2022. Restructuring Costs Quarter Ended March 31, (dollars in millions) 2023 2022 Restructuring costs $ 5$ 14 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$5 million for the quarter endedMarch 31, 2023 and included$4 million of costs related to 2023 actions and$1 million of costs related to 2022 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.
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The table below presents approximate cash outflows related to the restructuring
actions during the quarter ended March 31, 2023 , and the expected cash payments
to complete the actions announced:
(dollars in millions)
Cash outflows during the quarter ended March 31, 2023 $ 10 Expected cash payments remaining to complete actions announced 46
We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including$7 million for the 2023 actions and$70 million for the 2022 actions, of which approximately$15 million was realized for the 2023 and 2022 actions during the quarter endedMarch 31, 2023 .
For additional discussion of restructuring, see Note 12 to the Condensed Consolidated Financial Statements.
Other Income (Expense), Net
Quarter Ended March 31,
(dollars in millions) 2023 2022
Other income (expense), net $ 7 $ 16
The change in Other Income (Expense), Net, of ($9) million for the quarter ended
March 31, 2023 , compared to the same period in 2022, was primarily driven by
unfavorable foreign currency mark-to-market adjustments and the absence of
Separation related impacts recognized during the quarter ended March 31, 2022 .
Interest Expense (Income), Net
Quarter Ended March 31 ,
(dollars in millions) 2023 2022
Interest expense (income), net $ 33
Interest Expense (Income), Net was relatively flat in the quarter ended
The average interest rate on our long-term debt for each of the quarters endedMarch 31, 2023 and 2022 was 2.0%. For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements. Income Taxes Quarter Ended March 31, 2023 2022 Effective tax rate 26.7 % 27.8 % The decrease in the effective tax rate for the quarter endedMarch 31, 2023 , is primarily due to the impact of foreign currency on a distribution of previously taxed income and a change in the mix of earnings.
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.
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Noncontrolling Interest in Subsidiaries' Earnings and Net Income Attributable to
Otis Worldwide Corporation
Quarter Ended March 31,
(dollars in millions) 2023 2022
Noncontrolling interest in subsidiaries' earnings $ 21 $ 42
Net income attributable to Otis Worldwide Corporation $ 331 $ 311
Noncontrolling interest in subsidiaries' earnings were lower for the quarter
ended March 31, 2023 , compared to the same period in 2022 primarily due to Otis'
increased ownership in Otis Mobility (formerly Zardoya Otis ) in the second
quarter of 2022. For details on the results of the Tender Offer and purchases of
shares of Otis Mobility not previously owned by the Company, see Note 1 of the
Company's audited consolidated financial statements and notes thereto included
in our 2022 Form 10-K .
Net income attributable to Otis Worldwide Corporation increased for the quarter
ended March 31, 2023 , compared to the same period in 2022 as lower
noncontrolling interest in subsidiaries' earnings and the benefit of a lower
effective tax rate were partially offset by lower operating profit (including
the impact of foreign exchange rates).
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Segment Review
Summary performance for our operating segments for the quarters ended
Net Sales Operating Profit Operating Profit Margin
(dollars in millions) 2023 2022 2023 2022 2023 2022
New Equipment $ 1,307 $ 1,422 $ 67 $ 93 5.1 % 6.5 %
Service 2,039 1,992 476 447 23.3 % 22.4 %
Total segment 3,346 3,414 543 540 16.2 % 15.8 %
General corporate expenses and
other - - (30) (14) - -
Total $ 3,346 $ 3,414 $ 513 $ 526 15.3 % 15.4 %
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 ended March 31, 2023 and
2022 was as follows:
Quarter Ended March 31,
(dollars in millions) 2023 2022 Change Change
Net sales $ 1,307 $ 1,422 $ (115) (8.1) %
Cost of sales 1,098 1,190 (92) (7.7) %
209 232 (23) (9.9) %
Operating expenses 142 139 3 2.2 %
Operating profit $ 67 $ 93 $ (26) (28.0) %
Operating profit margin 5.1 % 6.5 %
Summary analysis of the Net sales change for New Equipment for the quarter ended
Components of Net sales change: Quarter EndedMarch 31, 2023 Organic volume (0.1) % Foreign currency translation (4.8) % Acquisitions/Divestitures, net and Other (3.2) % Total % change (8.1) %
Quarter Ended
Net sales
Organic sales declined (0.1)% as high-single digit organic sales growth in EMEA was offset by mid-single digit decline in theAmericas and low-single digit decline inAsia , as strong performance inAsia Pacific was offset by a decline inChina . The decrease in Net sales due to Acquisitions/Divestitures, net and Other is primarily the result of the sale of ourRussia business in the third quarter of 2022. 32
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Operating profit
New Equipment operating profit decreased$(26) million including foreign exchange headwinds of$(5) million . Unfavorable regional and product mix were partially offset by favorable productivity. Operating margin decreased 140 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. Summary performance for Service for the quarters endedMarch 31, 2023 and 2022 was as follows: Quarter Ended March 31, (dollars in millions) 2023 2022 Change Change Net sales $ 2,039$ 1,992 $ 47 2.4 % Cost of sales 1,252 1,218 34 2.8 % 787 774 13 1.7 % Operating expenses 311 327 (16) (4.9) % Operating profit $ 476$ 447 $ 29 6.5 % Operating profit margin 23.3 % 22.4 %
Summary analysis of Service Net sales change for the quarter ended
Components of Net sales change: Quarter Ended
6.3 %
Foreign currency translation (4.1) %
Acquisitions/Divestitures, net 0.2 %
Total % change 2.4 %
Quarter Ended
Net sales
The organic sales increase of 6.3% is due to organic sales increases in maintenance and repair of 7.0% and modernization of 3.3%.
Components of Net sales change: Maintenance and Repair Modernization
Organic volume 7.0 % 3.3 %
Foreign currency translation (4.4) % (3.8) %
Acquisitions/Divestitures, net 0.2 % 0.8 %
Total % change 2.8 % 0.3 %
33-------------------------------------------------------------------------------- Table of Contents Operating profit Service operating profit increased$29 million with higher volume of$43 million offset by foreign exchange headwinds of$(20) million . Favorable pricing on maintenance contracts and productivity, were partially offset by annual wage increases and other inflationary pressures, including higher material costs. Operating profit was also impacted by lower restructuring costs. Operating margin increased 90 basis points.
General Corporate Expenses and Other
Quarter Ended March 31,
(dollars in millions) 2023 2022
General corporate expenses and other $
(30)
General corporate expenses and other for the quarter endedMarch 31, 2023 increased$16 million compared to the same quarter in 2022, primarily due to unfavorable foreign currency mark-to-market adjustments and higher corporate costs. LIQUIDITY AND FINANCIAL CONDITION (dollars in millions) March 31, 2023 December 31, 2022 Cash and cash equivalents $ 1,117 $ 1,189 Total debt 6,762 6,768 Net debt (total debt less cash and cash equivalents) 5,645 5,579 Total equity (4,767) (4,799) Total capitalization (total debt plus total equity) 1,995 1,969
Net capitalization (total debt plus total equity less cash and cash equivalents)
878 780
Total debt to total capitalization 339 % 344 %
Net debt to net capitalization 643 % 715 %
As of March 31, 2023 , we had cash and cash equivalents of approximately
$1.1 billion , of which approximately 97% was held by the Company's foreign
subsidiaries. We manage our worldwide cash requirements by reviewing available
funds among the many subsidiaries through which we conduct our business and the
cost-effectiveness with which those funds can be accessed. On occasion, we are
required to maintain cash deposits with certain banks with respect to
contractual obligations related to acquisitions and divestitures or other legal
obligations. As of March 31, 2023 and December 31, 2022 , the amount of such
restricted cash was approximately $4 million and $6 million , respectively.
From time-to-time we may need to access the capital markets to obtain financing.
We may incur indebtedness or issue equity as needed. Although we believe that
the arrangements in place as of March 31, 2023 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 recent tightening of credit markets.
There can be no assurance that we will continue to have access to the capital
markets on terms acceptable to us.
As of March 31, 2023 , we had a revolving credit agreement with various banks
providing for a $1.5 billion unsecured, unsubordinated 5-year revolving credit
facility. As of March 31, 2023 , there were no borrowings under the revolving
credit agreement. The undrawn portion of the revolving credit agreement serves
as a backstop for the issuance of commercial paper.
There were no long-term debt issuances for the quarter ended March 31, 2023 . The
Company redeemed the $500 million floating notes originally due in 2023 during
the quarter ended March 31, 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.
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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. OnDecember 1, 2022 , our Board of Directors approved a share repurchase program for up to$2.0 billion of Common Stock, of which$175 million had been utilized as ofMarch 31, 2023 . 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.
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