Otis Worldwide Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023, compared with the same 2022 periods. Otis provides elevator and escalator equipment, installation, maintenance, repair and modernization services through New Equipment and Service segments. Interim financial statements are unaudited and were subject to a limited review, not an audit.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.523B | $3.344B | $10.589B | $10.246B |
| Operating profit | $571M | $529M | $1.664B | $1.542B |
| Operating margin | 16.2% | 15.8% | 15.7% | 15.0% |
| Net income attributable to Otis | $376M | $324M | $1.083B | $956M |
| Diluted EPS | $0.91 | $0.77 | $2.60 | $2.25 |
| Operating cash flow | Not separately provided | Not separately provided | $1.030B | $1.096B |
Q3 sales rose 5.4%; organic volume increased 5.2%. For the nine months, sales grew 3.3%, with 6.1% organic volume growth. Gross margin improved to 29.7% from 29.0% in Q3 and to 29.5% from 28.9% year to date. Management attributed the improvement to Service growth, pricing, productivity and lower commodity prices, partly offset by inflation.
Service was the main growth and profit driver. Q3 Service sales grew 10.1% to $2.088B and operating profit rose 13.7% to $507M; margin expanded to 24.3% from 23.5%. New Equipment Q3 sales declined 0.8% to $1.435B and operating profit fell 6.0% to $94M; margin narrowed to 6.6% from 6.9%. Nine-month Service sales grew 6.8%, while New Equipment sales fell 1.3%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $1.636B at September 30, 2023, up from $1.189B at year-end 2022; approximately 64% was held by foreign subsidiaries.
- Total debt was $7.407B and net debt was $5.771B, compared with $6.768B and $5.579B, respectively, at December 31, 2022. Total equity remained in deficit at $4.733B. The reported total-debt-to-capitalization and net-debt-to-net-capitalization ratios were 277% and 556%; the equity deficit makes these ratios unusually high.
- Current assets and current liabilities were both $6.749B. The balance sheet therefore reports a 1.0 current ratio.
- Nine-month operating cash flow declined to $1.030B from $1.096B, primarily due to working-capital timing, including accounts payable and contract balances. Investing used $132M, versus $62M provided in 2022. Financing used $418M, compared with $3.402B used in 2022, which included the $1.802B Zardoya Otis share acquisition.
- Otis issued $750M of 5.25% notes due 2028 in August. It had no commercial paper outstanding and no borrowings under its $1.5B revolving facility at quarter-end. Proceeds are intended in part to repay €500M of 0.000% notes due November 2023. The company reported compliance with debt covenants.
- Supplier-finance obligations included in accounts payable were $537M at quarter-end. Remaining share-repurchase authorization was approximately $1.4B; Q3 repurchases totaled $225M.
Outlook, commentary and notable items
- UpLift: The operating-model transformation is expected to generate approximately $150M in annual savings by mid-2025, with restructuring and other nonrecurring costs of approximately the same amount over that period. On October 5, after quarter-end, Otis approved approximately $55M of additional UpLift restructuring actions, expected to be incurred from Q4 2023 through 2024. No full-year revenue or earnings guidance is provided in the filing.
- Demand and operating risks: Management cited inflation, higher interest rates and tighter credit conditions as potential pressures on suppliers, customer demand and liquidity, orders, and delivery costs. It said it did not currently expect a significant impact on capital resources or liquidity, while noting these trends could affect performance.
- Geopolitical exposure: Otis said Ukraine represented less than 1% of revenue and operating profit; its Russia business was sold in July 2022. It reported no Israel or Gaza operations and did not then expect a material business impact from the conflict, while warning that broader developments could increase risks.
- Tax and legal contingencies: German tax litigation concerning approximately €215M of claimed tax benefits plus estimated interest of approximately €118M remained contested after German tax authorities appealed a favorable July 2023 ruling; a decision was expected in 2024. A separate Belgian tax case ended after an adverse ruling, with the related tax and interest fully reserved. The filing states that other disclosed matters are not expected to have a material adverse effect, based on information available.
- Other unusual comparisons: 2022 results included Russia-sale losses and charges of $6M for Q3 and $24M for the nine months; these were absent in 2023. Q3 and nine-month 2023 results included $4M of UpLift transformation costs. Effective tax rates fell to 25.8% for Q3 and 25.7% year to date, with management citing tax-related discrete items and lower forecast repatriation costs.
Most important facts for investors to verify
- Whether Service growth, pricing and margin gains continue to offset softer New Equipment performance, particularly in Asia.
- Progress, realized savings, total costs and timing of the UpLift plan, including the additional $55M approved after quarter-end.
- Cash conversion and working-capital trends, including receivables, contract balances and the $537M supplier-finance balance.
- Debt refinancing and interest-cost implications of the 5.25% 2028 notes and the November 2023 euro-note maturity.
- Developments in German tax litigation and other tax exposures, and any changes in reserves or potential cash payments.