Otis Worldwide Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited; the interim review by PwC was not an audit. Otis operates through New Equipment and Service segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $3.488bn | $3.701bn | $6.902bn | $7.109bn |
| Operating profit | $487m | $561m | $1.013bn | $1.070bn |
| Operating margin | 14.0% | 15.2% | 14.7% | 15.1% |
| Net income attributable to Otis | $321m | $326m | $632m | $634m |
| Diluted EPS | $0.76 | $0.76 | $1.48 | $1.47 |
Q2 gross margin was 28.2%, down from 29.0%; six-month gross margin was 28.8%, versus 29.5%. For the six months, operating cash flow was $857m, down from $1.118bn; investing cash flow used $10m, and financing activities used $2.937bn, including $1.802bn for the Zardoya Otis share purchase.
At June 30, cash and cash equivalents were $1.218bn, total debt was $6.683bn ($6.602bn long-term and $81m short-term), and net debt was $5.465bn. Current assets of $6.150bn were below current liabilities of $6.338bn. About 97% of cash was held by foreign subsidiaries. The $1.5bn revolving credit facility was undrawn, and the company reported compliance with debt covenants.
Changes versus comparable periods
- Q2 sales fell 5.8%; six-month sales fell 2.9%. Organic volume rose 0.4% in Q2 and 1.6% year to date, but foreign exchange reduced reported sales by 5.3% and 4.1%, respectively. Russia contributed a further reported decline of 1.0% and 0.5%.
- New Equipment was the main operating weakness: Q2 sales fell 11.2% and operating profit fell 32.7% to $99m; six-month sales declined 7.2% and profit declined 23.5% to $192m. Q2 margin fell to 6.5% from 8.5%.
- Service organic sales grew 5.2% in Q2 and 5.5% in the first half, led by maintenance, repair, and modernization. Reported sales were down 1.0% in Q2 but up 0.6% year to date; six-month operating profit rose 1.3% to $882m.
- Management cited commodity, freight, fuel, and wage inflation. Higher commodity costs, primarily steel, were $35m for Q2 and $71m for the first half. Productivity, service pricing, and lower SG&A partly offset these pressures.
- Net income attributable to Otis was broadly flat despite lower operating profit. Lower noncontrolling-interest earnings after Otis increased its ownership of Zardoya Otis, along with a lower effective tax rate, affected the comparison.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management expects to fund operations and planned requirements mainly through operating cash flow, cash on hand, credit lines, and capital-market access. The company reported $17.7bn of remaining performance obligations, with 90% expected to be recognized as sales over the following 24 months; the total included approximately $200m related to Russia.
- Otis completed the sale of its Russian business on July 27, 2022. It recorded an $18m impairment in Q2, and Russia-related geopolitical uncertainty, sanctions, foreign exchange, supply-chain, commodity, cyber, and operating-cost risks remain relevant. The conflict could affect demand and results more broadly.
- The Zardoya Otis tender offer and subsequent purchases brought Otis’s ownership to 100% in Q2. Cash consideration included approximately $1.802bn for the tendered shares and about €150m for the remaining shares. The transaction reduced cash and affected reported equity and leverage ratios.
- Q2 restructuring costs were $25m; first-half costs were $39m. Management said most remaining actions were targeted for completion in 2022 and cited expected annual recurring savings of $57m for 2022 actions and $39m for 2021 actions. Further restructuring may be considered as conditions evolve.
- Tax-rate variability is expected. Q2’s effective tax rate declined to 22.8% from 28.8%, primarily due to the elimination of U.S. BEAT and release of a European transfer-pricing tax reserve. German tax litigation concerns approximately €215m of claimed tax benefits plus estimated interest; the case was remanded for reconsideration, and the outcome remains uncertain.
- The filing disclosed a correction to the prior-quarter classification of Zardoya Otis interests: $409m was reclassified to a forward purchase agreement liability. The correction had no impact on the March-quarter statement of operations, comprehensive income, or cash flows. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether New Equipment demand, especially in China and the Americas, stabilizes and whether inflation and currency headwinds continue to pressure margins.
- Whether Service organic growth, pricing, and productivity can sustain performance and offset cost increases.
- The realized cash-flow, debt, and leverage effects of the Zardoya Otis transaction; leverage ratios were sharply affected by the tender-related equity reclassification.
- Post-sale financial effects of the Russia divestiture, including any remaining obligations, and broader exposure to geopolitical and supply-chain disruption.
- Progress against restructuring savings and the outcome and potential financial exposure of German tax litigation and other contingencies.