Otis Worldwide Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; PwC performed a review, not an audit. Otis operates through New Equipment and Service segments.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $3.346 billion | $3.414 billion | Down 2.0% |
| Gross margin | $996 million; 29.8% | $1.006 billion; 29.5% | Margin up 30 bps |
| Operating profit | $513 million | $526 million | Down 2.5% |
| Net income attributable to Otis | $331 million | $311 million | Up 6.4% |
| Diluted EPS | $0.79 | $0.73 | Up 8.2% |
| Operating cash flow | $278 million | $504 million | Down $226 million |
Service sales grew 2.4% to $2.039 billion and operating profit rose 6.5% to $476 million; its margin improved to 23.3% from 22.4%. New Equipment sales fell 8.1% to $1.307 billion and operating profit declined 28.0% to $67 million; its margin contracted to 5.1% from 6.5%. Consolidated operating margin was 15.3%, versus 15.4%.
Cash and cash equivalents were $1.117 billion at quarter-end, compared with $1.189 billion at year-end 2022. Total debt was $6.762 billion and net debt was $5.645 billion. Shareholders’ equity remained in deficit at $4.857 billion. The company reported $6.823 billion of current liabilities and $6.153 billion of current assets. It had a new $1.5 billion five-year revolving credit facility, undrawn at quarter-end, and reported compliance with debt covenants. About 97% of cash was held by foreign subsidiaries.
Cash used in financing was $341 million, including $175 million of share repurchases and $120 million of common dividends. The quarterly dividend declared was $0.29 per share. Free cash flow is not stated as a defined measure in the filing.
Material changes versus the prior period
- Organic sales volume increased 3.6%, but foreign-currency translation reduced sales 4.4% and acquisitions/divestitures, net, reduced them 1.2%. Service organic sales grew 6.3%; New Equipment organic sales declined 0.1%.
- New Equipment weakness reflected regional and product mix, with China among the areas of decline; sale of the Russia business also reduced reported sales. Service benefited from maintenance and repair growth, pricing, and productivity.
- Net income attributable to Otis increased despite lower operating profit, primarily because of lower noncontrolling-interest earnings following increased ownership of Otis Mobility and a lower effective tax rate.
- Operating cash flow decreased primarily due to working-capital timing, including a larger reduction in accounts payable. Contract liabilities rose to $3.032 billion from $2.714 billion, mainly because billings exceeded revenue earned.
Outlook, risks and unusual items
- No specific full-year financial guidance is provided in the supplied filing text. Management expects no significant near-term impact to capital and financial resources from current macroeconomic developments, citing cash, credit facilities, and capital-market access; it cautions that inflation, higher rates, tighter credit, supplier constraints, customer liquidity, order delays, and cancellations may affect results.
- Remaining performance obligations were $17.9 billion; Otis expects 90% to be recognized as sales over the following 24 months.
- Management cited inflation and higher service-material and labor costs, partly offset by pricing and productivity. The Russia-Ukraine conflict, foreign-exchange movements, geopolitical uncertainty, and potential supply-chain and cyber disruptions remain risks.
- German tax litigation relates to approximately €215 million ($232 million) of disputed tax benefits, plus estimated interest of approximately €118 million ($127 million). A hearing was scheduled for June 12, 2023; the company has recorded a €45 million ($48 million) interest accrual. In Belgium, an appellate ruling against Otis was issued in March 2023; associated tax and interest are fully reserved.
- Asbestos liabilities are estimated at $21 million to $43 million through 2059; $21 million is accrued, with a separate approximately $5 million insurance-recovery receivable. Standby letters of credit had maximum potential payments of $151 million, with no probable costs accrued. Management does not expect the disclosed matters to have a material adverse effect, while noting outcomes are uncertain.
- Restructuring costs were $5 million versus $14 million a year earlier. Expected remaining costs for actions initiated were $10 million; the MD&A separately reports $46 million of expected cash payments remaining to complete announced actions. Supplier-finance obligations included in accounts payable were $404 million, down from $564 million at year-end.
- The filing describes a prior-period classification correction for certain Zardoya Otis shares: $409 million was reclassified from redeemable noncontrolling interest to a separate current-liability line in the 2022 presentation. It did not affect 2022 operations, comprehensive income, or cash flows.
Important facts for investors to verify
- Whether Service growth and margins can continue to offset weaker New Equipment performance, especially given regional and China demand trends.
- Whether operating cash flow rebounds as supplier payments and other working-capital timing normalize.
- Debt maturities, refinancing needs, and access to liquidity; €500 million of notes were due in 2023, with $539 million shown as current long-term debt at quarter-end.
- Progress and potential exposure in German and Belgian tax matters, and any material changes to reserves or appeals.
- Execution of restructuring savings and the distinction between remaining restructuring costs and expected cash payments.