Business Context and Reporting Period
Otis Worldwide Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. Otis operates through New Equipment and Service segments; Service includes maintenance, repair and modernization. The interim financial statements received a limited review by PwC, not an audit.
Financial Performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $3.720B | $3.488B | $7.066B | $6.902B |
| Operating profit | $580M | $487M | $1.093B | $1.013B |
| Operating margin | 15.6% | 14.0% | 15.5% | 14.7% |
| Net income attributable to Otis | $376M | $321M | $707M | $632M |
| Diluted EPS | $0.90 | $0.76 | $1.70 | $1.48 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $724M | $857M |
Q2 sales grew 6.7% year over year, reflecting 9.5% organic volume growth offset by a 2.1% foreign-exchange headwind and a 0.7% net acquisitions/divestitures headwind. Six-month sales increased 2.4%, with 6.6% organic growth partly offset by currency and divestitures. Q2 gross margin rose to 29.1% from 28.2%; six-month gross margin was 29.4% versus 28.8%.
Q2 New Equipment sales rose 4.6% to $1.604B and operating profit increased 17.2% to $116M; margin improved to 7.2% from 6.5%. For the first half, sales declined 1.5% to $2.911B and operating profit fell 4.7% to $183M, with margin down to 6.3%. Q2 Service sales increased 8.3% to $2.116B and operating profit rose 13.1% to $492M; margin improved to 23.3% from 22.3%. First-half Service sales rose 5.3% to $4.155B and operating profit rose 9.8% to $968M.
At June 30, cash and cash equivalents were $1.219B, total debt $6.863B and net debt $5.644B. Total shareholders’ equity was negative $4.852B. Current assets were $6.417B versus current liabilities of $7.158B. A $1.5B five-year revolving credit facility was undrawn and served as a commercial-paper backstop; $156M of commercial paper was outstanding. The company reported total debt to total capitalization of 325% and net debt to net capitalization of 632%, measures affected by its equity deficit.
Material Changes and Cash Allocation
- Operating cash flow fell $133M year over year in the first half, primarily due to working-capital timing, including a larger increase in receivables and a smaller increase in payables; lower tax payments partly offset the decline.
- Investing activities used $91M in the first half, including $62M of capital expenditures and $20M for acquisitions and intangible assets. Financing activities used $585M, including $350M of share repurchases and $261M of common dividends.
- Otis repurchased 4.2M shares for approximately $350M in the first half. Its $2.0B repurchase authorization had approximately $1.7B remaining at June 30.
- Contract liabilities increased to $2.934B from $2.714B at year-end, primarily because billings exceeded revenue earned. Remaining performance obligations were $18.3B; Otis expected approximately 90% to be recognized as sales over the following 24 months.
Outlook, Risks and Unusual Items
The filing provides no specific full-year sales, earnings or cash-flow guidance. Management said it did not currently expect macroeconomic developments to significantly affect capital and financial resources or liquidity, citing cash, credit facilities and capital-market access. It also noted inflation, higher interest rates and tighter credit could affect suppliers, customer demand and liquidity, orders, and cancellations or delays. Management cited wage and Service-material inflation, partly offset by productivity and lower commodity prices.
- Q2 and first-half margin improvement reflected Service growth, pricing, productivity and lower commodity costs, partly offset by inflation. Q2 SG&A rose $40M, including higher employment costs and credit-loss reserves.
- The effective tax rate was 24.9% for Q2 versus 22.8% and 25.7% for the first half versus 25.4%. The increase primarily reflected the absence of tax benefits recorded in Q2 2022; management expects some quarter-to-quarter variability.
- Restructuring costs were $15M for the first half. Expected total costs for identified actions were $98M, with $27M remaining to incur under the note disclosure; MD&A separately reported $63M of expected remaining cash payments, reflecting differing measures.
- Macroeconomic uncertainty, currency, supplier constraints, construction demand and the Russia-Ukraine conflict remain risks. Ukraine represented less than 1% of revenue and operating profit in the first half; Otis sold its Russia business in July 2022.
- In German tax litigation, a local tax court ruled in Otis’s favor on July 21, 2023, after quarter-end; the tax authority could appeal. In Belgian tax litigation, an appellate court ruled against Otis in March 2023; the company was evaluating an appeal. Other disclosed legal matters include asbestos claims and an appealed dismissal of a putative class action. Management generally does not expect these matters to have a material adverse effect.
- Supplier-finance program obligations included in accounts payable were $577M at June 30. The company said supplier participation does not change its payment terms or obligations.
Important Facts for Investors to Verify
- Whether Service growth, pricing and productivity continue to offset inflation, and whether New Equipment’s first-half sales and margin weakness persists.
- Whether operating cash conversion recovers from the first-half working-capital drag, particularly receivables and supplier payments.
- Debt maturities and refinancing: $546M of current long-term debt included euro notes due 2023; verify repayment or refinancing after the reporting date.
- Cash availability and debt capacity, considering that approximately 98% of cash was held by foreign subsidiaries and reported equity was negative.
- Developments in German and Belgian tax disputes, including potential appeals, and the impact of any changes in tax reserves.
- Whether reported restructuring costs, remaining cash payments and expected savings develop as planned; the filing gives different remaining-cost and remaining-cash-payment figures.