Otis Worldwide Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed October 27, 2022. Otis manufactures, installs, maintains, and modernizes elevators and escalators. Its segments are New Equipment and Service. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3.344bn | $3.620bn | $10.246bn | $10.729bn |
| Operating profit | $529m | $542m | $1.542bn | $1.612bn |
| Operating margin | 15.8% | 15.0% | 15.0% | 15.0% |
| Net income attributable to Otis | $324m | $331m | $956m | $965m |
| Diluted EPS | $0.77 | $0.77 | $2.25 | $2.23 |
| Gross margin | 29.0% | 29.3% | 28.9% | 29.4% |
Revenue and segments: Q3 reported sales declined 7.6%; nine-month sales declined 4.5%. Foreign exchange reduced sales by 7.2 percentage points in Q3 and 5.2 points year to date; organic volume increased 0.8% and 1.4%, respectively. Q3 Service organic sales grew 6.2%, while New Equipment organic sales fell 5.4%. For nine months, Service organic sales grew 5.7% and New Equipment fell 3.9%.
Q3 New Equipment sales fell 13.9% to $1.447bn and operating profit fell 23.7% to $100m; margin declined to 6.9% from 7.8%. Service sales declined 2.2% to $1.897bn, but operating profit rose 0.5% to $446m and margin increased to 23.5% from 22.9%. Service growth and improved pricing helped offset currency headwinds and New Equipment weakness.
Cash flow: Nine-month operating cash flow was $1.096bn, down from $1.473bn. Capital expenditures were $81m, implying operating cash flow less capital expenditures of approximately $1.015bn, compared with $1.358bn in 2021. Investing activities provided $62m versus $69m used in 2021. Financing activities used $3.402bn, including $1.802bn to acquire remaining Zardoya Otis shares, $700m in share repurchases, and $345m in common dividends. Cash and cash equivalents ended at $1.034bn.
Debt and liquidity: Total debt was $6.562bn and net debt $5.528bn at September 30. Long-term debt was $6.459bn; short-term borrowings were $103m, including $71m of commercial paper. The company had no borrowings on its $1.5bn revolving facility and reported compliance with debt covenants. Cash was approximately 96% held by foreign subsidiaries. Current assets of $5.829bn compared with current liabilities of $5.992bn. Reported shareholders’ equity was negative $4.913bn, principally reflecting the Zardoya Otis transaction and related accounting reclassification.
Changes and notable items
- Sales were pressured by currency translation and lower New Equipment volume, particularly in China and the Americas. Inflation, including steel, freight, fuel, and wage costs, weighed on gross margin.
- SG&A declined $62m in Q3 and $130m year to date, reflecting cost containment, lower credit-loss reserves, and currency effects, partly offset by wage increases and restructuring.
- Otis completed the acquisition of the remaining Zardoya Otis shares in Q2 for approximately $1.802bn and owned 100% as of June 30. The transaction reduced noncontrolling-interest earnings attributable to others.
- Otis sold its Russia business on July 27, 2022. Russia-related sale and conflict charges were $10m in Q3 and $28m for nine months; the nine-month amount included an $18m impairment. The Russia business represented approximately 2% of 2021 revenue and operating profit.
- Nine-month restructuring costs were $45m. Management expected $65m of annual recurring savings from 2022 actions and $40m from 2021 actions; approximately $43m of combined savings had been realized through September. Further cash payments and charges remained expected.
Outlook, risks, and contingencies
The filing provides no specific full-year sales or earnings guidance. Remaining performance obligations were $16.6bn, of which the company expected 90% to be recognized as sales over the following 24 months. Management expected to fund operating, investing, and financing needs primarily through operating cash flow, cash on hand, credit facilities, and capital-market access, while noting future financing access is not assured.
Management cited inflation and commodity costs, foreign-exchange movements, weaker construction demand, China and New Equipment trends, COVID-19 effects, supply-chain constraints, and the Russia-Ukraine conflict as risks. It said the conflict could intensify macroeconomic, operating, cyber, sanctions, and currency risks. COVID-19 and Russia-Ukraine assessments had not produced material financial-statement impacts through the reporting date, but future effects could be material. Management also anticipated quarter-to-quarter tax-rate variability.
Contingencies include German tax litigation concerning approximately €215m ($208m) of claimed tax benefits, plus estimated interest of approximately €118m ($114m). The company had accrued €45m (about $43m) of interest; the litigation remained unresolved. Estimated asbestos liabilities were $22m–$45m, with $22m accrued and a roughly $5m insurance-recovery receivable. The company said it did not expect the other disclosed matters, including environmental and legal claims, to have a material adverse effect. A putative class action was dismissed with prejudice on September 30; plaintiffs appealed on October 26, 2022.
Most important facts for investors to verify
- Whether Service growth and pricing can continue to offset New Equipment weakness, inflation, and foreign-exchange pressure.
- Whether operating cash flow recovers from the year-over-year decline and supports dividends, repurchases, and debt obligations.
- The effects of the Zardoya Otis acquisition on cash, leverage, equity, and future earnings, and the implications of the large reported equity deficit.
- Progress on restructuring savings and remaining cash costs, and any further Russia-related or geopolitical impacts.
- Developments in the German tax litigation, the class-action appeal, and other disclosed contingencies.