Otis Worldwide Corporation — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter ended March 31, 2022, with comparisons to Q1 2021. Otis operates in New Equipment and Service; Service includes maintenance, repair and modernization. The interim financial statements received a review, not an audit.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net sales | $3.414 billion | $3.408 billion | +0.2%; organic volume +3.1%, offset mainly by 3.0% unfavorable currency translation |
| Operating profit | $526 million | $509 million | +3.3%; operating margin 15.4% versus 14.9% |
| Net income attributable to Otis | $311 million | $308 million | +1.0% |
| Diluted EPS | $0.73 | $0.71 | +2.8% |
| Operating cash flow | $504 million | $585 million | Down $81 million |
| Cash and cash equivalents | $1.235 billion | $1.565 billion at year-end | About 98% held by foreign subsidiaries |
| Total debt | $6.745 billion | $7.273 billion at year-end | Includes $6.694 billion long-term debt and $51 million short-term borrowings |
| Net debt | $5.510 billion | $5.708 billion at year-end | As reported by the company |
Gross margin was 29.5%, down 0.4 percentage points. Income tax expense was $136 million and the effective tax rate was 27.8%, compared with 25.9% a year earlier. Capital expenditures were $30 million. Cash, cash equivalents and restricted cash totaled $3.078 billion; restricted cash was $1.843 billion and was not equivalent to freely available cash.
Material changes and operating drivers
- Service: Sales rose 2.2% to $1.992 billion, with organic growth of 5.8%; operating profit increased 4.0% to $447 million and margin improved to 22.4% from 22.1%. Organic maintenance and repair sales grew 5.6%, and modernization grew 6.9%.
- New Equipment: Sales declined 2.5% to $1.422 billion; organic sales decreased 0.5%. Operating profit fell 10.6% to $93 million and margin declined to 6.5% from 7.1%. Management cited $38 million of commodity headwinds, partly offset by lower bad-debt expense and improved installation productivity.
- Organic cost of products and services rose amid labor inflation and commodity costs, partly offset by productivity gains. SG&A declined $23 million, reflecting cost containment, currency effects and lower credit-loss reserves, partly offset by labor inflation.
- Operating cash flow declined mainly because of less favorable working-capital movements. Contract assets and liabilities generated a $278 million cash inflow, while accrued liabilities used $178 million and accounts receivable used $51 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management expects to fund operations and other requirements primarily through operating cash flow, available cash, bank credit lines and capital-market access. It notes financing access is not assured on acceptable terms.
- Remaining performance obligations were $17.5 billion at March 31; Otis expects 90% to be recognized as sales over the following 24 months. This is a contracted-obligation measure, not a guarantee of future results.
- On April 7, the company reported acceptance of tenders for 45.49% of Zardoya Otis shares not previously owned. Settlement on April 12 used approximately €1.5 billion of restricted escrow cash and raised Otis’s ownership to 95.51%. The purchase of the remaining shares for approximately €150 million and delisting were expected in Q2 2022.
- Approval of the Zardoya Otis tender offer led to reclassification of noncontrolling interest as redeemable noncontrolling interest. This contributed to a $1.5 billion reduction in reported equity and a resulting equity deficit of $4.922 billion; the company cautioned that this accounting change drove sharply higher debt-to-capitalization ratios. It was not itself a cash outflow in Q1.
- Otis repaid $500 million of floating-rate debt in January and resumed share repurchases. It repurchased 2.6 million shares for approximately $200 million in Q1; a new authorization permits up to $1 billion of repurchases.
- Russia represented about 2% of 2021 revenue and profit. Otis said it was not taking new elevator or escalator orders or making new investments there, while continuing existing agreements and essential services where possible and in compliance with sanctions and export controls. The company reported no material Q1 financial impact from the Ukraine crisis, but continues to assess developments.
- Management identified COVID-19-related risks including demand changes, order delays or cancellations, customer liquidity and credit risk, and supply and raw-material constraints. Labor inflation, commodities, foreign exchange and supply disruption also remain relevant risks.
- Material contingencies include German tax litigation concerning approximately €215 million of claimed tax benefits and estimated interest of approximately €118 million; the Federal Tax Court remanded the case for reconsideration, with no assurance of a favorable outcome. The company had recorded €45 million of related interest accrual. Asbestos liabilities were estimated at $22–$45 million, with $22 million accrued. Otis said it could not estimate any possible loss in a putative class action involving employee compensation adjustments.
- Q1 restructuring charges were $14 million. Management expected $71 million of cash payments to complete announced actions, including $36 million of additional expenses to be recognized, and cited expected annual recurring savings of $30 million for 2022 actions and $38 million for 2021 actions.
Most important facts for investors to verify
- Whether Service growth and margin improvement can offset weakness and commodity pressure in New Equipment.
- Cash conversion and working-capital trends, particularly contract billings, receivables and accrued liabilities; distinguish restricted escrow cash from available liquidity.
- Completion and funding of the Zardoya Otis transaction, including the remaining expected purchase and subsequent effects on debt, cash and noncontrolling interests.
- Progress on the German tax litigation, related accruals and other contingent liabilities.
- Whether cost inflation, currency movements, COVID-19 and Russia/Ukraine developments materially affect demand, margins or supply chains.
- Actual restructuring cash costs and savings, and the pace and funding of share repurchases.