Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.33M
2: EX-15 Letter re: Unaudited Interim Financial Info HTML 24K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 28K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 28K
5: EX-31.3 Certification -- §302 - SOA'02 HTML 29K
6: EX-32 Certification -- §906 - SOA'02 HTML 27K
12: R1 Cover Page HTML 86K
13: R2 Condensed Consolidated Statements of Operations HTML 115K
14: R3 Condensed Consolidated Statements of Comprehensive HTML 62K
Income
15: R4 Condensed Consolidated Balance Sheets HTML 156K
16: R5 Condensed Consolidated Balance Sheets HTML 29K
(Parenthetical)
17: R6 Condensed Consolidated Statements of Changes in HTML 100K
Equity
18: R7 Condensed Consolidated Statements of Changes in HTML 26K
Equity (Parenthetical)
19: R8 Condensed Consolidated Statements of Cash Flows HTML 129K
20: R9 General HTML 37K
21: R10 Earnings per Share HTML 54K
22: R11 Revenue Recognition HTML 42K
23: R12 Accounts Receivable, Net HTML 45K
24: R13 Inventories HTML 32K
25: R14 Business Acquisitions, Dispositions, Goodwill and HTML 43K
Intangible Assets
26: R15 Borrowings and Lines of Credit HTML 85K
27: R16 Employee Benefit Plans HTML 75K
28: R17 Stock HTML 33K
29: R18 Accumulated Other Comprehensive Income (Loss) HTML 89K
30: R19 Income Taxes HTML 31K
31: R20 Restructuring Costs HTML 72K
32: R21 Financial Instruments HTML 75K
33: R22 Fair Value Measurements HTML 92K
34: R23 Guarantees HTML 35K
35: R24 Contingent Liabilities HTML 39K
36: R25 Segment Financial Data HTML 110K
37: R26 Accounting Pronouncements HTML 40K
38: R27 General (Policies) HTML 28K
39: R28 Earnings per Share (Tables) HTML 53K
40: R29 Revenue Recognition (Tables) HTML 36K
41: R30 Accounts Receivable, Net (Tables) HTML 47K
42: R31 Inventories (Tables) HTML 32K
43: R32 Business Acquisitions, Dispositions, Goodwill and HTML 43K
Intangible Assets (Tables)
44: R33 Borrowings and Lines of Credit (Tables) HTML 84K
45: R34 Employee Benefit Plans (Tables) HTML 73K
46: R35 Accumulated Other Comprehensive Income (Loss) HTML 87K
(Tables)
47: R36 Restructuring Costs (Tables) HTML 70K
48: R37 Financial Instruments (Tables) HTML 71K
49: R38 Fair Value Measurements (Tables) HTML 91K
50: R39 Guarantees (Tables) HTML 34K
51: R40 Segment Financial Data (Tables) HTML 108K
52: R41 General (Details) HTML 64K
53: R42 Earnings per Share (Details) HTML 70K
54: R43 Revenue Recognition - Contract With Customer, HTML 38K
Assets and Liabilities (Details)
55: R44 Revenue Recognition - Narrative (Details) HTML 41K
56: R45 Accounts Receivable, Net - Schedule of Accounts HTML 39K
Receivable (Details)
57: R46 Accounts Receivable, Net - Schedule of Allowance HTML 33K
for Credit Losses (Details)
58: R47 Inventories (Details) HTML 37K
59: R48 Business Acquisitions, Dispositions, Goodwill and HTML 58K
Intangible Assets - Narrative (Details)
60: R49 Business Acquisitions, Dispositions, Goodwill and HTML 41K
Intangible Assets - Schedule of Goodwill (Details)
61: R50 Borrowings and Lines of Credit - Short-Term HTML 31K
Borrowings (Details)
62: R51 Borrowings and Lines of Credit - Narrative HTML 56K
(Details)
63: R52 Borrowings and Lines of Credit - Long-Term Debt HTML 90K
(Details)
64: R53 Borrowings and Lines of Credit - Schedule of Debt HTML 30K
Issuance Expenses (Details)
65: R54 Borrowings and Lines of Credit - Schedule of HTML 33K
Average Interest Rates on Borrowings (Details)
66: R55 Employee Benefit Plans - Schedule of Defined HTML 57K
Benefit Plan Disclosures (Details)
67: R56 Employee Benefit Plans - Schedule of Share-based HTML 36K
Compensation and Related Income Tax Benefits
(Details)
68: R57 Employee Benefit Plans - Narrative (Details) HTML 31K
69: R58 Stock (Details) HTML 54K
70: R59 Accumulated Other Comprehensive Income (Loss) HTML 64K
(Details)
71: R60 Income Taxes (Details) HTML 31K
72: R61 Restructuring Costs - Pre-Tax Restructuring Costs HTML 44K
(Details)
73: R62 Restructuring Costs - Schedule of Pretax HTML 32K
Restructuring Costs (Details)
74: R63 Restructuring Costs - Schedule of Restructuring HTML 37K
Costs Expected, Incurred, and Remaining (Details)
75: R64 Restructuring Costs - Restructuring Roll forward HTML 44K
(Details)
76: R65 Financial Instruments - Narrative (Details) HTML 48K
77: R66 Financial Instruments - Schedule of Fair Value of HTML 54K
Derivative Instruments (Details)
78: R67 Financial Instruments - Schedule of Gain (Loss) on HTML 26K
Derivative Instruments Reclassified From OCI
(Details)
79: R68 Financial Instruments - Schedule of Gain (Loss) on HTML 28K
Derivative Instruments in Other Income (Details)
80: R69 Fair Value Measurements (Details) HTML 67K
81: R70 Guarantees - Guarantees and Product Warranties HTML 33K
Rollforward (Details)
82: R71 Guarantees - Narrative (Details) HTML 27K
83: R72 Contingent Liabilities (Details) HTML 59K
84: R73 Segment Financial Data (Details) HTML 65K
87: XML IDEA XML File -- Filing Summary XML 159K
85: XML XBRL Instance -- otis-20220930_htm XML 2.68M
86: EXCEL IDEA Workbook of Financial Reports XLSX 145K
8: EX-101.CAL XBRL Calculations -- otis-20220930_cal XML 195K
9: EX-101.DEF XBRL Definitions -- otis-20220930_def XML 581K
10: EX-101.LAB XBRL Labels -- otis-20220930_lab XML 1.60M
11: EX-101.PRE XBRL Presentations -- otis-20220930_pre XML 913K
7: EX-101.SCH XBRL Schema -- otis-20220930 XSD 167K
88: JSON XBRL Instance as JSON Data -- MetaLinks 452± 651K
89: ZIP XBRL Zipped Folder -- 0001781335-22-000045-xbrl Zip 441K
(Address of principal executive offices, including zip code)
(i860) i674-3000
(Registrant's
telephone number, including area code)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock ($0.01 par value)
iOTIS
iNew York Stock Exchange
i0.000%
Notes due 2023
iOTIS/23
iNew York Stock Exchange
i0.318%
Notes due 2026
iOTIS/26
iNew York Stock Exchange
i0.934%
Notes due 2031
iOTIS/31
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý. No ¨.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesý. No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
ý
Accelerated Filer
¨
Non-accelerated Filer
¨
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐. No ý.
At October 14, 2022 there were i416,586,077shares of Common Stock outstanding.
Otis Worldwide Corporation's and its subsidiaries' names, abbreviations thereof, logos, and product
and service designators are all either the registered or unregistered trademarks or tradenames of Otis Worldwide Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms "we", "us", "our", "the Company" or "Otis", unless the context otherwise requires, mean Otis Worldwide Corporation and its subsidiaries. References to Internet websites in this Form 10-Q are provided
for convenience only. Information available through these websites is not incorporated by reference into this Form 10-Q.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: iGeneral
The
Condensed Consolidated Financial Statements as of September 30, 2022 and for the quarters and nine months ended September 30, 2022 and 2021 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States ("U.S."). The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information
included herein should be read in conjunction with the Company's annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for fiscal year 2021 ("2021 Form 10-K" or "Form 10-K").
Unless the context otherwise requires, references to "Otis", "we", "us", "our" and "the Company" refer to Otis Worldwide Corporation and its subsidiaries.
There
have been no changes to the Company's significant accounting policies described in the Company's Form 10-K that have a material impact on the Company's Condensed Consolidated Financial Statements and the related notes.
Revisions
As previously disclosed, in 2021 the Company identified a misclassification between noncontrolling interest and redeemable noncontrolling interest. Accordingly, the
Company adjusted the noncontrolling interest and redeemable noncontrolling interest in the Condensed Consolidated Statements of Changes in Equity as of September 30, 2021, resulting in an increase to Redeemable noncontrolling interest of $i102 million, a decrease to Noncontrolling interest of $i73
million and a decrease to Accumulated deficit of $i29 million. Refer to Note 2 of the Company’s audited consolidated financial statements and notes thereto included in our 2021 Form 10-K.
Zardoya Otis Tender
Offer
The Company previously announced its Tender Offer to acquire all of the issued and outstanding shares of Zardoya Otis not owned by the Company in cash, and its intention to delist the shares of Zardoya Otis from the Spanish stock exchanges subsequent to the Tender Offer. The price per share of the Tender Offer was €i7.07 in cash as of March
31, 2022, after adjustments for dividends paid. The Tender Offer was approved by the Spanish regulator on February 28, 2022. As a result of the Tender Offer approval, the issued and outstanding shares of Zardoya Otis owned by Euro Syns, S.A. were reclassified to current liabilities as Forward purchase agreement, and the remaining shares not owned by the Company were deemed redeemable at the option of the other shareholders and were reclassified from Noncontrolling interest to Redeemable noncontrolling interest on our Condensed Consolidated Balance Sheets. The difference between the historical noncontrolling interest carrying value in the balance sheet and the fair value of the Tender Offer was recorded to Accumulated deficit.
The results of the
Tender Offer were announced on April 7, 2022, with tenders, including of the Euro Syns, S.A.' shares, of i45.49% of the shares outstanding accepted, resulting in the Company owning i95.51%
of Zardoya Otis. The shares tendered to the Company were settled in cash on April 12, 2022 for approximately €i1.5 billion from the Company's restricted cash held in escrow. The acquisition and settlement of the remaining issued and outstanding shares of Zardoya Otis not owned by the Company
for approximately €i150 million occurred in the second quarter, with the automatic delisting of Zardoya Otis shares on May 9, 2022.
The Company owned a controlling interest and had operational control of Zardoya Otis as of and for the periods ended September 30, 2022 and 2021,
and all other periods during 2022 and 2021, and therefore its financial results are included in our Condensed Consolidated Financial Statements. The Company owned i50.02% of Zardoya Otis as of March 31, 2022, and ii100/%
as of June 30 and September 30, 2022.
On April 3, 2020, the Company became an independent publicly-traded company (the "Separation") through a pro-rata distribution of i0.5
shares of Common Stock for every share of United Technologies Corporation, subsequently renamed to Raytheon Technologies Corporation ("UTC" or "RTX", as applicable), common stock held at the close of business on the record date of March 19, 2020. Otis began to trade as a separate public company (New York Stock Exchange: OTIS) on April 3, 2020.
iUse of Estimates. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates.
We assessed certain accounting matters that generally require consideration of forecasted financial information in the context of the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2022 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of our goodwill and other long-lived assets, financial assets and revenue recognition. While there was not a material impact to our Condensed Consolidated Financial Statements as of September 30, 2022 and
for the quarters and nine months ended September 30, 2022 and 2021, respectively, resulting from our assessments of these matters, future assessment of our current expectations at that time of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our Condensed Consolidated Financial Statements in future reporting periods.
We also assessed certain accounting matters as they relate to the ongoing conflict between Russia and Ukraine, including, but not limited to our allowance for credit losses, the carrying value of long-lived assets, revenue recognition and the classification of assets. There was not a material impact to our Condensed Consolidated Financial Statements as of September 30, 2022
and for the quarter and nine months ended September 30, 2022 resulting from our assessment of these matters. We continue to assess the impact on our results of operations, financial position and overall performance as the situation develops and any broader implications it may have on the global economy. Additionally, the Company sold its business in Russia during the third quarter of 2022. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" for additional information regarding the sale of our Russia business.
Note 2: iEarnings
per Share
i
Quarter
Ended September 30,
Nine Months Ended September 30,
(amounts in millions, except per share amounts)
2022
2021
2022
2021
Net
income attributable to Otis Worldwide Corporation
$
i324
$
i331
$
i956
$
i965
Impact
of redeemable noncontrolling interest
i—
i—
i—
i—
Net
income attributable to common shareholders
$
i324
$
i331
$
i956
$
i965
Basic
weighted average number of shares outstanding
i418.5
i425.8
ii421.3/
ii428.5/
Stock
awards and equity units (share equivalent)
i2.7
i4.8
ii3.0/
i3.5
Diluted
weighted average number of shares outstanding
i421.2
i430.6
i424.3
i432.0
Earnings
Per Share of Common Stock:
Basic
$
i0.77
$
i0.78
$
i2.27
$
i2.25
Diluted
$
i0.77
$
i0.77
$
i2.25
$
i2.23
/
The
computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the Common Stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted earnings per share excludes the effect of the potential exercise of stock awards when the awards' assumed proceeds exceed the average market price of the common shares during the period. There were ii2.4/
million of anti-dilutive stock awards excluded from the computation for the quarter and nine months ended September 30, 2022, and ii0.1/
million for the quarter and nine months ended September 30, 2021.
We account for revenue in accordance with Accounting Standards Codification ("ASC") Topic 606: Revenue from Contracts with Customers.
Contract Assets and Liabilities. Contract assets reflect revenue recognized in advance of customer billing. Contract liabilities are recognized when a customer pays consideration, or we have a right to receive an amount of unconditional consideration, in advance
of the satisfaction of performance obligations under the contract. We typically receive progress payments from our customers as we perform our work over time.
Contract
assets increased by $i91 million during the nine months ended September 30, 2022 as a result of the progression of current contracts and timing of billing on customer contracts, partially offset by the impact of foreign exchange rates. Contract
liabilities increased by $i28 million during the nine months ended September 30, 2022 primarily due to contract billings in excess of revenue earned, partially offset by the impact of foreign exchange rates and a decrease of $i102
million of contract liabilities due to the sale of our Russia business during the third quarter of 2022. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" for additional information regarding the sale of our Russia business.
Remaining Performance Obligations ("RPO"). RPO represents the aggregate amount of total contract
transaction price that is unsatisfied or partially unsatisfied. As of September 30, 2022, our total RPO was $i16.6 billion.
Of the total RPO as of September 30, 2022, we expect i90%
will be recognized as sales over the following i24 months.
The changes in allowance for expected credit losses related to Accounts receivable, net for the nine months ended September 30, 2022 and 2021, respectively, are as follows:
Nine
Months Ended September 30,
(dollars in millions)
2022
2021
Balance as of January 1
$
i175
$
i161
Provision
for expected credit losses
i4
i27
Write-offs
charged against the allowance for expected credit losses
Raw
materials, work-in-process and finished goods are net of valuation reserves of $i93 million and $i99 million as of September 30, 2022 and
December 31, 2021, respectively.
Inventories decreased during the nine months ended September 30, 2022, including decreases of $i16 million of raw materials and work-in-process and $i36
million of finished goods due to the sale of our Russia business during the third quarter of 2022. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" for additional information regarding the sale of our Russia business. These decreases were partially offset by increases to inventory in order to support backlog conversion.
Note 6: iBusiness
Acquisitions, Dispositions, Goodwill and Intangible Assets
Business Acquisitions. Our acquisitions of businesses and intangibles assets, net of cash, totaled $i38 million and $i59
million in the nine months ended September 30, 2022 and 2021, respectively. The acquisitions consisted of a number of acquisitions primarily in our Service segment. Transaction costs incurred were not considered significant.
Goodwill. iChanges in our Goodwill balances during the nine months ended September 30, 2022 were as follows:
1 The
sale of our Russia business included $i29 million of goodwill. For additional information, refer to the subheading "Disposals and Held For Sale Assets and Liabilities" below.
Intangible Assets. Intangible assets cost and accumulated amortization were $i1,892
million and $i1,546 million, respectively, as of September 30, 2022, and $i2,117
million and $i1,698 million, respectively, as of December 31, 2021.
Amortization of intangible assets for the quarter and nine months ended September 30, 2022 was $i18
million and $i55 million, respectively, compared to $i22 million and $i67
million for the same periods in 2021. Excluding the impact of currency translation adjustments, there were no other significant changes in our Intangible Assets during the quarters and nine months ended September 30, 2022 and 2021.
Disposals and Held For Sale Assets and Liabilities. As of September 30, 2022, assets held for sale were $i9
million, and are included in Other current assets in the Condensed Consolidated Balance Sheets. There were iino/
balances as of December 31, 2021.
In June 2022, we entered into an agreement to sell our business in Russia to a third party, which was then sold on July 27, 2022. As of June 30, 2022, our operations in Russia, primarily in the New Equipment segment, were classified as assets and liabilities held for sale of $i157
million and $i136 million, respectively. The Company recorded the loss on sale and related charges of $i6
million and $i24 million in Other expense (income), net in the Condensed Consolidated Statements of Operations for the quarter and nine months ended September 30, 2022, respectively, including an impairment loss of $i18
million related to the net assets held for sale during the quarter ended June 30, 2022.
Commercial
Paper. As of September 30, 2022, there were $i71 million in borrowings outstanding under the Company's $i1.5
billion commercial paper programs. We use our commercial paper borrowings for general corporate purposes including to finance acquisitions, pay dividends, repurchase shares and for debt refinancing. The need for commercial paper borrowings may arise if the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
For details regarding the Company's short-term borrowings activity in 2021, refer to Note 10 of the Company's audited consolidated financial statements and notes thereto included in our 2021 Form
10-K.
Long-term debt. As of September 30, 2022, we have a credit agreement, as amended, with various banks providing for a $i1.5 billion unsecured, unsubordinated, i5-year
revolving credit facility, with an interest rate of LIBOR plus i125 basis points and a commitment fee rate of i12.5 basis points, that matures in April 2025. As
of September 30, 2022, there were ino borrowings under the Company's revolving credit facility.
As of September 30,
2022, the Company is in compliance with all covenants in the revolving credit agreement and the indentures governing all outstanding long-term debt. iLong-term debt consisted of the following:
LIBOR plus i45 bps floating rate notes due 2023 1,2,3
$
i—
$
i500
i0.000%
notes due 2023 (€i500 million principal value) 2
i484
i565
i2.056%
notes due 2025 2
i1,300
i1,300
i0.37%
notes due 2026 (¥i21.5 billion principal value) 2
i149
i189
i0.318%
notes due 2026 (€i600 million principal value) 2
i580
i677
i2.293%
notes due 2027 2
i500
i500
i2.565%
notes due 2030 2
i1,500
i1,500
i0.934%
notes due 2031 (€i500 million principal value) 2
i484
i565
i3.112%
notes due 2040 2
i750
i750
i3.362%
notes due 2050 2
i750
i750
Other
(including finance leases)
i6
i4
Total
principal long-term debt
i6,503
i7,300
Other
(discounts and debt issuance costs)
(i44)
(i51)
Total
long-term debt
i6,459
i7,249
Less:
current portion
i—
i—
Long-term
debt, net of current portion
$
i6,459
$
i7,249
1 The
three-month LIBOR rate as of December 31, 2021 was approximately i0.21%.
2 We may redeem these notes at our option pursuant to certain terms.
3The Company redeemed its $i500
million floating rate notes due in 2023, at par, using cash on hand in January 2022.
For additional details regarding the Company's debt in 2021, refer to Note 10 of the Company's audited consolidated financial statements and notes thereto included in our 2021 Form 10-K.
i
Debt
discounts and debt issuance costs are presented as a reduction of debt on the Condensed Consolidated Balance Sheets and are amortized as a component of interest expense over the term of the related debt using the effective interest method. The Condensed Consolidated Statements of Operations for the quarters and nine months ended September 30, 2022 and 2021 reflects the following:
The average maturity of our long-term debt as of September 30, 2022 is approximately i8.9 years. The average interest expense rate on our borrowings outstanding as of September 30, 2022 and December 31, 2021 was as follows:
Pension and Postretirement Plans.The Company sponsors both funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit plans, and defined contribution plans. iContributions
to our plans were as follows:
Quarter Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Defined
benefit plans
$
i7
$
i5
$
i28
$
i23
Defined
contribution plans
i14
i14
i49
i47
Multi-employer
pension and postretirement plans
i40
i38
i101
i118
The
following table illustrates the components of net periodic benefit cost for the Company's defined benefit pension plans:
Quarter Ended September 30,
Nine
Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Service cost
$
i10
$
i11
$
i30
$
i33
Interest
cost
i4
i3
i13
i10
Expected
return on plan assets
(i8)
(i6)
(i21)
(i18)
Recognized
actuarial net loss
i3
i5
i8
i14
Net
settlement and curtailment (gain) loss
i1
(i1)
i1
(i1)
Total
net periodic benefit cost
$
i10
$
i12
$
i31
$
i38
Postretirement
Benefit Plans.The Company sponsors postretirement benefit plans that provide health benefits to eligible retirees. The postretirement plans are unfunded. The net periodic benefit cost was less than $iiii1/// million
for the quarters and nine months ended September 30, 2022 and 2021, respectively.
Stock-based Compensation. The Company adopted the 2020 Long-Term Incentive Plan (the "Plan") effective April 3, 2020. As of September 30, 2022, approximately i24 million
shares remain available for awards under the Plan.
Stock-based Compensation Expense
The Company measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the Condensed Consolidated Statements of Operations. A forfeiture rate assumption is applied on grant date to adjust the expense recognition for awards that are not expected to vest.
As
of September 30, 2022, there was approximately $i68 million of total unrecognized compensation cost related to non-vested equity awards granted under the Plan. This cost is expected to be recognized ratably over a weighted-average period of i1.9
years.
Note 9: iStock
Preferred Stock. There are ii125/
million shares of $ii0.01/ par value
authorized Preferred Stock, of which iiiinone///
were issued or outstanding as of September 30, 2022 and December 31, 2021.
Common Stock. There are ii2/
billion shares of $ii0.01/ par value Common Stock authorized.
As of September 30, 2022, i435.4 million shares of Common Stock were issued, which includes i18.8 million shares of treasury stock. As
of December 31, 2021, i434.7 million shares of Common Stock were issued, which included i9.7 million shares of treasury stock.
Share
Repurchase Program. As of December 31, 2021, the Company was authorized by the Board of Directors to purchase up to $i1 billion of Common Stock under a share repurchase program, of which $i275
million was remaining at such time.
During the quarter ended March 31, 2022, we repurchased an additional i2.6 million shares for approximately $i200
million under the above-referenced program. On March 9, 2022, our Board of Directors revoked any remaining share repurchase authority under the prior share repurchase program and approved a new share repurchase program for up to $i1 billion of Common Stock, of which $i500
million had been utilized as of September 30, 2022.
During the quarter and nine months ended September 30, 2022, the Company repurchased i3.8 million and i9.1
million shares, respectively, for approximately $i300 million and $i700 million, respectively, compared to i2.4
million and i9.7 million shares in the same periods of 2021 for approximately $i219 million and $i725
million, respectively.
The Company's share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be purchased in the open market, in privately negotiated transactions, under accelerated share repurchase programs or under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Note 10: iAccumulated Other Comprehensive Income (Loss)
i
A
summary of the changes in each component of Accumulated other comprehensive income (loss), net of tax, for the quarters and nine months ended September 30, 2022 and 2021 is provided below:
Amounts
reclassified that relate to foreign currency translation are related to our Russia business sold during the quarter ended September 30, 2022. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" for additional information regarding the sale of our Russia business.
Amounts reclassified that relate to defined benefit pension and postretirement plans include amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each
period presented. See Note 8, "Employee Benefit Plans"for additional information.
Note 11: iIncome Taxes
The increase in the effective tax rate for the quarter ended September 30, 2022, is primarily due to the
absence of a favorable income tax settlement related to the Separation recorded in the quarter ended September 30, 2021, partially offset by a reduction in tax liability as a result of finalizing the 2021 U.S. federal income tax return.
The effective tax rate for the nine months ended September 30, 2022, is unchanged as a result of offsetting items, including the elimination of Base Erosion Anti Abuse Tax (“BEAT”) in the U.S., the release of a tax reserve related to a forward transfer pricing agreement with a European tax authority, the absence of a reduction in the deferred tax liability related to repatriation of foreign earnings recorded in the quarter ended March 31, 2021, and the absence of a favorable income tax settlement as described
above.
The Company conducts business globally and, as a result, the Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Portugal, South Korea, Spain, Switzerland, the United Kingdom and the United States. With a few exceptions, the
Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2010.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. The evaluation considers any additional worldwide uncertain tax positions, the closure of tax statutes or the re-valuation of current uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts. Based on the preceding factors, it is reasonably possible that within the next 12 months unrecognized tax benefits could change within the range of a $i20
million increase to a $i310 million decrease and associated interest could change within the range of a $i5
million increase to a $i130 million decrease.
See Note 16, “Contingent Liabilities” for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
Note
12: iRestructuring Costs
During the quarter and nine months ended September 30, 2022, we recorded restructuring costs totaling $i6
million and $i45 million, respectively, for new and ongoing restructuring actions. iWe recorded these charges as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Cost of products and services sold
$
i2
$
i5
$
i16
$
i19
Selling,
general and administrative
i4
i4
i29
i16
Total
$
i6
$
i9
$
i45
$
i35
Restructuring
Actions. During the nine months ended September 30, 2022, we recorded the following restructuring costs: $i41 million for restructuring actions initiated in 2022, consisting of $i15
million in Cost of products and services sold and $i26 million in Selling, general and administrative expenses; $i3 million for restructuring actions
initiated in 2021 consisting of $i1 million in Cost of products and services sold and $i2 million in Selling, general and administrative expenses; and $i1
million for restructuring actions initiated prior to 2021.
We are targeting to complete in 2022 the majority of remaining restructuring actions initiated in 2022 and 2021, with certain utilization beyond 2022.
The
following table summarizes the accrual balance and utilization for the 2022 and 2021 restructuring actions, which are primarily for severance costs:
Additionally,
there is a $i13 million accrual balance as of September 30, 2022 for restructuring actions initiated prior to 2021 remaining to be utilized. Most of the expected charges will require cash payment.
Note 13: iFinancial
Instruments
We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under ASC 815, Derivatives and Hedging. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, commodity prices and foreign exchange rates. These fluctuations can increase the costs of financing, investing in and operating the business. We may use derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, commodity price and interest rate exposures.
The average of the notional amount of foreign exchange contracts
hedging foreign currency transactions was $i3.7 billion and $i3.3
billion as of September 30, 2022 and December 31, 2021, respectively. The average of the notional amount of contracts hedging commodity purchases was $i15 million and $i16
million as of September 30, 2022 and December 31, 2021, respectively.
The
following table summarizes the fair value and presentation on the Condensed Consolidated Balance Sheets for derivative instruments as of September 30, 2022 and December 31, 2021:
Derivatives
designated as Cash flow hedging instruments. The amounts of gain or (loss) attributable to foreign exchange and commodity contract activity reclassified from Accumulated other comprehensive income (loss) were immaterial for the quarters and nine months ended September 30, 2022 and 2021, respectively.
i
The
effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) as of September 30, 2022 and December 31, 2021 are presented in the table below:
Gain (loss) recorded in Accumulated other comprehensive income (loss)
$
i3
$
i7
/
The
Company utilizes the critical terms match method in assessing firm commitment derivatives and regression testing in assessing commodity derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.
Assuming current market conditions continue, a pre-tax loss of $i2
million is expected to be reclassified from Accumulated other comprehensive income (loss) into Cost of products sold to reflect the fixed prices obtained from foreign exchange and commodity hedging within the next 12 months. All derivative contracts accounted for as cash flow hedges as of September 30, 2022 will mature by October 2026.
Net Investment Hedges. We have foreign-denominated long-term debt balances that qualify as net investment hedges. Changes in the value of these net investment hedges due to foreign currency gains or losses are deferred as foreign currency translation adjustments in Other comprehensive income (loss) on the Condensed Consolidated Statements of Comprehensive Income, and
will remain in Accumulated other comprehensive income (loss) until the hedged investment is sold or substantially liquidated. We evaluate the effectiveness of the net investment hedges each quarter.
We have ¥i21.5 billion of Japanese Yen
denominated long-term debt, which qualifies as a net investment hedge against our investments in Japanese businesses. As of September 30, 2022, the net investment hedge is deemed to be effective. During the quarter and nine months ended September 30, 2022, we recognized gains of $i10 million
and $i40 million, respectively, compared to gains of $i1
million and $i5 million, respectively, in the same periods of 2021, associated with this net investment hedge in Other comprehensive income (loss).
In September 2020, we issued €i420
million of Euro denominated commercial paper. The Euro denominated commercial paper while outstanding qualified as a net investment hedge against our investments in European businesses. During 2021, we fully repaid the Euro denominated commercial paper, and there is no longer a net investment hedge against our investments in European businesses as of September 30, 2022 or December 31, 2021. During the quarter and nine months ended September 30, 2021, we recognized gains of $i4
million and $i16 million, respectively, associated with this net investment hedge in Other comprehensive income (loss).
Derivatives not designated as Cash flow hedging instruments. iThe
net effect of derivatives not designated as Cash flow hedging instruments primarily within Other income (expense) net, on the Condensed Consolidated Statements of Operations was as follows:
Valuation Techniques. Our equity securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. The fair value gains or losses related to our equity securities are recorded through net income. Our derivative assets and liabilities include foreign exchange and commodity contracts
that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks.
As of September 30, 2022, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.
The fair values of the current portion of the Company's financial instruments that are not carried at fair value approximated their carrying values because of the short-term nature of the current portion. The
fair value of receivables, including customer financing notes receivable, net, that were issued long-term are based on the discounted values of their related cash flows at interest rates reflecting the attributes of the counterparties, including geographic location. Customer-specific risk, including credit risk, is already considered in the carrying value of those receivables. Our notes, as described in Note 7, "Borrowings and Lines of Credit", are measured at fair value using closing bond prices from active markets.
Recurring Fair Value Measurements.iIn
accordance with the provisions of ASC 820: Fair Value Measurements, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and non-recurring basis in our Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021:
Fair
Value of Financial Instruments.iThe following table provides carrying amounts and fair values of financial instruments that are not carried at fair value as of September 30, 2022 and December 31, 2021:
The
following tables provide the valuation hierarchy classification of assets and liabilities that are not carried at fair value in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021:
The Company provides service and warranty on its products beyond normal service and warranty policies. iThe
changes in the carrying amount of service and product guarantees for the nine months ended September 30, 2022 and 2021 are as follows:
The Company provides certain financial guarantees to third parties. As of September 30, 2022, Otis has stand-by letters of credit with maximum potential payment totaling $i141 million. We accrue costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred
is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued. In accordance with ASC Topic 460: Guarantees, we record these liabilities at fair value. As of September 30, 2022, Otis has determined there are no estimated costs probable under these guarantees.
Note 16: iContingent
Liabilities
Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. In addition to the specific amounts noted below, where we have recorded loss contingency accruals for the below and other matters, the amounts in aggregate are not material. Legal costs generally are expensed when incurred.
Environmental. As previously disclosed, the Company's operations are subject to environmental regulation by authorities with jurisdiction over its operations.
The Company has accrued for the costs of environmental remediation activities, including, but not limited to, investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassesses these amounts. Management believes that the likelihood of incurring losses materially in excess of amounts accrued is remote. The outstanding liability for environmental obligations was $i5 million
and $i12 million as of September 30, 2022 and December 31, 2021, respectively, and is principally included in Other long-term liabilities on the Condensed Consolidated Balance Sheets.
Legal Proceedings.
German Tax Litigation
As previously disclosed,
we have been involved in administrative review proceedings with the German Tax Office, which concern approximately €i215 million (approximately $i208 million as of September 30,
2022) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of our operations in Germany. Upon audit, these tax benefits were disallowed by the German Tax Office. We estimate interest associated with the aforementioned tax benefits is an additional approximately €i118 million (approximately $i114
million as of September 30, 2022).
In August 2012, a suit was filed in the local German Tax Court (Berlin-Brandenburg). In 2015, our former parent, UTC, now RTX, made tax and interest payments to German tax authorities of €i275 million (approximately $i300
million) in order to avoid additional interest accruals pending final resolution of this matter. In March 2016, the local German Tax Court dismissed the suit, and we appealed this decision to the German Federal Tax Court. Following a hearing in July 2018, the German Federal Tax Court remanded the matter to the local German Tax Court for further proceedings. In December 2020, the local German Tax Court ruled against the Company.
On January 26, 2021, the Company filed an appeal with the German Federal Tax Court. On February 8, 2022, the
Company received the decision of the German Federal Tax Court, in which the Court remanded the case for reconsideration by the local German Tax Court. The local German Tax Court has not yet set a hearing date. Despite the remand, there is no assurance that the local German Tax Court will rule in the Company's favor, and the decision of the German Tax Office ultimately could be sustained.
Pursuant to the Tax Matters Agreement ("TMA") with our former parent, UTC, the Company retains the liability associated with the remaining interest, and has recorded an interest accrual of €i45
million (approximately $i43 million as of September 30, 2022), net of payments and other deductions, included within Accrued liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2022. If the Company prevails in this matter, any recoveries would be allocated between RTX and the
Company pursuant to the terms of the TMA.
As previously disclosed, we have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos. While we have never manufactured any asbestos-containing component parts, and no longer incorporate asbestos in any current products, certain of our historical products have contained components manufactured by third parties incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or were covered in full
or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos-related claims were not material individually or in the aggregate as of and for the periods ended September 30, 2022 and December 31, 2021.
The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $ii22/
million to $ii45/
million as of September 30, 2022 and December 31, 2021. Because no amount within the range of estimates is more likely to occur than any other, we have recorded the minimum amount of $ii22/
million, which is principally recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. Amounts are on a pre-tax basis, not discounted, and exclude the Company's legal fees to defend the asbestos claims (which will continue to be expensed as they are incurred). In addition, the Company has an insurance recovery receivable for probable asbestos-related recoveries of approximately $ii5/
million, which is principally included in Other assets on our Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.
Putative Class Action Lawsuit
On August 12, 2020, a putative class action lawsuit, (Geraud Darnis et al. v. Raytheon Technologies Corporation et al.), was filed in the United States District Court for the District of Connecticut (the "Court") against Otis, RTX, Carrier Global Corporation ("Carrier"), which was also separated from UTC in the Separation, each of their directors, and various incentive and deferred compensation plans. On September 13, 2021, plaintiffs filed
an amended complaint against the ithree company defendants only. The named plaintiffs are former employees of UTC and its current and former subsidiaries, including Otis and Carrier. They seek to recover monetary damages, as well as related declaratory and equitable relief, based on claimed decreases in the value of long-term incentive awards and deferred compensation under nonqualified deferred compensation plans allegedly caused by the formula used to calculate the adjustments
to such awards and deferred compensation from RTX, Carrier, and Otis following the spin-offs of Carrier and Otis and the subsequent combination of UTC and Raytheon Company. On September 30, 2022, in response to motions to dismiss filed by the defendants, the Court dismissed the class action in its entirety with prejudice. On October 26, 2022, the plaintiffs filed a Notice of Appeal with the Court, appealing its decision. At this time, we do not believe this action will have a material adverse effect on our business, financial conditions, cash flows or results of operations.
Other. As previously disclosed, we have commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies
based on a range of possible outcomes. If no amount within this range is a better estimate than any other, we accrue the minimum amount. While it is not possible to determine the ultimate disposition of each of these claims and whether they will be resolved consistent with our beliefs, we expect that the outcome of such claims, individually or in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows or results of operations.
As previously disclosed, in certain European countries, claims for overcharges on elevators and escalators related to civil cartel cases have been made, which we have accrued for based on our evaluation of the claims. While it is not possible to determine the ultimate disposition of each of these claims and whether they will be resolved consistent with our beliefs, historical settlement experience of these cases has
not been material to the business, financial condition, cash flows or results of operations, however the future outcome of these cases cannot be determined.
As previously disclosed, in the ordinary course of business, the Company is also routinely a defendant in, party to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the
Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Our operations are classified into itwo operating segments: New Equipment and Service. Through the New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators as well as escalators and moving walkways to customers in the residential and commercial building and infrastructure projects. The Service segment provides maintenance and repair services for both our products and those of other manufacturers, and provides modernization
services to upgrade elevators and escalators. The operating segments are generally based on the management structure of the Company, how management allocates resources, assesses performance and makes strategic and operational decisions.
Segment Information. iSegment information for the quarters ended September 30,
2022 and 2021 are as follows:
Net
Sales
Operating Profit
Operating Profit Margin
(dollars in millions)
2022
2021
2022
2021
2022
2021
New Equipment
$
i1,447
$
i1,681
$
i100
$
i131
i6.9
%
i7.8
%
Service
i1,897
i1,939
i446
i444
i23.5
%
i22.9
%
Total
segments
i3,344
i3,620
i546
i575
i16.3
%
i15.9
%
General
corporate expenses and other
i—
i—
(i17)
(i33)
i—
i—
Total
$
i3,344
$
i3,620
$
i529
$
i542
i15.8
%
i15.0
%
Segment
information for the nine months ended September 30, 2022 and 2021 are as follows:
Net
Sales
Operating Profit
Operating Profit Margin
(dollars in millions)
2022
2021
2022
2021
2022
2021
New Equipment
$
i4,403
$
i4,866
$
i292
$
i382
i6.6
%
i7.9
%
Service
i5,843
i5,863
i1,328
i1,315
i22.7
%
i22.4
%
Total
segments
i10,246
i10,729
i1,620
i1,697
i15.8
%
i15.8
%
General
corporate expenses and other
i—
i—
(i78)
(i85)
i—
i—
Total
$
i10,246
$
i10,729
$
i1,542
$
i1,612
i15.0
%
i15.0
%
Total
assets are not presented for each segment as they are not presented to, or reviewed by, the Chief Operating Decision Maker.
Geographic Sales.iGeographic Net sales are attributed to the geographic regions based on their location of origin. With the exception of the U.S. and China, there were no individually significant countries with sales exceeding 10% of Net sales during the quarters and nine months ended September 30,
2022 and 2021.
Disaggregated Sales by Type. iSegment Net sales disaggregated by product and service type for the quarters and nine months ended September 30, 2022 and 2021 are as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
New Equipment
$
i1,447
$
i1,681
$
i4,403
$
i4,866
Maintenance
and Repair
i1,555
i1,608
i4,784
i4,828
Modernization
i342
i331
i1,059
i1,035
Total
Service
i1,897
i1,939
i5,843
i5,863
Total
$
i3,344
$
i3,620
$
i10,246
$
i10,729
Major
Customers. There were no customers that individually accounted for 10% or more of the Company's consolidated Net sales for the quarters and nine months ended September 30, 2022 and 2021.
Note 18: iAccounting
Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference
rate reform. ASU 2020-04 is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. We are currently evaluating the impact of adopting this standard but do not expect it to have a material impact on our Condensed Consolidated Financial Statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts
with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early application permitted. We are currently evaluating the impact of adopting this standard, however we do not expect it to have a material impact on our Condensed Consolidated Financial Statements.
In September 2022, the FASB
issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Topic 450-50): Disclosure of Supplier Finance Program Obligations that requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, except for the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are
currently evaluating the impact of adopting this standard on our Condensed Consolidated Financial Statements.
Other new accounting pronouncements issued but not effective until after September 30, 2022 did not and are not expected to have a material impact on our financial position, results of operations or liquidity.
With respect to the unaudited condensed consolidated
financial information of Otis Worldwide Corporation for the quarters and nine months ended September 30, 2022 and 2021, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated October 27, 2022, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional review procedures beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be
restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Otis Worldwide Corporation
Results of Review of Interim Financial Information
We have reviewed the accompanying
condensed consolidated balance sheet of Otis Worldwide Corporation and its subsidiaries (the “Company”) as of September 30, 2022, and the related condensed consolidated statements of operations, of comprehensive income and of changes in equity for the three-month and nine-month periods ended September 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2022 and 2021, including the related notes (collectively referred to as the “interim financial information”).
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2021, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 4, 2022, we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information isthe responsibility of the Company’s management.We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
Business Summary
We are the world’s leading elevator and escalator manufacturing, installation and service company. Our
Company is organized into two segments, New Equipment and Service. Through our New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators, as well as escalators and moving walkways for residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers and general contractors who develop and/or design buildings for residential, commercial, retail or mixed-use activity. We sell our New Equipment directly to customers, as well as through agents and distributors.
Through our Service segment, we perform maintenance and repair services for both our own products and those of other manufacturers and provide modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings
and other customized maintenance offerings tailored to meet customer needs, as well as repair services to address equipment and component wear and tear and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed.
We serve our customers through a global network of employees. These include sales personnel, field technicians with separate skills in performing installation and service, as well as engineers driving our continued product development and innovation.
We function under a centralized operating model whereby a global strategy is set around New Equipment and Service because we seek to grow our maintenance portfolio, in part, through the conversion of new elevator and escalator installations into service contracts. Accordingly, we benefit from an integrated global strategy, which sets priorities and establishes accountability across the full product lifecycle.
The current status of significant factors affecting our business environment in 2022 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form
10-K.
Recent Developments
Sale of Russia business and risks associated with the ongoing conflict between Russia and Ukraine
The ongoing conflict between Russia and Ukraine has resulted in worldwide geopolitical and macroeconomic uncertainty, including volatile commodity markets, foreign exchange fluctuations, supply chain disruptions, increased risk of cyber incidents, reputational risk, increased operating costs (including fuel and other input costs), environmental, health and safety risks related to securing and maintaining facilities, additional sanctions and other regulations (including restrictions on the transfer of funds to and from Russia).
To
the extent possible, we continue to operate our business in Ukraine, which represented less than 1% of our full year 2021 and nine months ended September 30, 2022 revenue and operating profit.
As previously disclosed, in March 2022 we stopped taking new equipment orders in Russia and making new investments in the country, and reassessed our operations in Russia, which represented approximately 2% of our 2021 revenue and operating profit and approximately 1% of our six months ended June 30, 2022 revenue and operating profit, comprised mostly of New Equipment. In June 2022, we entered into an agreement to sell our business in Russia to a third party, resulting in classification of the business' assets and liabilities as held for sale as of June
30, 2022 and recording an impairment loss of $18 million. On July 27, 2022, we completed the sale of our business in Russia to the third party. We recorded an impairment from the sale and conflict-related charges totaling $10 million and $28 million, primarily in Other expense (income), net in the Condensed Consolidated Statements of Operations for the quarter and nine months ended September 30, 2022, respectively. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" for further details.
We
cannot predict how the conflict will evolve. If the conflict continues for a significant time or expands to other countries, it could heighten certain risks disclosed in Item 1A "Risk Factors" in our 2021 Form 10-K, including but not limited to, adverse effects on macroeconomic conditions, including increased inflation, constraints on the availability of commodities, supply chain disruption and decreased business spending; cyber-incidents; disruptions to our or our business partners’ global technology infrastructure, including through cyber-attack or cyber-intrusion; adverse changes in international trade policies and relations; claims, litigation and regulatory enforcement; our ability to implement and execute our business strategy; terrorist activities; our exposure to foreign currency
fluctuations; reputational risk; and constraints, volatility, or disruption in the capital markets, any of which could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Consistent with our risk management process, the Otis Board of Directors and its Audit Committee have received numerous updates on the ongoing conflict between Russia and Ukraine and have reviewed, and continue to review, with management the financial, operational, compliance, reputational and cyber risks associated therewith and related mitigation actions. The Otis Board of Directors oversaw the process of selling our business in Russia, including reviewing the terms and conditions thereof, and the Audit Committee approved the sale. The Otis Board of Directors continued to receive updates on the sale process until the completion of the sale, including with respect
to the satisfaction of the closing conditions.
Zardoya Otis Tender Offer
As previously disclosed, the Company announced the Tender Offer to acquire all issued and outstanding shares of Zardoya Otis not owned by Otis, at an offer price of €7.07 per share in cash, after adjusting for dividends. The results of the Tender Offer were announced on April 7, 2022, with tenders of 45.49% of the shares outstanding accepted. The shares tendered to the Company were settled in cash on April 12, 2022 for approximately €1.5 billion from the
Company's restricted cash held in escrow, resulting in the Company owning 95.51% of Zardoya Otis. The acquisition and settlement of the remaining issued and outstanding shares not owned by the Company for approximately €150 million (based on the adjusted tender price of €7.07 per share) and the automatic delisting of Zardoya Otis shares occurred during the second quarter of 2022.
See Note 1, "General" to the Condensed Consolidated Financial Statements, for further details regarding this transaction and financing arrangements entered into in connection with the Tender Offer.
The results of our operations and overall financial performance were impacted due to the COVID-19 pandemic during the quarters and nine months ended September 30, 2022 and 2021. COVID-19 has had and could continue to have an impact on our business in the future, including impacts to overall financial performance during the remainder of 2022, as a result of the following, among other things:
•Customer demand impacting our new equipment, maintenance and repair, and modernization businesses;
•Cancellations or delays of customer orders;
•Customer
liquidity constraints and related credit reserves; and
•Supplier and raw material capacity constraints, delays and related costs
We currently do not expect any significant impact to our capital and financial resources from the COVID-19 pandemic, including to our overall liquidity position based on our available cash and cash equivalents and our access to credit facilities and the capital markets.
See the "Liquidity and Financial Condition" section in this Form 10-Q for further detail and Item 1A. "Risk Factors" in our Form 10-Kfor additional risks related to COVID-19.
Preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of
the Condensed Consolidated Financial Statements, or are the most sensitive to change due to outside factors, are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" included in our Form 10-K. Except as disclosed in Note 18 to our Condensed Consolidated Financial Statements in this Form 10-Q, pertaining to adoption of new accounting pronouncements, there have been no material changes in these policies.
As
a result of our business in Russia being sold during the third quarter of 2022, the results of the operations in Russia are excluded from the organic volume changes and are reflected in Acquisitions and divestitures. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" to the Condensed Consolidated Financial Statements, for further details.
RESULTS OF OPERATIONS
Net Sales
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Net sales
$
3,344
$
3,620
$
10,246
$
10,729
Percentage
change year-over-year
(7.6)
%
(4.5)
%
The factors contributing to the total percentage change year-over-year in total Net sales for the quarter and nine months ended September 30, 2022 are as follows:
The
Organic volume increase of 0.8%for the quarter ended September 30, 2022 was driven by an increase in organic sales of 6.2% in Service, largely offset by a decrease of (5.4)% in New Equipment organic sales.
The Organic volume increase of 1.4% for the nine months ended September 30, 2022 was driven by an increase in organic sales of 5.7% in Service, partially offset by a decrease of (3.9)% in New Equipment organic sales.
See the "Segment Review" section for a discussion of Net sales by segment.
The factors contributing to the percentage change year-over-year for the quarter and nine months ended September 30, 2022 in total cost of products and services sold are as follows:
Components
of Cost of Products and Services Sold change:
The
organic increase in total cost of products and services sold for the quarter and nine months ended September 30, 2022 was primarily driven by the organic sales increases noted above and inflationary pressures, including higher commodity prices of $18 million and $89 million, respectively, primarily driven by steel, in addition to higher freight and fuel costs and annual wage increases, partially mitigated by productivity.
Gross Margin
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Gross margin
$
971
$
1,060
$
2,960
$
3,154
Gross
margin percentage
29.0
%
29.3
%
28.9
%
29.4
%
Gross margin percentage decreased 30 and 50 basis points for the quarter and nine months ended September 30, 2022, respectively, when compared to the same periods for 2021, due to the inflationary pressures described above, partially
offset by favorable service pricing, productivity and the benefit from Service sales growing faster than New Equipment sales.
See the "Segment Review" section for discussion of operating results by segment.
Research and Development
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Research and development
$
37
$
39
$
112
$
113
Percentage
of Net sales
1.1
%
1.1
%
1.1
%
1.1
%
Research and development was relatively flat for the quarter and nine months ended September 30, 2022, when compared to the same period for 2021.
Selling, General and Administrative
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Selling, general and administrative
$
417
$
479
$
1,315
$
1,445
Percentage
of Net sales
12.5
%
13.2
%
12.8
%
13.5
%
Selling, general and administrative expenses decreased $62 million and $130 million for the quarter and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, as cost containment actions, other employment
related cost reductions, lower credit loss reserves, as well as the impact from foreign exchange of $35 million and $69 million for the quarter and nine months ended September 30, 2022, respectively, were partially offset by annual wage
Selling, general and administrative expenses as a percentage of Net sales decreased 70 basis points for the quarter and nine months ended September 30, 2022, compared to the same periods in 2021.
Restructuring
Costs
Nine Months Ended September 30,
(dollars in millions)
2022
2021
Restructuring costs
$
45
$
35
We
initiate restructuring actions to keep our cost structure competitive. Charges generally arise from severance related to workforce reductions, and to a lesser degree, facility exit and lease termination costs associated with the consolidation of office and manufacturing operations. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.
Total restructuring costs were $45 million for the nine months ended September 30, 2022 and included $41 million of costs related to 2022 actions, $3 million of costs related to 2021 actions and $1 million of costs related to pre-2021 actions.
Most
of the expected charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the nine months ended September 30, 2022, we had cash outflows of approximately $47 million related to the restructuring actions and expect to make cash payments of $58 million to complete the actions announced, which will be comprised of the utilization of existing restructuring accruals and $22 million of additional restructuring expenses to be recognized.
We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $65 million for the 2022 actions and $40 million for the 2021 actions, of which approximately $43 million was realized for the 2022 and 2021 actions during the nine months ended September 30,
2022.
For additional discussion of restructuring, see Note 12 to the Condensed Consolidated Financial Statements.
Other Income (Expense), Net
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Other income (expense), net
$
12
$
—
$
9
$
16
The
change in Net Other Income (Expense), of $12 million for the quarter ended September 30, 2022, compared to the same period in 2021, was primarily driven by favorable foreign currency mark-to-market adjustments and the absence of the impact of settlements of certain TMA transactions recognized during the quarter ended September 30, 2021, partially offset by the loss on the sale of our Russia business and related charges.
The change in Other Income (Expense), Net of $(7) million for the nine months ended September 30, 2022, compared to the same period in 2021, was primarily driven by a loss on the sale of our Russia business and related charges, partially offset by favorable foreign currency
mark-to-market adjustments and lower non-recurring Separation-related costs.
For additional discussion of the sale of our Russia business, see Note 6 to the Condensed Consolidated Financial Statements.
Interest Expense (Income), Net
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
Interest
expense (income), net
$
35
$
33
$
107
$
92
Net Interest Expense (Income) was relatively flat in the quarter ended September 30, 2022, compared to the same period in 2021.
The increase in Interest Expense (Income), Net of $15 million in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily driven by interest expense related to the Tender Offer for Zardoya Otis and lower interest income year-over-year.
The average interest rate on our long-term debt forthe quarter and nine months ended September 30, 2022 is 2.0% and for the same periods in 2021 was2.4%.
For additional discussion
of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.
The
increase in the effective tax rate for the quarter ended September 30, 2022, is primarily due to the absence of a favorable income tax settlement related to the Separation recorded in the quarter ended September 30, 2021, partially offset by a reduction in tax liability as a result of finalizing the 2021 U.S. federal income tax return.
The effective tax rate for the nine months ended September 30, 2022, is unchanged as a result of offsetting items, including the elimination of Base Erosion Anti Abuse Tax (“BEAT”) in the U.S., the release of a tax reserve related to a forward transfer pricing agreement with a European tax authority, the absence of a reduction in the deferred tax liability related to repatriation of foreign earnings recorded
in the quarter ended March 31, 2021, and the absence of a favorable income tax settlement as described above.
We anticipate some variability in the tax rate quarter to quarter from potential discrete items.
For additional discussion of income taxes and the effective income tax rate, see Note 11 to the Condensed Consolidated Financial Statements.
Noncontrolling Interest in Subsidiaries' Earnings and Net Income Attributable to Otis Worldwide Corporation
Net
income attributable to Otis Worldwide Corporation
$
324
$
331
$
956
$
965
Noncontrolling interest in subsidiaries'
earnings were lower for the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to Otis' increased ownership in Zardoya Otis in the second quarter of 2022. For details on the results of the Tender Offer and purchases of shares of Zardoya Otis not previously owned by the Company, see Note 1 to the Condensed Consolidated Financial Statements.
Net income attributable to Otis Worldwide Corporation was relatively flat for the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.
Summary performance for our operating segments for the quarters ended September 30, 2022 and 2021 was as follows:
Net
Sales
Operating Profit
Operating Profit Margin
(dollars in millions)
2022
2021
2022
2021
2022
2021
New Equipment
$
1,447
$
1,681
$
100
$
131
6.9
%
7.8
%
Service
1,897
1,939
446
444
23.5
%
22.9
%
Total
segment
3,344
3,620
546
575
16.3
%
15.9
%
General corporate expenses and other
—
—
(17)
(33)
—
—
Total
$
3,344
$
3,620
$
529
$
542
15.8
%
15.0
%
Summary
performance for our operating segments for the nine months ended September 30, 2022 and 2021 was as follows:
Net
Sales
Operating Profit
Operating Profit Margin
(dollars in millions)
2022
2021
2022
2021
2022
2021
New Equipment
$
4,403
$
4,866
$
292
$
382
6.6
%
7.9
%
Service
5,843
5,863
1,328
1,315
22.7
%
22.4
%
Total
segment
10,246
10,729
1,620
1,697
15.8
%
15.8
%
General corporate expenses and other
—
—
(78)
(85)
—
—
Total
$
10,246
$
10,729
$
1,542
$
1,612
15.0
%
15.0
%
New
Equipment
The New Equipment segment designs, manufactures, sells and installs a wide range of passenger and freight elevators, as well as escalators and moving walkways in residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers and general contractors that develop and/or design buildings for residential, infrastructure, commercial, retail or mixed-use activity. We sell directly to customers as well as through agents and distributors. We also sell New Equipment to government agencies to support infrastructure projects, such as airports, railways or metros.
Summary performance for New Equipment for the quarters and nine months ended September 30,
2022 and 2021 was as follows:
Summary analysis of the Net sales change for New Equipment for the quarter and nine months ended September 30, 2022 compared with the quarter and nine months ended September 30, 2021 was as follows:
Organic sales declined (5.4)% as low teens growth in Asia Pacific and mid single digit growth in EMEA was more than offset by declines in China and Americas.
Operating profit
New
Equipment operating profit decreased $(31) million primarily driven by lower volume of $(28) million and the related under absorption. Favorable productivity and lower selling, general and administrative costs more than offset commodity costs of $(18) million, primarily steel, in addition to other inflationary increases, including freight costs. Operating profit was also impacted by operations in Russia of $(10) million. Operating margin decreased 90 basis points.
Organic sales declined (3.9)% as high single digit growth in Asia Pacific and low single digit growth in EMEA was more than offset by declines in China and the Americas.
Operating
profit
New Equipment operating profit decreased $(90) million. Lower volume of $(38) million, under absorption from lower volume, higher commodity costs of ($89) million, primarily steel, and increased freight costs were partially mitigated by favorable productivity and lower selling, general and administrative costs. Operating profit was also impacted by operations in Russia of $(32) million. Operating margin decreased 130 basis points.
Service
The Service segment performs maintenance and repair services for both our products, and those of other manufacturers, and provides modernization
services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services that address equipment and component wear and tear, and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics, to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed.
Summary performance for Service for the quarters and nine months ended September 30, 2022 and 2021 was as follows:
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
Change
Change
2022
2021
Change
Change
Net
sales
$
1,897
$
1,939
$
(42)
(2.2)
%
$
5,843
$
5,863
$
(20)
(0.3)
%
Cost
of sales
1,165
1,179
(14)
(1.2)
%
3,597
3,589
8
0.2
%
732
760
(28)
(3.7)
%
2,246
2,274
(28)
(1.2)
%
Operating
expenses
286
316
(30)
(9.5)
%
918
959
(41)
(4.3)
%
Operating profit
$
446
$
444
$
2
0.5
%
$
1,328
$
1,315
$
13
1.0
%
Operating
profit margin
23.5
%
22.9
%
22.7
%
22.4
%
Summary analysis of Service Net sales change
for the quarter and nine months ended September 30, 2022 compared with the quarter and nine months ended September 30, 2021 was as follows:
The organic sales increase of 6.2% is due to organic sales increases in maintenance and repair of 5.4% and modernization of 10.3%.
Components
of Net sales change:
Maintenance and Repair
Modernization
Organic volume
5.4
%
10.3
%
Foreign currency translation
(8.8)
%
(7.6)
%
Acquisitions/Divestitures,
net
—
%
0.9
%
Total
% change
(3.4)
%
3.6
%
Operating profit
Service operating profit increased $2 million with higher volume of $41 million offset by foreign exchange headwinds of $(47) million. Improved pricing on maintenance contracts, productivity, and other employment related cost reductions more than offset annual wage
increases and other inflationary pressures, including higher fuel and material costs. Operating margin increased 60 basis points.
The organic sales increase of 5.7% is due to organic sales increases in maintenance and repair of 5.3% and modernization of 7.8%.
Components
of Net sales change:
Maintenance and Repair
Modernization
Organic volume
5.3
%
7.8
%
Foreign currency translation
(6.3)
%
(5.7)
%
Acquisitions/Divestitures,
net
0.1
%
0.3
%
Total
% change
(0.9)
%
2.4
%
Operating profit
Service operating profit increased $13 million due to higher volume of
$104 million, favorable pricing on maintenance contracts and productivity, partially offset by foreign exchange headwinds of $(103) million, annual wage increases and other inflationary pressures, including higher fuel costs. Operating margin increased 30 basis points.
General Corporate Expenses and Other
Quarter
Ended September 30,
Nine Months Ended September 30,
(dollars in millions)
2022
2021
2022
2021
General corporate expenses and other
$
(17)
$
(33)
$
(78)
$
(85)
General
corporate expenses and other for the quarter ended September 30, 2022 decreased $16 million compared to the same quarter in 2021, primarily due to favorable foreign currency mark-to-market adjustments and the absence of the impact of settlements of certain TMA transactions recognized during the quarter ended September 30, 2021, partially offset by the loss on the sale of our Russia business and related charges.
General corporate expenses and other for the nine months ended September 30, 2022 decreased $7 million compared to the same period in 2021, primarily due to favorable foreign currency mark-to-market adjustments and lower non-recurring Separation related costs, partially offset by the loss on the sale of our Russia business and related
charges.
Net debt (total debt less cash and cash
equivalents)
5,528
5,708
Total equity 1
(4,861)
(3,144)
Total capitalization (total debt plus total equity)
1,701
4,129
Net
capitalization (total debt plus total equity less cash and cash equivalents)
667
2,564
Total debt to total capitalization 1
386
%
176
%
Net
debt to net capitalization 1
829
%
223
%
1 Our total debt to total capitalization ratio and net debt to net capitalization ratio increased in the nine months ended September 30, 2022 due to the $1.5 billion reduction in equity as a result of the Tender Offer. For more information on the impact of the Zardoya Otis noncontrolling interest reclassification, see Note 1 to the Condensed Consolidated Financial
Statements.
As of September 30, 2022, we had cash and cash equivalents of approximately $1.0 billion, of which approximately 96% was held by the Company's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries
through which we conduct our business and the cost-effectiveness with which those funds can be accessed. On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions and divestitures or other legal obligations. As of September 30, 2022 and December 31, 2021, the amount of such restricted cash was approximately $8 million and $1.9 billion, respectively, including cash held in escrow to fund the Tender Offer as of December 31, 2021. For information on the results of the Tender Offer and use of the cash held in escrow for the Tender Offer, see Note 1 to the Condensed Consolidated Financial Statements.
From time-to-time we may need to access the capital markets to
obtain financing. We may incur indebtedness or issue equity as needed. Although we believe that the arrangements in place as of September 30, 2022 permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future could be impacted by many factors, including (1) our credit ratings or absence of a credit rating, (2) the liquidity of the overall capital markets and (3) the current state of the economy. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.
There were no long-term debt issuances for the nine months ended September 30, 2022. The Company redeemed
the $500 million floating notes originally due in 2023 during the nine months ended September 30, 2022. For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.
The Company does not intend to reinvest certain undistributed earnings of our international subsidiaries that have been previously taxed in the U.S. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, we will continue to permanently reinvest these earnings.
We
expect to fund our ongoing operating, investing and financing requirements mainly through cash flows from operations, available liquidity through cash on hand and available bank lines of credit and access to capital markets.
On March 9, 2022, our Board of Directors revoked any remaining share repurchase authority under the prior share repurchase program and approved a new share repurchase program for up to $1 billion of Common Stock, of which $500 million had been utilized as of September 30, 2022. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs or under plans complying with rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.
Cash
Flow - Operating Activities
Nine Months Ended September 30,
(dollars in millions)
2022
2021
Net cash flows provided by operating activities
$
1,096
$
1,473
Cash
generated from operating activities in the nine months ended September 30, 2022 was $377 million lower than the same period in 2021, primarily due to lower cash flow related to current assets and current liabilities activity of $415 million, as described below. These were partially offset by $64 million of higher non-cash adjustments from Net income and $38 million of higher Other operating activities, net, primarily due to long-term accruals and other activities in the nine months ended September 30, 2022.
Cash outflows related to current assets and current liabilities operating activity for the nine months ended
September 30, 2022 were $151 million. These cash outflows were primarily driven by:
•Accounts receivable, net, which increased $171 million, primarily due to the timing of billings;
•Accrued liabilities, which decreased $166 million, primarily due to the timing of payments of employee-related benefits, income taxes and other accruals; and
•Inventories, which increased $80 million, primarily to support backlog conversion; which were partially offset by
•Contract assets, current and Contract liabilities, current, net change of $143 million, driven by the timing of billings on contracts compared to the progression on current contracts; and
•Accounts payable, which increased by $137 million, due to the timing of payments to suppliers.
Cash inflows related to current assets and current liabilities operating activity for the nine months ended September 30, 2021 were $264 million. These cash inflows were primarily driven by:
•Accounts payable, which increased $230 million, primarily due to increased volume;
•Contract assets, current and Contract liabilities, current, net change of $140 million, driven by the timing of billings on contracts
compared to the progression on current contracts;
•Inventories, which decreased $18 million, due to the timing of deliveries to construction sites; and
•Other current assets, which decreased $12 million, due to prepaid income tax refunds and indemnification payments received, partially offset by advance payments to suppliers; which were partially offset by
•Accounts receivable, net, which increased $107 million, primarily due to increased volume; and
•Accrued
liabilities, which decreased $29 million, primarily due to the timing of payments of income taxes, including the payment of foreign tax obligations pursuant to the TMA.
Cash Flow - Investing Activities
Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, proceeds from the sale of fixed assets and settlement of derivative contracts.
Acquisitions of businesses and intangible assets, net of cash
(38)
(59)
21
Dispositions
of businesses, net of cash
61
—
61
Proceeds from the sale of (investments in) marketable securities
(7)
40
(47)
Receipts (payments) on settlements of
derivative contracts
121
35
86
Other investing activities, net
6
30
(24)
Net cash flows provided by (used in) investing activities
$
62
$
(69)
$
131
Cash
flows provided by (used in) investing activities in the nine months ended September 30, 2022 was a cash inflow of $62 million compared to a cash outflow of $69 million during the same period in 2021. The higher cash of $131 million was the result of the following drivers:
•$86 million higher net cash receipts from the settlement of derivative instruments, with net cash receipts of $121 million and $35 million during the nine months ended September 30, 2022 and 2021, respectively;
•$61 million of net proceeds from the sale of our business in Russia during the third quarter of 2022; and
•$34
million lower capital expenditures and $21 million lower investments in businesses and intangible assets in the nine months ended September 30, 2022; partially offset by
•$47 million less cash from marketable securities, resulting from $7 million of investments in marketable securities in the nine months ended September 30, 2022 compared to $40 million of net proceeds from sale of and investments in marketable securities in the nine months ended September
30, 2021.
As discussed in Note 13 to the Condensed Consolidated Financial Statements, we enter into derivative instruments for risk management purposes. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use derivative instruments, including forward contracts and options to manage certain foreign currency exposures and commodity prices.
See Note 6 to the Condensed Consolidated Financial Statements for further details regarding the sale of our business in Russia.
Cash
Flow - Financing Activities
Financing activities primarily include increases or decreases in short-term borrowings, issuance or repayment of long-term debt, dividends paid to common shareholders, repurchases of Common Stock and dividends or other payments to noncontrolling interests.
Nine Months Ended September 30,
(dollars
in millions)
2022
2021
Change
Financing Activities:
Increase (decrease) in short-term borrowings, net
$
80
$
(645)
$
725
Proceeds
from issuance of long-term debt
—
199
(199)
Payment of debt issuance costs
—
(11)
11
Repayment of long-term debt
(500)
—
(500)
Dividends
paid on Common Stock
(345)
(291)
(54)
Repurchases of Common Stock
(700)
(725)
25
Dividends paid to noncontrolling interest
(107)
(130)
23
Acquisition
of Zardoya Otis shares
(1,802)
—
(1,802)
Other financing activities, net
(28)
(18)
(10)
Net cash flows provided by (used in) financing activities
$
(3,402)
$
(1,621)
$
(1,781)
Net
cash used in financing activities increased $1.8 billion in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to the settlement in cash of the Tender Offer for $1,802 million (€1,663 million) during the second quarter of 2022. For additional discussion of the Tender Offer, see Note 1 to the Condensed Consolidated Financial Statements.
Net repayments on borrowings were $420 million during the nine months ended September 30, 2022, compared to $457 million during the same period in 2021, which were made with cash flow from operations and existing cash balances. Net repayments on borrowings are comprised of the following activity:
•Repayments
of long-term debt of $500 million, partially offset by net short-term borrowings of $80 million, during the nine months ended September 30, 2022; and
•Net repayments of short-term borrowings of $645 million, partially offset by net proceeds from the issuance of long-term debt of $188 million, during the nine months ended September 30, 2021.
For additional discussion of borrowings activity, see Note 7 to the Condensed Consolidated Financial Statements.
Guaranteed Securities: Summarized Financial Information
The following information is provided in compliance with Rule 13-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended, with respect to the 2023 Euro Notes, the 2026 Euro Notes and the 2031 Euro Notes (together the "Euro Notes"), in each case issued by Highland Holdings S.à r.l. (“Highland”), a private limited liability company (société à responsabilité limitée) incorporated and existing under the laws of the Grand Duchy of Luxembourg ("Luxembourg"). The Euro Notes are fully and unconditionally guaranteed by Otis Worldwide Corporation ("OWC") on an unsecured, unsubordinated basis. Refer to "Note 10: Borrowings and Lines of Credit" in Item 8 in
our 2021 Form 10-K, for additional information.
Highland is a wholly-owned, indirect consolidated subsidiary of OWC. OWC is incorporated under the laws of Delaware. As a company incorporated and existing under the laws of Luxembourg, and with its registered office in Luxembourg, Highland is subject to Luxembourg insolvency and bankruptcy laws in the event any insolvency proceedings are initiated against it. Luxembourg bankruptcy law is significantly different from, and may be less favorable to creditors than, the bankruptcy law in effect in the United States and may make it more difficult for creditors to recover the amount they could expect to recover in liquidation
under U.S. insolvency and bankruptcy rules.
The Euro Notes are not guaranteed by any of OWC's or Highland's subsidiaries (all OWC subsidiaries other than Highland are referred to herein as "non-guarantor subsidiaries"). Holders of the Euro Notes will have a direct claim only against Highland, as issuer, and OWC, as guarantor.
The following tables set forth the summarized financial information as of and for the nine months ended September 30, 2022 and as of December 31,
2021 of each of OWC and Highland on a standalone basis, which does not include the consolidated impact of the assets, liabilities, and financial results of their subsidiaries except as noted on the tables below, nor does it include any impact of intercompany eliminations as there were no intercompany transactions between OWC and Highland. This summarized financial information is not intended to present the financial position or results of operations of OWC or Highland in accordance with U.S. GAAP.
Highland Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)
$
—
$
—
Current
assets (intercompany receivables from non-guarantor subsidiaries)
1
2
Noncurrent assets (investments in consolidated subsidiaries)
12,524
12,524
Noncurrent assets (intercompany receivables from non-guarantor subsidiaries)
538
666
Noncurrent
assets (excluding investments in consolidated subsidiaries)
—
—
Current liabilities (intercompany payables to non-guarantor subsidiaries)
304
171
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)
6
2
Noncurrent
liabilities
1,539
1,795
Off-Balance Sheet Arrangements and Contractual Obligations
Item 5 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K discloses our off-balance sheet arrangements and contractual obligations. As of September 30,
2022, there have been no material changes to these off-balance sheet arrangements and contractual obligations, outside the ordinary course of business except for those disclosed in "Note 7, Borrowings and Lines of Credit" within Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk during the quarter and nine months ended September 30, 2022. For a discussion of the
Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Item 7A"Quantitative and Qualitative Disclosures About Market Risk" in our 2021 Form 10-K.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including the President and Chief Executive
Officer ("CEO"), the Executive Vice President and Chief Financial Officer ("CFO") and the Vice President and Chief Accounting Officer ("CAO"), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO, our CFO and our CAO have concluded that, as of September 30, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO, our CFO and our CAO, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Cautionary Note Concerning Factors That May Affect Future Results
This Form 10-Q contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other information released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for Otis’ future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,”“expect,”“expectations,”“plans,”“strategy,”“prospects,”“estimate,”“project,”“target,”“anticipate,”“will,”“should,”“see,”“guidance,”“outlook,”“medium-term,”“near-term,”“confident,”“goals” and other words of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, dividends, share repurchases, tax rates, R&D spend, credit ratings, net indebtedness and other measures of financial performance or potential future plans, strategies or transactions, or statements that relate to climate change and our intent to achieve certain ESG targets or goals, including operational impacts and costs associated therewith, and other statements that are not historical facts. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or
implied in the forward-looking statements. For those statements, Otis claims the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:
•the effect of economic conditions in the industries and markets in which Otis and its businesses operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction, pandemic health issues (including COVID-19 and variants thereof and the ongoing economic recovery therefrom and their effects on, among other things, global supply, demand and distribution), natural disasters, whether as a result of climate change or otherwise,
and the financial condition of Otis’ customers and suppliers;
•the effect of changes in political conditions in the U.S. and other countries in which Otis and its businesses operate, including the effects of the ongoing conflict between Russia and Ukraine and related sanctions and export controls, on general market conditions, global trade policies, currency exchange rates and stakeholder perception in the near term and beyond;
•challenges in the development, production, delivery, support, performance and realization of the anticipated benefits of advanced technologies and new products and services;
•future levels of indebtedness, capital spending and research and development spending;
•future availability
of credit and factors that may affect such availability, credit market conditions and Otis’ capital structure;
•the timing and scope of future repurchases of Otis’ common stock ("Common Stock"), which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash;
•fluctuations in prices and delays and disruption in delivery of materials and services from suppliers, whether as a result of COVID-19, the ongoing conflict between Russia and Ukraine or otherwise;
•cost reduction or containment actions, restructuring costs and related savings and other consequences thereof;
•new business and investment opportunities;
•the
outcome of legal proceedings, investigations and other contingencies;
•pension plan assumptions and future contributions;
•the impact of the negotiation of collective bargaining agreements and labor disputes;
•the effect of changes in tax, environmental, regulatory (including among other things import/export) and other laws and regulations in the U.S. and other countries in which Otis and its businesses operate, including as a result of the ongoing conflict between Russia and Ukraine;
•the ability of Otis to retain and hire key personnel;
•the scope, nature, impact or timing of acquisition and divestiture activity, the
integration of acquired businesses into existing businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs;
•the ability to achieve the expected benefits of the Tender Offer and the timing thereof;
•the determination by the Internal Revenue Service and other tax authorities that the distribution or certain related transactions in connection with the Separation should be treated as taxable transactions; and
•the amount of our obligations and nature of our disputes that have or may hereafter arise under the agreements we entered into with RTX and Carrier in connection with the Separation.
These and other factors are more fully discussed in this Form 10-Q in the "Notes to Condensed Consolidated Financial Statements" under the headings "Note 1: General" and "Note 16: Contingent Liabilities, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in our 2021 Form 10-K under the headings "Item 1. Business", "Item 1A. Risk Factors", "Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" under the headings "Note 1: Business Overview" and "Note 22: Contingent Liabilities" and elsewhere in each of these filings. The
forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with the SEC.
See Note 16, Contingent Liabilities to the Condensed Consolidated Financial Statements, for discussion regarding material legal proceedings.
Except as otherwise noted above, there have been no material developments in legal proceedings. For previously reported information about legal proceedings refer to "Part II - Other Information, Item 1. Legal Proceedings" in our Form 10-Qs for the quarters ended June 30, 2022
and March 31, 2022 and to Item 3 "Legal Proceedings" in our 2021 Form 10-K.
Item 1A. Risk Factors
Additional information regarding risk factors can be found under "Risks associated with the ongoing conflict between Russia and Ukraine" and "Cautionary Note Concerning Factors That May Affect Future Results" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q.
Except
as otherwise noted above, there have been no material changes in the Company's risk factors from those disclosed in Item 1A "Risk Factors", in our 2021Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides
information about our purchases during the quarter ended September 30, 2022 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.
2022
Total Number of Shares Purchased (thousands)
Average
Price Paid per Share (1)
Total Number of Shares Purchased as Part of a Publicly Announced Program (thousands)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (dollars in millions)
July 1 - July 31
—
$
—
—
$
800
August
1 - August 31
3,793
79.08
3,793
$
500
September 1 - September 30
—
—
—
$
500
Total
3,793
$
—
3,793
(1)
Average price paid per share includes costs associated with the repurchases.
On April 27, 2020, our Board of Directors authorized a share repurchase program for up to $1 billion of Common Stock. On March 9, 2022, our Board of Directors revoked any remaining share repurchase authority under the prior share repurchase program and approved a new share repurchase program for up to $1 billion of Common Stock. As of September 30, 2022, the maximum dollar value of shares that may yet be purchased under this current program was $500 million. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under
accelerated share repurchase programs or under plans complying with Rules 10b5-1 and 10b-18 under the Exchange Act.
XBRL
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
Cover
Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
Notes
to Exhibits List:
* Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the quarters and nine months ended September 30, 2022 and 2021, (ii) Condensed Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2022 and 2021, (iii) Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, (iv) Condensed
Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, (v) Condensed Consolidated Statements of Changes in Equity for the quarters and nine months ended September 30, 2022 and 2021 and (vi) Notes to Condensed Consolidated Financial Statements.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
