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

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).

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, comprised mostly of New Equipment. In June 2022 we entered into an agreement to sell our business in Russia to a third party, which was subject to customary closing conditions. The sale was completed in July 2022. See Note 19, "Subsequent Events" to the Condensed Consolidated Financial Statements, for further details.

Prior to the closing of the sale, we continued to fulfill our existing contracts and provide essential services in Russia, when possible, while remaining in compliance with applicable laws, including applicable sanctions and export controls. As of June 30, 2022, the Company's business in Russia had remaining performance obligations for contracts with customers of approximately $230 million, including customary performance guarantees and purchase obligations to suppliers. The Company estimates that, as of June 30, 2022, its Russia business had the net assets, cash flows and liquidity to continue to fulfill contractual obligations to customers, suppliers and employees.

To the extent possible, we continue to operate our business in Ukraine, which represented less than 1% of our full year 2021 and six months ended June 30, 2022 revenue and operating profit.

Additionally, 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, and continues to receive, numerous updates on the ongoing conflict between Russia and Ukraine and reviewed, and continues 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.

Russia Held for Sale Business

As a result of our decision during the second quarter of 2022 to sell our business in Russia, and the expectation that the sale of the business will be completed within the next twelve months, we have classified the business' assets and liabilities as held for sale as of June 30, 2022. The Company recorded an impairment loss of $18 million related to the net assets held for sale in Other expense (income), net in the Condensed Consolidated Statements of Operations for the quarter and six months ended June 30, 2022.

See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" and Note 19, "Subsequent Events" to the Condensed Consolidated Financial Statements for further details, including the completion of the sale in July 2022.

Zardoya Otis Tender Offer

As previously disclosed, the Company announced the Tender Offer to acquire all of the 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.

Impact of COVID-19 on our Company

The results of our operations and overall financial performance were impacted due to the COVID-19 pandemic during the quarters and six months ended June 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

• 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-K for additional risks related to COVID-19.

CRITICAL ACCOUNTING ESTIMATES

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 meeting the criteria for held for sale in the quarter ended June 30, 2022, we are excluding the results of our operations in Russia from the organic/operational volume changes in the current and prior year comparison in our Results of Operations and net sales and operating profit changes in our Segment Review of the Management’s Discussion and Analysis in this Form 10-Q and as noted below. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" to the Condensed Consolidated Financial Statements, for further details. In future filings, after the business in Russia is sold, the results of the operations in Russia will be excluded through Acquisitions and divestitures.

RESULTS OF OPERATIONS

Net Sales

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Net sales						$	3,488					$	3,701					$	6,902					$	7,109
Percentage change year-over-year						(5.8)		%										(2.9)		%

The factors contributing to the total percentage change year-over-year in total Net sales for the quarter and six months ended June 30, 2022 are as follows:

Components of Net sales change:						Quarter Ended June 30, 2022						Six Months Ended June 30, 2022
Organic volume						0.4		%				1.6		%
Foreign currency translation						(5.3)		%				(4.1)		%
Russia						(1.0)		%				(0.5)		%
Acquisitions and divestitures, net						0.1		%				0.1		%
Total % change						(5.8)		%				(2.9)		%

The Organic volume increase of 0.4% for the quarter ended June 30, 2022 was driven by an increase in organic sales of 5.2% in Service, largely offset by a decrease of (5.0)% in New Equipment organic sales.

The Organic volume increase of 1.6% for the six months ended June 30, 2022 was driven by an increase in organic sales of 5.5% in Service, partially offset by a decrease of (3.2)% in New Equipment organic sales.

See "Segment Review" section for a discussion of Net sales by segment.

Cost of Products and Services Sold

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Total cost of products and services sold						$	2,505					$	2,626					$	4,913					$	5,015
Percentage change year-over-year						(4.6)		%										(2.0)		%

The factors contributing to the percentage change year-over-year for the quarter and six months ended June 30, 2022 in total cost of products and services sold are as follows:

Components of Cost of Products and Services Sold change:						Quarter Ended June 30, 2022						Six Months Ended June 30, 2022
Organic volume						1.8		%				2.4		%
Foreign currency translation						(5.3)		%				(4.0)		%
Russia						(0.9)		%				(0.3)		%
Other						(0.2)		%				(0.1)		%
Total % change						(4.6)		%				(2.0)		%

The organic increase in total cost of products and services sold for the quarter and six months ended June 30, 2022 was primarily driven by the organic sales increases noted above and inflationary pressures, including higher commodity prices of $35 million and $71 million, respectively, primarily driven by steel, as well as higher freight and fuel costs and annual wage increases, partially mitigated by productivity.

Gross Margin

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Gross margin						$	983					$	1,075					$	1,989					$	2,094
Gross margin percentage						28.2		%				29.0		%				28.8		%				29.5		%

Gross margin percentage decreased 80 and 70 basis points for the quarter and six months ended June 30, 2022, respectively, when compared to the same periods for 2021, due to the inflationary pressures described above, partially offset by favorable service pricing and 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 June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Research and development						$	38					$	39					$	75					$	74
Percentage of Net sales						1.1		%				1.1		%				1.1		%				1.0		%

Research and development was relatively flat for the quarter and six months ended June 30, 2022, when compared to the same period for 2021.

Selling, General and Administrative

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Selling, general and administrative						$	439					$	484					$	898					$	966
Percentage of Net sales						12.6		%				13.1		%				13.0		%				13.6		%

Selling, general and administrative expenses decreased $45 million and $68 million for the quarter and six months ended June 30, 2022, respectively, when compared to the same periods in 2021, as cost containment actions, other employment related cost reductions, lower credit loss reserves and the impact from foreign exchange were partially offset by annual wage increases and higher restructuring costs.

Selling, general and administrative expenses as a percentage of Net sales decreased 50 and 60 basis points for the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Restructuring Costs

						Six Months Ended June 30,
(dollars in millions)						2022						2021
Restructuring costs						$	39					$	26

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 $39 million for the six months ended June 30, 2022 and included $37 million of costs related to 2022 actions, $1 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 six months ended June 30, 2022, we had cash outflows of approximately $34 million related to the restructuring actions and expect to make cash payments of $70 million to complete the actions announced, which will be comprised of the utilization of existing restructuring accruals and $26 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 $57 million for the 2022 actions and $39 million for the 2021 actions, of which approximately $23 million was realized for the 2022 and 2021 actions during the six months ended June 30, 2022.

For additional discussion of restructuring, see Note 12 to the Condensed Consolidated Financial Statements.

Other Income (Expense), Net

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Other income (expense), net						$	(19)					$	9					$	(3)					$	16

The change in Net Other Income (Expense), of $(28) million and $(19) million for the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021, was primarily driven by an impairment of our Russia investment of $(18) million and unfavorable foreign currency mark-to-market adjustments related to Russia operations.

For additional discussion of the Russia impairment, see Note 6 to the Condensed Consolidated Financial Statements.

Interest Expense (Income), Net

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Interest expense (income), net						$	35					$	27					$	72					$	59

The increase in Net Interest Expense (Income), of $8 million and $13 million in the quarter and six months ended June 30, 2022, respectively, compared to the same periods 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 for the quarter and six months ended June 30, 2022 is 2.0% and for the same periods in 2021 was 2.3% and 2.4%, respectively.

For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.

Income Taxes

						Quarter Ended June 30,												Six Months Ended June 30,
						2022						2021						2022						2021
Effective tax rate						22.8		%				28.8		%				25.4		%				27.4		%

The decrease in the effective tax rate for the quarter ended June 30, 2022, is primarily due to the elimination of Base Erosion Anti Abuse Tax (“BEAT”) in the U.S., and the release of a tax reserve related to a forward transfer pricing agreement with a European tax authority. In addition, the quarter ended June 30, 2021, included an income tax settlement related to the Separation. The decrease in the effective tax rate for the six months ended June 30, 2022, is partially offset by the absence of a reduction in the deferred tax liability related to repatriation of foreign earnings recorded in the quarter ended March 31, 2021.

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

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
Noncontrolling interest in subsidiaries' earnings						$	27					$	53					$	69					$	97
Net income attributable to Otis Worldwide Corporation						$	321					$	326					$	632					$	634

Noncontrolling interest in subsidiaries' earnings were lower for the quarter and six months ended June 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 six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Segment Review

Summary performance for our operating segments for the quarters ended June 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						$	1,534					$	1,727					$	99					$	147					6.5		%				8.5		%
Service						1,954						1,974						435						441						22.3		%				22.3		%
Total segment						3,488						3,701						534						588						15.3		%				15.9		%
General corporate expenses and other						—						—						(47)						(27)						—						—
Total						$	3,488					$	3,701					$	487					$	561					14.0		%				15.2		%

Summary performance for our operating segments for the six months ended June 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						$	2,956					$	3,185					$	192					$	251					6.5		%				7.9		%
Service						3,946						3,924						882						871						22.4		%				22.2		%
Total segment						6,902						7,109						1,074						1,122						15.6		%				15.8		%
General corporate expenses and other						—						—						(61)						(52)						—						—
Total						$	6,902					$	7,109					$	1,013					$	1,070					14.7		%				15.1		%

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 who 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 six months ended June 30, 2022 and 2021 was as follows:

						Quarter Ended June 30,																								Six Months Ended June 30,
(dollars in millions)						2022						2021						Change						Change						2022						2021						Change						Change
Net sales						$	1,534					$	1,727					$	(193)					(11.2)		%				$	2,956					$	3,185					$	(229)					(7.2)		%
Cost of sales						1,291						1,418						(127)						(9.0)		%				2,481						2,605						(124)						(4.8)		%
						243						309						(66)						(21.4)		%				475						580						(105)						(18.1)		%
Operating expenses						144						162						(18)						(11.1)		%				283						329						(46)						(14.0)		%
Operating profit						$	99					$	147					$	(48)					(32.7)		%				$	192					$	251					$	(59)					(23.5)		%
Operating profit margin						6.5		%				8.5		%																6.5		%				7.9		%

Summary analysis of the Net sales change for New Equipment for the quarter and six months ended June 30, 2022 compared with the quarter and six months ended June 30, 2021 was as follows:

Components of Net sales change:						Quarter Ended June 30, 2022						Six Months Ended June 30, 2022
Organic volume						(5.0)		%				(3.2)		%
Foreign currency translation						(3.8)		%				(2.7)		%
Russia						(1.9)		%				(1.0)		%
Acquisitions/Divestitures, net and Other						(0.5)		%				(0.3)		%
Total % change						(11.2)		%				(7.2)		%

Quarter Ended June 30, 2022

Net sales

Organic sales declined (5.0)% as high single digit growth in Asia Pacific and low single digit growth in EMEA was more than offset by declines in China and Americas.

Operating profit

New Equipment operating profit decreased $(48) million. Lower volume of $(7) million, under absorption from lower volume, higher commodity costs of $(35) 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 $(15) million and higher restructuring costs. Operating margin decreased 200 basis points.

Six Months Ended June 30, 2022

Net sales

Organic sales declined (3.2)% as mid single digit growth in Asia Pacific and low single digit growth in EMEA was more than offset by declines in China and Americas.

Operating profit

New Equipment operating profit decreased $(59) million. Lower volume of $(10) million, under absorption from lower volume, higher commodity costs of ($71) million, primarily steel, and increased freight costs were partially mitigated by favorable productivity and lower bad debt expense. Operating profit was also impacted by operations in Russia of $(22) million and higher restructuring costs. Operating margin decreased 140 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 six months ended June 30, 2022 and 2021 was as follows:

						Quarter Ended June 30,																								Six Months Ended June 30,
(dollars in millions)						2022						2021						Change						Change						2022						2021						Change						Change
Net sales						$	1,954					$	1,974					$	(20)					(1.0)		%				$	3,946					$	3,924					$	22					0.6		%
Cost of sales						1,214						1,208						6						0.5		%				2,432						2,410						22						0.9		%
						740						766						(26)						(3.4)		%				1,514						1,514						—						—		%
Operating expenses						305						325						(20)						(6.2)		%				632						643						(11)						(1.7)		%
Operating profit						$	435					$	441					$	(6)					(1.4)		%				$	882					$	871					$	11					1.3		%
Operating profit margin						22.3		%				22.3		%																22.4		%				22.2		%

Summary analysis of Service Net sales change for the quarter and six months ended June 30, 2022 compared with the quarter and six months ended June 30, 2021 was as follows:

Components of Net sales change:						Quarter Ended June 30, 2022						Six Months Ended June 30, 2022
Organic volume						5.2		%				5.5		%
Foreign currency translation						(6.5)		%				(5.1)		%
Russia						0.1		%				—		%
Acquisitions/Divestitures, net						0.2		%				0.2		%
Total % change						(1.0)		%				0.6		%

Quarter Ended June 30, 2022

Net sales

The organic sales increase of 5.2% is due to organic sales increases in maintenance and repair of 4.9% and modernization of 6.4%.

Components of Net sales change:						Maintenance and Repair						Modernization
Organic volume						4.9		%				6.4		%
Foreign currency translation						(6.5)		%				(6.1)		%
Russia						0.1		%				—		%
Acquisitions/Divestitures, net						0.2		%				—		%
Total % change						(1.3)		%				0.3		%

Operating profit

Service operating profit decreased $(6) million with higher volume of $29 million offset by foreign exchange headwinds of $(34) million. Annual wage increases and other inflationary pressures, including higher fuel costs, were more than offset by improved pricing on maintenance contracts, productivity, and other employment related cost reductions. Operating margin was flat.

Six Months Ended June 30, 2022

Net sales

The organic sales increase of 5.5% is due to organic sales increases in maintenance and repair of 5.2% and modernization of 6.7%.

Components of Net sales change:						Maintenance and Repair						Modernization
Organic volume						5.2		%				6.7		%
Foreign currency translation						(5.1)		%				(4.9)		%
Acquisitions/Divestitures, net						0.2		%				—		%
Total % change						0.3		%				1.8		%

Operating profit

Service operating profit increased $11 million due to higher volume of $63 million, favorable pricing on maintenance contracts and productivity, partially offset by foreign exchange headwinds of $(58) million, annual wage increases and other inflationary pressures, including higher fuel costs. Operating margin increased 20 basis points.

General Corporate Expenses and Other

						Quarter Ended June 30,												Six Months Ended June 30,
(dollars in millions)						2022						2021						2022						2021
General corporate expenses and other						$	(47)					$	(27)					$	(61)					$	(52)

General corporate expenses and other for the quarter ended June 30, 2022 increased $20 million primarily due to an impairment of our Russia investment of $18 million when compared to the same quarter in 2021.

General corporate expenses and other for the six months ended June 30, 2022 increased $9 million primarily due to an impairment of our Russia investment of $18 million, partially offset by lower non-recurring Separation costs incurred when compared to the same period in 2021.

LIQUIDITY AND FINANCIAL CONDITION

(dollars in millions)									June 30, 2022						December 31, 2021
Cash and cash equivalents									$	1,218					$	1,565
Total debt									6,683						7,273
Net debt (total debt less cash and cash equivalents)									5,465						5,708
Total equity 1									(4,888)						(3,144)
Total capitalization (total debt plus total equity)									1,795						4,129
Net capitalization (total debt plus total equity less cash and cash equivalents)									577						2,564
Total debt to total capitalization 1									372		%				176		%
Net debt to net capitalization 1									947		%				223		%

1 Our total debt to total capitalization ratio and net debt to net capitalization ratio increased in the six months ended June 30, 2022 due to the $1.5 billion reduction in equity upon the Tender Offer being approved by the Spanish regulator, and the resulting reclassification of our noncontrolling interest in Zardoya Otis to a forward purchase agreement in part and to redeemable noncontrolling interest in part, based on the value 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 June 30, 2022, we had cash and cash equivalents of approximately $1.2 billion, of which approximately 97% 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 June 30, 2022 and December 31, 2021, the amount of such restricted cash was approximately $13 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 June 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 six months ended June 30, 2022. The Company redeemed the $500 million floating notes originally due in 2023 during the six months ended June 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.

As a result of the increased debt incurred in 2021 to fund the Tender Offer, we temporarily suspended share repurchases as we focused on deleveraging. During the quarter ended March 31, 2022, we repaid certain debt and resumed our share repurchases. 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 $200 million had been utilized as of June 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

						Six Months Ended June 30,
(dollars in millions)						2022						2021
Net cash flows provided by operating activities						$	857					$	1,118

Cash generated from operating activities in the six months ended June 30, 2022 was $261 million lower than the same period in 2021, primarily due to lower cash flow related to current assets and current liabilities activity of $324 million, as described below. These were partially offset by $37 million of higher non-cash adjustments from Net income and $59 million of higher Other operating activities, net, primarily due to long-term accruals and other activities in the six months ended June 30, 2022.

Six Months Ended June 30, 2022 Changes in Working Capital

Cash outflows related to current assets and current liabilities operating activity for the six months ended June 30, 2022 were $14 million. These cash outflows were primarily driven by:

• Accrued liabilities, which decreased $140 million, primarily due to the timing of payments of employee-related benefits, income taxes and other accruals;

• Accounts receivable, net, which increased $104 million, primarily due to the timing of billings; and

• Inventories, which increased $39 million, primarily due to the impact of higher production inventory levels related to the timing of deliveries to construction sites; mostly offset by

• Accounts payable, which increased by $135 million, due to the timing of payments to suppliers; and

• Contract assets, current and Contract liabilities, current, net change of $134 million, driven by the timing of billings on contracts compared to the progression on current contracts.

Six Months Ended June 30, 2021 Changes in Working Capital

Cash inflows related to current assets and current liabilities operating activity for the six months ended June 30, 2021 were $310 million. These cash inflows were primarily driven by:

• Contract assets, current and Contract liabilities, current, net change of $225 million, driven by the timing of billings on contracts compared to the progression on current contracts;

• Accounts payable, which increased $124 million, primarily due to increased volume and the timing of payments to suppliers; and

• Other current assets, which decreased $55 million, due to prepaid income tax utilization and refunds received; partially offset by

• Accounts receivable, net, which increased $54 million, due to increased volume;

• Accrued liabilities, which decreased $23 million, primarily due to the timing of payments of income taxes, including the payment of foreign tax obligations pursuant to the TMA; and

• Inventories, which increased $17 million, due to the impact of higher production inventory related to higher volume and timing of deliveries to construction sites.

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.

Six Months Ended June 30, 2022 compared to Six Months Ended June 30, 2021

						Six Months Ended June 30,
(dollars in millions)						2022						2021						Change
Investing Activities:
Capital expenditures						$	(57)					$	(84)					$	27
Investments in businesses and intangible assets, net of cash acquired						(28)						(51)						23
Proceeds from the sale of (investments in) marketable securities						(7)						40						(47)
Receipts (payments) on settlements of derivative contracts						78						17						61
Other investing activities, net						4						11						(7)
Net cash flows used in investing activities						$	(10)					$	(67)					$	57

Cash flows used in investing activities in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 decreased $57 million, including the following drivers:

• $61 million higher net cash receipts from the settlement of derivative instruments, with net cash receipts of $78 million and $17 million during the six months ended June 30, 2022 and 2021, respectively; and

• $27 million lower capital expenditures and $23 million lower investments in businesses and intangible assets in the six months ended June 30, 2022; partially offset by

• $7 million of investments in marketable securities in the six months ended June 30, 2022 compared to $40 million of net proceeds from sale of and investments in marketable securities in the six months ended June 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.

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.

						Six Months Ended June 30,
(dollars in millions)						2022						2021						Change
Financing Activities:
Increase (decrease) in short-term borrowings, net						$	57					$	(345)					$	402
Proceeds from issuance of long-term debt						—						199						(199)
Payment of debt issuance costs						—						(2)						2
Repayment of long-term debt						(500)						—						(500)
Dividends paid on Common Stock						(224)						(189)						(35)
Repurchases of Common Stock						(400)						(506)						106
Dividends paid to noncontrolling interest						(41)						(55)						14
Acquisition of Zardoya Otis shares						(1,802)						—						(1,802)
Other financing activities, net						(27)						(18)						(9)
Net cash flows provided by (used in) financing activities						$	(2,937)					$	(916)					$	(2,021)

Net cash used in financing activities increased $2.0 billion in the six months ended June 30, 2022 compared to the same period in 2021, primarily due to the following:

• 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.

• Higher net repayments on borrowings of $443 million during the six months ended June 30, 2022 compared to $148 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 $57 million, during the six months ended June 30, 2022; and

◦Net repayments of short-term borrowings of $345 million, partially offset by net proceeds from the issuance of long-term debt of $197 million, during the six months ended June 30, 2021.

• Lower repurchases of Common Stock in the six months ended June 30, 2022 compared to the same period in 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 quarter ended June 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.

(dollars in millions)						Six Months Ended June 30, 2022
OWC Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						(1)
Income from consolidated subsidiaries						60
Income (loss) from operations excluding income from consolidated subsidiaries						2
Net income (loss) excluding income from consolidated subsidiaries						(49)

(dollars in millions)						June 30, 2022						December 31, 2021
OWC Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	85					$	197
Current assets (intercompany receivables from non-guarantor subsidiaries)						—						—
Noncurrent assets, investments in consolidated subsidiaries						1,271						1,271
Noncurrent assets (excluding investments in consolidated subsidiaries)						46						48
Current liabilities (intercompany payables to non-guarantor subsidiaries)						2,455						1,516
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						127						73
Noncurrent liabilities						5,184						5,725

(dollars in millions)						Six Months Ended June 30, 2022
Highland Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						—
Income from consolidated subsidiaries						738
Income (loss) from operations excluding income from consolidated subsidiaries						—
Net income (loss) excluding income from consolidated subsidiaries						(4)

(dollars in millions)						June 30, 2022						December 31, 2021
Highland Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	—					$	—
Current assets (intercompany receivables from non-guarantor subsidiaries)						2						2
Noncurrent assets (investments in consolidated subsidiaries)						12,524						12,524
Noncurrent assets (intercompany receivables from non-guarantor subsidiaries)						622						666
Noncurrent assets (excluding investments in consolidated subsidiaries)						—						—
Current liabilities (intercompany payables to non-guarantor subsidiaries)						370						171
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						5						2
Noncurrent liabilities						1,674						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 June 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 the "Note 7, Borrowings and Lines of Credit" within Item 1 of this Form 10-Q.