Otis Worldwide 10-Q 2023-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-39221

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OTIS WORLDWIDE CORPORATION

(Exact name of registrant as specified in its charter)

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Delaware						83-3789412
(State or other jurisdiction of incorporation)						(I.R.S. Employer Identification No.)

One Carrier Place, Farmington, Connecticut 06032

(Address of principal executive offices, including zip code)

(860) 674-3000

(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock ($0.01 par value)			OTIS			New York Stock Exchange
0.000% Notes due 2023			OTIS/23			New York Stock Exchange
0.318% Notes due 2026			OTIS/26			New York Stock Exchange
0.934% Notes due 2031			OTIS/31			New 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. Yes ý. 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). Yes ý. 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.

Large Accelerated Filer			ý			Accelerated Filer			¨
Non-accelerated Filer			¨			Smaller Reporting Company			☐
						Emerging Growth Company			☐

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 ☐. No ý.

As of April 14, 2023 there were 413,291,336 shares of Common Stock outstanding.

OTIS WORLDWIDE CORPORATION

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2023

			Page
PART I – FINANCIAL INFORMATION			4
Item 1. Financial Statements:			4
Condensed Consolidated Statements of Operations for the quarters ended March 31, 2023 and 2022			4
Condensed Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2023 and 2022			5
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022			6
Condensed Consolidated Statements of Changes in Equity for the quarters ended March 31, 2023 and 2022			7
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2023 and 2022			8
Notes to Condensed Consolidated Financial Statements			9
Report of Independent Registered Public Accounting Firm			25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II – OTHER INFORMATION			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 6. Exhibits			42
SIGNATURES			43

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.

PART I – FINANCIAL INFORMATION

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

						Quarter Ended March 31,
(dollars in millions, except per share amounts; shares in millions)						2023						2022
Net sales:
Product sales						$	1,307					$	1,422
Service sales						2,039						1,992
						3,346						3,414
Costs and expenses:
Cost of products sold						1,098						1,190
Cost of services sold						1,252						1,218
Research and development						35						37
Selling, general and administrative						455						459
						2,840						2,904
Other income (expense), net						7						16
Operating profit						513						526
Non-service pension cost (benefit)						—						—
Interest expense (income), net						33						37
Net income before income taxes						480						489
Income tax expense						128						136
Net income						352						353
Less: Noncontrolling interest in subsidiaries' earnings						21						42
Net income attributable to Otis Worldwide Corporation						$	331					$	311
Earnings per share (Note 2):
Basic						$	0.80					$	0.73
Diluted						$	0.79					$	0.73
Weighted average number of shares outstanding:
Basic shares						414.3						424.2
Diluted shares						417.8						427.7

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Net income						$	352					$	353
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments						(34)						—
Pension and postretirement benefit plan adjustments						—						2
Change in unrealized cash flow hedging						3						—
Other comprehensive income (loss), net of tax						(31)						2
Comprehensive income (loss), net of tax						321						355
Less: Comprehensive (income) loss attributable to noncontrolling interest						(24)						23
Comprehensive income attributable to Otis Worldwide Corporation						$	297					$	378

See accompanying Notes to Condensed Consolidated Financial Statements.

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in millions)						March 31, 2023						December 31, 2022
Assets
Cash and cash equivalents						$	1,117					$	1,189
Accounts receivable (net of allowance for expected credit losses of $139 and $152)						3,364						3,357
Contract assets						710						664
Inventories						642						617
Other current assets						320						316
Total Current Assets						6,153						6,143
Future income tax benefits						281						285
Fixed assets (net of accumulated depreciation of $1,183 and $1,151)						719						719
Operating lease right-of-use assets						468						449
Intangible assets, net						360						369
Goodwill						1,570						1,567
Other assets						294						287
Total Assets						$	9,845					$	9,819
Liabilities and Equity (Deficit)
Short-term borrowings and current portion of long-term debt						$	646					$	670
Accounts payable						1,515						1,717
Accrued liabilities						1,679						1,794
Contract liabilities						2,983						2,662
Total Current Liabilities						6,823						6,843
Long-term debt						6,116						6,098
Future pension and postretirement benefit obligations						391						392
Operating lease liabilities						329						315
Future income tax obligations

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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 2023 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

Impact of Macroeconomic Developments on Our Company

Macroeconomic developments have impacted, and continue to impact, aspects of the Company's operations and overall financial performance during the quarters ended March 31, 2023 and 2022. These macroeconomic developments include, among others, inflationary pressures, higher interest rates and most recently tighter credit conditions. These macroeconomic trends could continue to impact our business, including impacts to overall financial performance during the remainder of 2023, as a result of the following, among other things:

• Supplier liquidity, as well as supplier and raw material capacity constraints, delays and related costs;

• Customer demand impacting our new equipment, maintenance and repair, and modernization businesses;

• Customer liquidity constraints and related credit reserves; and

• Cancellations or delays of customer orders.

We currently do not expect any significant impact to our capital and financial resources from these macroeconomic developments, 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 the COVID-19 pandemic, including macroeconomic risks associated therewith, and global economic, capital market and political conditions in general, and conditions in the construction and infrastructure industries in particular.

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 2022 and quarter ended March 31, 2023 revenue and operating profit. As previously disclosed, we sold our business in Russia to a third party on July 27, 2022, which represented approximately 1% of both our revenue and operating profit in 2022.

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 2022 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.

Environmental, Social and Governance ("ESG")

There have been no, and we do not expect there to be in the near term, material impacts on our business, financial condition or results of operations as a result of compliance with legislation or regulatory rules regarding climate change, from the known physical effects of climate change or as a result of implementing our ESG initiatives. Increased regulation (including pending SEC and European Union requirements) and other climate change concerns, however, could subject us to additional costs and restrictions, and we are not able to predict how such regulations or concerns would affect our business, operations or financial results.

For additional discussion of Otis’ ESG goals, see the discussion under “Environmental, Social and Governance (“ESG”)” in Item 1 in our 2022 Form 10-K.

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.

RESULTS OF OPERATIONS

Net Sales

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Net sales						$	3,346					$	3,414
Percentage change year-over-year						(2.0)		%

The factors contributing to the total percentage change year-over-year in total Net sales for the quarter ended March 31, 2023 are as follows:

Components of Net sales change:						Quarter Ended March 31, 2023
Organic volume						3.6		%
Foreign currency translation						(4.4)		%
Acquisitions and divestitures, net						(1.2)		%
Total % change						(2.0)		%

The Organic volume increase of 3.6% for the quarter ended March 31, 2023 was driven by an increase in organic sales of 6.3% in Service, slightly offset by a decrease of (0.1)% in New Equipment organic sales.

The decrease in Net sales due to Acquisitions and divestitures, net is primarily the result of the sale of our Russia business in the third quarter of 2022.

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

Cost of Products and Services Sold

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Total cost of products and services sold						$	2,350					$	2,408
Percentage change year-over-year						(2.4)		%

The factors contributing to the percentage change year-over-year for the quarter ended March 31, 2023 in total cost of products and services sold are as follows:

Components of Cost of Products and Services Sold change:						Quarter Ended March 31, 2023
Organic volume						3.9		%
Foreign currency translation						(4.7)		%
Acquisitions and divestitures, net and other						(1.6)		%
Total % change						(2.4)		%

The organic increase in Total cost of products and services sold for the quarter ended March 31, 2023 was primarily driven by the organic sales increases noted above and inflationary pressures, including annual wage increases and higher Service related material costs, partially mitigated by productivity.

The decrease in Total cost of products and services sold due to Acquisitions and divestitures, net is primarily the result of the sale of our Russia business in the third quarter of 2022.

Gross Margin

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Gross margin						$	996					$	1,006
Gross margin percentage						29.8		%				29.5		%

Gross margin percentage increased 30 basis points for the quarter ended March 31, 2023, when compared to the same period for 2022, due to the benefit from Service sales growing faster than New Equipment sales, favorable service pricing, and the benefits from productivity, partially offset by the inflationary pressures described above.

See the "Segment Review" section for discussion of operating results by segment.

Research and Development

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Research and development						$	35					$	37
Percentage of Net sales						1.0		%				1.1		%

Research and development was relatively flat for the quarter ended March 31, 2023, when compared to the same period for 2022.

Selling, General and Administrative

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Selling, general and administrative						$	455					$	459
Percentage of Net sales						13.6		%				13.4		%

Selling, general and administrative expenses decreased $4 million for the quarter ended March 31, 2023, when compared to the same period in 2022, as cost containment actions, lower restructuring costs, as well as the impact from foreign exchange of $14 million for the quarter ended March 31, 2023, were partially offset by annual wage increases and higher other employment related costs.

Selling, general and administrative expenses as a percentage of Net sales increased 20 basis points for the quarter ended March 31, 2023, compared to the same period in 2022.

Restructuring Costs

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Restructuring costs						$	5					$	14

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 $5 million for the quarter ended March 31, 2023 and included $4 million of costs related to 2023 actions and $1 million of costs related to 2022 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.

The table below presents approximate cash outflows related to the restructuring actions during the quarter ended March 31, 2023, and the expected cash payments to complete the actions announced:

(dollars in millions)
Cash outflows during the quarter ended March 31, 2023						$	10
Expected cash payments remaining to complete actions announced						46

We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $7 million for the 2023 actions and $70 million for the 2022 actions, of which approximately $15 million was realized for the 2023 and 2022 actions during the quarter ended March 31, 2023.

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

Other Income (Expense), Net

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Other income (expense), net						$	7					$	16

The change in Other Income (Expense), Net, of ($9) million for the quarter ended March 31, 2023, compared to the same period in 2022, was primarily driven by unfavorable foreign currency mark-to-market adjustments and the absence of Separation related impacts recognized during the quarter ended March 31, 2022.

Interest Expense (Income), Net

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Interest expense (income), net						$	33					$	37

Interest Expense (Income), Net was relatively flat in the quarter ended March 31, 2023, compared to the same period in 2022.

The average interest rate on our long-term debt for each of the quarters ended March 31, 2023 and 2022 was 2.0%. For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.

Income Taxes

						Quarter Ended March 31,
						2023						2022
Effective tax rate						26.7		%				27.8		%

The decrease in the effective tax rate for the quarter ended March 31, 2023, is primarily due to the impact of foreign currency on a distribution of previously taxed income and a change in the mix of earnings.

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 March 31,
(dollars in millions)						2023						2022
Noncontrolling interest in subsidiaries' earnings						$	21					$	42
Net income attributable to Otis Worldwide Corporation						$	331					$	311

Noncontrolling interest in subsidiaries' earnings were lower for the quarter ended March 31, 2023, compared to the same period in 2022 primarily due to Otis' increased ownership in Otis Mobility (formerly Zardoya Otis) in the second quarter of 2022. For details on the results of the Tender Offer and purchases of shares of Otis Mobility not previously owned by the Company, see Note 1 of the Company's audited consolidated financial statements and notes thereto included in our 2022 Form 10-K.

Net income attributable to Otis Worldwide Corporation increased for the quarter ended March 31, 2023, compared to the same period in 2022 as lower noncontrolling interest in subsidiaries' earnings and the benefit of a lower effective tax rate were partially offset by lower operating profit (including the impact of foreign exchange rates).

Segment Review

Summary performance for our operating segments for the quarters ended March 31, 2023 and 2022 was as follows:

						Net Sales												Operating Profit												Operating Profit Margin
(dollars in millions)						2023						2022						2023						2022						2023						2022
New Equipment						$	1,307					$	1,422					$	67					$	93					5.1		%				6.5		%
Service						2,039						1,992						476						447						23.3		%				22.4		%
Total segment						3,346						3,414						543						540						16.2		%				15.8		%
General corporate expenses and other						—						—						(30)						(14)						—						—
Total						$	3,346					$	3,414					$	513					$	526					15.3		%				15.4		%

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 ended March 31, 2023 and 2022 was as follows:

						Quarter Ended March 31,
(dollars in millions)						2023						2022						Change						Change
Net sales						$	1,307					$	1,422					$	(115)					(8.1)		%
Cost of sales						1,098						1,190						(92)						(7.7)		%
						209						232						(23)						(9.9)		%
Operating expenses						142						139						3						2.2		%
Operating profit						$	67					$	93					$	(26)					(28.0)		%
Operating profit margin						5.1		%				6.5		%

Summary analysis of the Net sales change for New Equipment for the quarter ended March 31, 2023 compared with the quarter ended March 31, 2022 was as follows:

Components of Net sales change:						Quarter Ended March 31, 2023
Organic volume						(0.1)		%
Foreign currency translation						(4.8)		%
Acquisitions/Divestitures, net and Other						(3.2)		%
Total % change						(8.1)		%

Quarter Ended March 31, 2023

Net sales

Organic sales declined (0.1)% as high-single digit organic sales growth in EMEA was offset by mid-single digit decline in the Americas and low-single digit decline in Asia, as strong performance in Asia Pacific was offset by a decline in China.

The decrease in Net sales due to Acquisitions/Divestitures, net and Other is primarily the result of the sale of our Russia business in the third quarter of 2022.

Operating profit

New Equipment operating profit decreased $(26) million including foreign exchange headwinds of $(5) million. Unfavorable regional and product mix were partially offset by favorable productivity. 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 ended March 31, 2023 and 2022 was as follows:

						Quarter Ended March 31,
(dollars in millions)						2023						2022						Change						Change
Net sales						$	2,039					$	1,992					$	47					2.4		%
Cost of sales						1,252						1,218						34						2.8		%
						787						774						13						1.7		%
Operating expenses						311						327						(16)						(4.9)		%
Operating profit						$	476					$	447					$	29					6.5		%
Operating profit margin						23.3		%				22.4		%

Summary analysis of Service Net sales change for the quarter ended March 31, 2023 was as follows:

Components of Net sales change:						Quarter Ended March 31, 2023
Organic volume						6.3		%
Foreign currency translation						(4.1)		%
Acquisitions/Divestitures, net						0.2		%
Total % change						2.4		%

Quarter Ended March 31, 2023

Net sales

The organic sales increase of 6.3% is due to organic sales increases in maintenance and repair of 7.0% and modernization of 3.3%.

Components of Net sales change:						Maintenance and Repair						Modernization
Organic volume						7.0		%				3.3		%
Foreign currency translation						(4.4)		%				(3.8)		%
Acquisitions/Divestitures, net						0.2		%				0.8		%
Total % change						2.8		%				0.3		%

Operating profit

Service operating profit increased $29 million with higher volume of $43 million offset by foreign exchange headwinds of $(20) million. Favorable pricing on maintenance contracts and productivity, were partially offset by annual wage increases and other inflationary pressures, including higher material costs. Operating profit was also impacted by lower restructuring costs. Operating margin increased 90 basis points.

General Corporate Expenses and Other

						Quarter Ended March 31,
(dollars in millions)						2023						2022
General corporate expenses and other						$	(30)					$	(14)

General corporate expenses and other for the quarter ended March 31, 2023 increased $16 million compared to the same quarter in 2022, primarily due to unfavorable foreign currency mark-to-market adjustments and higher corporate costs.

LIQUIDITY AND FINANCIAL CONDITION

(dollars in millions)									March 31, 2023						December 31, 2022
Cash and cash equivalents									$	1,117					$	1,189
Total debt									6,762						6,768
Net debt (total debt less cash and cash equivalents)									5,645						5,579
Total equity									(4,767)						(4,799)
Total capitalization (total debt plus total equity)									1,995						1,969
Net capitalization (total debt plus total equity less cash and cash equivalents)									878						780
Total debt to total capitalization									339		%				344		%
Net debt to net capitalization									643		%				715		%

As of March 31, 2023, we had cash and cash equivalents of approximately $1.1 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 March 31, 2023 and December 31, 2022, the amount of such restricted cash was approximately $4 million and $6 million, respectively.

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 March 31, 2023 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, including recent tightening of credit markets. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.

As of March 31, 2023, we had a revolving credit agreement with various banks providing for a $1.5 billion unsecured, unsubordinated 5-year revolving credit facility. As of March 31, 2023, there were no borrowings under the revolving credit agreement. The undrawn portion of the revolving credit agreement serves as a backstop for the issuance of commercial paper.

There were no long-term debt issuances for the quarter ended March 31, 2023. The Company redeemed the $500 million floating notes originally due in 2023 during the quarter ended March 31, 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 December 1, 2022, our Board of Directors approved a share repurchase program for up to $2.0 billion of Common Stock, of which $175 million had been utilized as of March 31, 2023. 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 Flows

The following table reflects the major categories of cash flows. For additional details, see the Condensed Consolidated Statement of Cash Flows.

						Quarter Ended March 31,
(dollars in millions)						2023						2022
Net cash flows provided by (used in):
Operating activities						$	278					$	504
Investing activities						(21)						(17)
Financing activities						(341)						(823)
Effect of foreign exchange rate changes on cash and cash equivalents						10						(63)
Net increase (decrease) in cash and cash equivalents and restricted cash						$	(74)					$	(399)

Operating activities

Cash flows from operating activities primarily represent inflows and outflows associated with our operations. Primary activities include net income from operations adjusted for non-cash transactions, working capital changes and changes in other assets and liabilities. The year-over-year decrease in net cash provided by operating activities was primarily driven by working capital balances during the periods, including a larger decrease in Accounts payable in the quarter ended March 31, 2023 compared to the same period in 2022, due to the timing of payments to suppliers and higher balances due as of December 31, 2022 compared to December 31, 2021.

During the quarter ended March 31, 2023, net cash provided by operating activities was $278 million. The primary driver of the inflow related to $352 million of net income and changes in Contract assets, current and Contract liabilities, current, net, due to the timing of billings on contracts compared to the progression on current contracts. These were partially offset by a decrease in Accounts payable due to the timing of payments to suppliers and a decrease in Accrued liabilities due to the timing of payments, including employee-related benefits and interest.

During the quarter ended March 31, 2022, net cash provided by operating activities was $504 million. The primary driver of the inflow related to $353 million of net income and changes in Contract assets, current and Contract liabilities, current, net, due to the timing of billings on contracts compared to the progression on current contracts. These were partially offset by a decrease in Accrued liabilities due to the timing of payments of employee-related benefits, interest and income taxes, as well as an increase in Accounts receivable, net, due to the timing of billings.

Investing activities

Cash flows from investing activities primarily represent inflows and outflows associated with long-term assets, including capital expenditures, investments in businesses and securities, proceeds from the sale of fixed assets and the settlement of derivative contracts. During the quarter ended March 31, 2023, net cash used in investing activities was $21 million. The primary driver of the outflow related to $25 million of capital expenditures and $16 million acquisitions of businesses and intangible assets, partially offset by $17 million of net cash receipts from the settlement of derivative instruments. During the quarter ended March 31, 2022, net cash used in investing activities was $17 million. The primary driver of the outflow related to $30 million of capital expenditures, $8 million acquisitions of businesses and intangible assets and $7 million investments in marketable securities, partially offset by $28 million of net cash receipts from the settlement of derivative instruments.

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 and commodity price exposures.

Financing activities

Cash flows from financing activities primarily represent inflows and outflows associated with equity and borrowings. Primary activities include short-term and long-term borrowing activity, paying dividends to shareholders, the repurchase of our Common Stock and dividends or other payments to noncontrolling interests. During the quarter ended March 31, 2023, net cash used in financing activities was $341 million. The primary drivers of the outflow were the repurchases of our Common Stock of $175 million and dividends paid on our Common Stock of $120 million. During the quarter ended March 31, 2022, net cash used in financing activities was $823 million. The primary drivers of the outflow were the repayments of long-term debt of $500 million, repurchases of our Common Stock of $200 million and dividends paid on our Common Stock of $102 million.

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 2022 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 March 31, 2023 and as of December 31, 2022 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)						Quarter Ended March 31, 2023
OWC Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						2
Income from consolidated subsidiaries						60
Income (loss) from operations excluding income from consolidated subsidiaries						(2)
Net income (loss) excluding income from consolidated subsidiaries						(28)

(dollars in millions)						March 31, 2023						December 31, 2022
OWC Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	111					$	94
Current assets (intercompany receivables from non-guarantor subsidiaries)						—						—
Noncurrent assets, investments in consolidated subsidiaries						1,236						1,236
Noncurrent assets (excluding investments in consolidated subsidiaries)						44						45
Current liabilities (intercompany payables to non-guarantor subsidiaries)						3,383						3,090
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						144						166
Noncurrent liabilities						5,188						5,186

(dollars in millions)						Quarter Ended March 31, 2023
Highland Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						—
Income from consolidated subsidiaries						—
Income (loss) from operations excluding income from consolidated subsidiaries						—
Net income (loss) excluding income from consolidated subsidiaries						(21)

(dollars in millions)						March 31, 2023						December 31, 2022
Highland Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	—					$	—
Current assets (intercompany receivables from non-guarantor subsidiaries)						1						195
Noncurrent assets (investments in consolidated subsidiaries)						15,716						12,524
Noncurrent assets (intercompany receivables from non-guarantor subsidiaries)						581						572
Noncurrent assets (excluding investments in consolidated subsidiaries)						—						—
Current liabilities (intercompany payables to non-guarantor subsidiaries)						382						—
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						542						532
Noncurrent liabilities (excluding intercompany payables to non-guarantor subsidiaries)						1,177						1,160
Noncurrent liabilities (intercompany payables to non-guarantor subsidiaries)						3,244						—

Off-Balance Sheet Arrangements and Contractual Obligations

Item 5 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Form 10-K discloses our off-balance sheet arrangements and contractual obligations. As of March 31, 2023, 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.