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 life cycle.

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 2022 Form 10-K.

Recent Developments

UpLift Program

The UpLift program was announced in July 2023, with the goal to transform our operating model. The program will include the standardization of our processes and improving our supply chain procurement, among other aspects of the program, as well as restructuring actions. We expect the program to generate approximately $150 million in annual savings by mid-year 2025, with restructuring and other non-recurring costs ("transformation costs") over that period of approximately the same amount. For further details, refer to the discussion on restructuring costs in the "Results of Operations," as well as Note 12 and Note 19 to the Condensed Consolidated Financial Statements.

Impact of Global Macroeconomic Developments on Our Company

Global macroeconomic developments have impacted, and continue to impact, aspects of the Company's operations and overall financial performance during the quarters and nine months ended September 30, 2023 and 2022. These macroeconomic developments include, among others, inflationary pressures, higher interest rates and 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 2022 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 and Other Geo-political Events

The ongoing conflict between Russia and Ukraine has resulted in worldwide geo-political 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 nine months ended September 30, 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.

Additionally, we do not have operations in Israel or Gaza and currently do not expect the recent war in the region to have a material impact on our business.

We cannot predict how the events described above will evolve. If the events continue for a significant time or expand to other countries, they 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 2022 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 September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Net sales						$	3,523					$	3,344					$	10,589					$	10,246
Percentage change year-over-year						5.4		%										3.3		%

The factors contributing to the total percentage change year-over-year in total Net sales for the quarter and nine months ended September 30, 2023 are as follows:

Components of Net sales change:						Quarter Ended September 30, 2023						Nine Months Ended September 30, 2023
Organic volume						5.2		%				6.1		%
Foreign currency translation						0.6		%				(2.1)		%
Acquisitions and divestitures, net						(0.4)		%				(0.7)		%
Total % change						5.4		%				3.3		%

The Organic volume increase of 5.2% for the quarter ended September 30, 2023 was driven by an increase in organic sales of 8.4% in Service and 1.0% in New Equipment. The Organic volume increase of 6.1% for the nine months ended September 30, 2023 was driven by an increase in organic sales of 8.0% in Service and 3.6% in New Equipment.

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 September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Total cost of products and services sold						$	2,477					$	2,373					$	7,464					$	7,286
Percentage change year-over-year						4.4		%										2.4		%

The factors contributing to the percentage change year-over-year for the quarter and nine months ended September 30, 2023 in total cost of products and services sold are as follows:

Components of Cost of Products and Services Sold change:						Quarter Ended September 30, 2023						Nine Months Ended September 30, 2023
Organic volume						4.3		%				5.7		%
Foreign currency translation						0.4		%				(2.2)		%
Acquisitions and divestitures, net and other						(0.3)		%				(1.1)		%
Total % change						4.4		%				2.4		%

The organic increase in Total cost of products and services sold for the quarter and nine months ended September 30, 2023 was primarily driven by the organic sales increases noted above. Inflationary pressures, including annual wage increases and higher Service related material costs were mitigated by productivity and lower commodity prices, primarily steel.

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 September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Gross margin						$	1,046					$	971					$	3,125					$	2,960
Gross margin percentage						29.7		%				29.0		%				29.5		%				28.9		%

Gross margin percentage increased 70 and 60 basis points for the quarter and nine months ended September 30, 2023, respectively, when compared to the same periods for 2022, due to the benefit from Service sales growing faster than New Equipment sales, favorable pricing, lower commodity prices, and the benefits from productivity, partially offset by the inflationary pressures described above.

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

Research and Development

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Research and development						$	36					$	37					$	107					$	112
Percentage of Net sales						1.0		%				1.1		%				1.0		%				1.1		%

Research and development was relatively flat for the quarter and nine months ended September 30, 2023, when compared to the same periods for 2022.

Selling, General and Administrative

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Selling, general and administrative						$	452					$	417					$	1,386					$	1,315
Percentage of Net sales						12.8		%				12.5		%				13.1		%				12.8		%

Selling, general and administrative expenses increased $35 million for the quarter ended September 30, 2023 driven by annual wage increases, higher other employment related costs, higher restructuring costs and unfavorable foreign exchange impacts of $5 million, partially offset by cost containment actions when compared to the same period in 2022.

Selling, general and administrative expenses increased $71 million for the nine months ended September 30, 2023 driven by annual wage increases and higher other employment related costs, partially offset by cost containment actions, lower restructuring costs and favorable foreign exchange impacts of $14 million. The nine months ended September 30, 2023, compared to the same period in 2022, was also impacted by higher credit loss reserves.

Selling, general and administrative expenses as a percentage of Net sales increased 30 basis points for the quarter and nine months ended September 30, 2023, compared to the same periods in 2022.

Restructuring and Transformation Costs

						Nine Months Ended September 30,
(dollars in millions)						2023						2022
Restructuring costs						$	36					$	45

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.

During the nine months ended September 30, 2023, we also incurred $4 million of incremental non-restructuring costs associated with the UpLift program ("transformation costs"), including consulting and personnel costs, which were recorded in Other income (expense), net in the Condensed Consolidated Statements of Operations. There were no UpLift restructuring actions initiated in the nine months ended September 30, 2023. See Note 19 to the Condensed Consolidated Financial Statements for discussion regarding UpLift restructuring actions approved following period-end.

Total restructuring costs were $36 million for the nine months ended September 30, 2023 and included $31 million of costs related to 2023 actions and $5 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 nine months ended September 30, 2023, and the expected cash payments to complete the actions announced:

(dollars in millions)
Cash outflows during the nine months ended September 30, 2023						$	30
Expected cash payments remaining to complete actions announced						70

We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $28 million for the 2023 actions and $66 million for the 2022 actions, of which approximately $55 million was realized for the 2023 and 2022 actions during the nine months ended September 30, 2023.

For additional discussion of restructuring, see Note 12 and Note 19 to the Condensed Consolidated Financial Statements.

Other Income (Expense), Net

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Other income (expense), net						$	13					$	12					$	32					$	9

The change in Other Income (Expense), Net, of $1 million and $23 million for the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, was primarily driven by the absence of the loss on the sale of our Russia business and related charges of $6 million and $24 million when compared to the same periods in 2022, respectively, partially offset by UpLift transformation costs of $4 million in the quarter and nine months ended September 30, 2023. These periods were also impacted by foreign currency mark-to-market adjustments.

Interest Expense (Income), Net

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Interest expense (income), net						$	39					$	35					$	109					$	107

Interest Expense (Income), increased $4 million and $2 million for the quarter and nine months ended September 30, 2023, compared to the same periods in 2022, respectively, driven by higher interest expense related to the $750 million unsecured, unsubordinated debt issued in August 2023, partially offset by higher interest income.

The average interest rate on our long-term debt for each of the quarter and nine months ended September 30, 2023 and 2022 was approximately 2%. For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.

Income Taxes

						Quarter Ended September 30,												Nine Months Ended September 30,
						2023						2022						2023						2022
Effective tax rate						25.8		%				29.0		%				25.7		%				26.7		%

The decrease in the effective tax rate for the quarter ended September 30, 2023, is primarily due to a reduction in the deferred tax liability related to repatriation of foreign earnings, reversal of tax reserves related to the U.S. foreign tax credit regulations, and the closure of a foreign tax audit.

The decrease in the effective tax rate for the nine months ended September 30, 2023 is due to a lower forecasted tax cost on repatriation in 2023. This is partially offset by the absence of a tax reserve release related to a forward transfer pricing agreement with a European tax authority and the elimination of Base Erosion Anti-Abuse Tax in the U.S., recorded in 2022.

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 September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
Noncontrolling interest in subsidiaries' earnings						$	19					$	26					$	71					$	95
Net income attributable to Otis Worldwide Corporation						$	376					$	324					$	1,083					$	956

Noncontrolling interest in subsidiaries' earnings were $(7) million lower for the quarter ended September 30, 2023, compared to the same period in 2022, primarily driven by the impacts of foreign exchange and net income from non-wholly owned subsidiaries. Ownership interest in the underlying non-wholly owned subsidiaries has remained generally consistent year-over-year.

Noncontrolling interest in subsidiaries' earnings were $(24) million lower for the nine months ended September 30, 2023, compared to the same period in 2022, primarily driven by Otis' increased ownership in Otis Mobility (formerly Zardoya Otis) starting in the second quarter of 2022, as well as impacts of foreign exchange and net income from non-wholly owned subsidiaries. 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 and nine months ended September 30, 2023, compared to the same periods in 2022, due to higher operating profit (including the impact of foreign exchange rates), lower noncontrolling interest in subsidiaries' earnings, and a lower effective tax rate.

Segment Review

Summary performance for our operating segments for the quarters ended September 30, 2023 and 2022 was as follows:

						Net Sales												Operating Profit												Operating Profit Margin
(dollars in millions)						2023						2022						2023						2022						2023						2022
New Equipment						$	1,435					$	1,447					$	94					$	100					6.6		%				6.9		%
Service						2,088						1,897						507						446						24.3		%				23.5		%
Total segment						3,523						3,344						601						546						17.1		%				16.3		%
General corporate expenses and other						—						—						(30)						(17)						—						—
Total						$	3,523					$	3,344					$	571					$	529					16.2		%				15.8		%

Summary performance for our operating segments for the nine months ended September 30, 2023 and 2022 was as follows:

						Net Sales												Operating Profit												Operating Profit Margin
(dollars in millions)						2023						2022						2023						2022						2023						2022
New Equipment						$	4,346					$	4,403					$	277					$	292					6.4		%				6.6		%
Service						6,243						5,843						1,475						1,328						23.6		%				22.7		%
Total segment						10,589						10,246						1,752						1,620						16.5		%				15.8		%
General corporate expenses and other						—						—						(88)						(78)						—						—
Total						$	10,589					$	10,246					$	1,664					$	1,542					15.7		%				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, 2023 and 2022 was as follows:

						Quarter Ended September 30,																								Nine Months Ended September 30,
(dollars in millions)						2023						2022						Change						Change						2023						2022						Change						Change
Net sales						$	1,435					$	1,447					$	(12)					(0.8)		%				$	4,346					$	4,403					$	(57)					(1.3)		%
Cost of sales						1,195						1,208						(13)						(1.1)		%				3,621						3,689						(68)						(1.8)		%
						240						239						1						0.4		%				725						714						11						1.5		%
Operating expenses						146						139						7						5.0		%				448						422						26						6.2		%
Operating profit						$	94					$	100					$	(6)					(6.0)		%				$	277					$	292					$	(15)					(5.1)		%
Operating profit margin						6.6		%				6.9		%																6.4		%				6.6		%

Summary analysis of the Net sales change for New Equipment for the quarter and nine months ended September 30, 2023 compared with the quarter and nine months ended September 30, 2022 was as follows:

Components of Net sales change:						Quarter Ended September 30, 2023						Nine Months Ended September 30, 2023
Organic volume						1.0		%				3.6		%
Foreign currency translation						(0.9)		%				(3.0)		%
Acquisitions and divestitures, net and other						(0.9)		%				(1.9)		%
Total % change						(0.8)		%				(1.3)		%

Quarter Ended September 30, 2023

Net sales

The organic sales increase of 1.0% was driven by high-single digit organic sales growth in Americas and EMEA, partially offset by mid-single digit organic sales decline in Asia.

The decrease in Net sales due to Acquisitions and 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 $(6) million including foreign exchange headwinds of ($9) million with volume relatively flat. Favorable price, improved productivity and commodity tailwinds more than offset regional and product mix headwinds and higher selling, general and administrative costs. Operating profit was also impacted by higher restructuring costs. Operating margin decreased 30 basis points.

Nine Months Ended September 30, 2023

Net sales

The organic sales increase of 3.6% was driven by high-single digit organic sales growth in EMEA, mid-single digit organic sales growth in Americas and low-single digit organic sales growth in Asia.

The decrease in Net sales due to Acquisitions and 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 $(15) million including $(23) million of foreign exchange headwinds. Higher volume, favorable price, improved productivity and commodity tailwinds were partially offset by regional and product mix headwinds and higher selling, general and administrative costs. Operating margin decreased 20 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, 2023 and 2022 was as follows:

						Quarter Ended September 30,																								Nine Months Ended September 30,
(dollars in millions)						2023						2022						Change						Change						2023						2022						Change						Change
Net sales						$	2,088					$	1,897					$	191					10.1		%				$	6,243					$	5,843					$	400					6.8		%
Cost of sales						1,282						1,165						117						10.0		%				3,843						3,597						246						6.8		%
						806						732						74						10.1		%				2,400						2,246						154						6.9		%
Operating expenses						299						286						13						4.5		%				925						918						7						0.8		%
Operating profit						$	507					$	446					$	61					13.7		%				$	1,475					$	1,328					$	147					11.1		%
Operating profit margin						24.3		%				23.5		%																23.6		%				22.7		%

Summary analysis of Service Net sales change for the quarter and nine months ended September 30, 2023 compared with the quarter and nine months ended September 30, 2022 was as follows:

Components of Net sales change:						Quarter Ended September 30, 2023						Nine Months Ended September 30, 2023
Organic volume						8.4		%				8.0		%
Foreign currency translation						1.8		%				(1.3)		%
Acquisitions and divestitures, net						(0.1)		%				0.1		%
Total % change						10.1		%				6.8		%

Quarter Ended September 30, 2023

Net sales

The organic sales increase of 8.4% is due to organic sales increases in maintenance and repair of 8.6% and in modernization of 7.6%.

Components of Net sales change:						Maintenance and Repair						Modernization
Organic volume						8.6		%				7.6		%
Foreign currency translation						2.0		%				0.9		%
Acquisitions and divestitures, net						(0.2)		%				0.3		%
Total % change						10.4		%				8.8		%

Operating profit

Service operating profit increased $61 million with higher volume of $53 million and foreign exchange tailwinds of $13 million. Improved pricing on maintenance contracts and productivity offset by higher restructuring costs, as well as annual wage increases and other inflationary pressures, including higher material costs. Operating margin increased 80 basis points.

Nine Months Ended September 30, 2023

Net sales

The organic sales increase of 8.0% is due to organic sales increases in maintenance and repair of 8.2% and in modernization of 7.3%.

Components of Net sales change:						Maintenance and Repair						Modernization
Organic volume						8.2		%				7.3		%
Foreign currency translation						(1.2)		%				(1.7)		%
Acquisitions and divestitures, net						—		%				0.7		%
Total % change						7.0		%				6.3		%

Operating profit

Service operating profit increased $147 million with higher volume of $156 million partially offset by foreign exchange headwinds of $(9) million. Improved pricing on maintenance contracts and productivity offset annual wage increases and other inflationary pressures, including higher material costs. Operating margin increased 90 basis points.

General Corporate Expenses and Other

						Quarter Ended September 30,												Nine Months Ended September 30,
(dollars in millions)						2023						2022						2023						2022
General corporate expenses and other						$	(30)					$	(17)					$	(88)					$	(78)

General corporate expenses and other for the quarter and nine months ended September 30, 2023 increased $13 million and $10 million, respectively, compared to the same periods in 2022, primarily due to the impact of foreign currency mark-to-market adjustments, UpLift transformation costs of $4 million and higher corporate costs, partially offset by the absence of the loss on the sale of our Russia business and related charges of $6 million and $24 million when compared to the same periods in 2022, respectively.

LIQUIDITY AND FINANCIAL CONDITION

(dollars in millions)									September 30, 2023						December 31, 2022
Cash and cash equivalents									$	1,636					$	1,189
Total debt									7,407						6,768
Net debt (total debt less cash and cash equivalents)									5,771						5,579
Total equity									(4,733)						(4,799)
Total capitalization (total debt plus total equity)									2,674						1,969
Net capitalization (total debt plus total equity less cash and cash equivalents)									1,038						780
Total debt to total capitalization									277		%				344		%
Net debt to net capitalization									556		%				715		%

As of September 30, 2023, we had cash and cash equivalents of approximately $1.6 billion, of which approximately 64% was held by the Company's foreign subsidiaries. Domestic cash and cash equivalents as of September 30, 2023 includes amounts that will be used to fund the repayment at maturity of the €500 million 0.000% notes due November 12, 2023. 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, 2023 and December 31, 2022, the amount of such restricted cash was approximately $5 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 September 30, 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 tighter credit conditions. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.

As of September 30, 2023, we had a revolving credit agreement with various banks providing for a $1.5 billion unsecured, unsubordinated five-year revolving credit facility. As of September 30, 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.

On August 16, 2023, we issued $750 million unsecured, unsubordinated five-year notes due August 16, 2028 (the "Notes") with an interest rate of 5.25%. The net proceeds of the Notes were used to fund the repayment of Otis' commercial paper borrowings and will be used to fund the repayment at maturity of the €500 million 0.000% notes due November 12, 2023, with the remainder used for other general corporate purposes. 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 December 1, 2022, our Board of Directors approved a share repurchase program for up to $2.0 billion of Common Stock, of which approximately $1.4 billion was remaining as of September 30, 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 Statements of Cash Flows.

						Nine Months Ended September 30,
(dollars in millions)						2023						2022
Net cash flows provided by (used in):
Operating activities						$	1,030					$	1,096
Investing activities						(132)						62
Financing activities						(418)						(3,402)
Effect of foreign exchange rate changes on cash and cash equivalents						(34)						(191)
Net increase (decrease) in cash and cash equivalents and restricted cash						$	446					$	(2,435)

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 decrease in Accounts payable in the nine months ended September 30, 2023 compared to an increase 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, as well as a smaller inflow from net Contract assets and liabilities, current in the nine months ended September 30, 2023 compared to the same period in 2022, due to the timing of billings on contracts compared to the progression on current contracts. These were partially offset by the timing of income tax payments and a smaller increase in Inventories in the nine months ended September 30, 2023 compared to the same period in 2022.

During the nine months ended September 30, 2023, net cash provided by operating activities was $1.0 billion. The primary driver of the inflow related to $1.2 billion 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 an increase in Accounts receivable, net, due to the timing of billings.

During the nine months ended September 30, 2022, net cash provided by operating activities was $1.1 billion. The primary driver of the inflow related to $1.1 billion of net income. An increase in Accounts receivable, net, due to the timing of billings, a decrease in Accrued liabilities due to the timing of payments of employee-related benefits, income taxes and other accruals, and an increase in Inventories to support backlog conversion were partially offset by 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 and increased Accounts payable due to the timing of payments to suppliers.

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 nine months ended September 30, 2023, net cash used in investing activities was $132 million. The primary driver of the outflow related to $96 million of capital expenditures, $27 million of acquisitions of businesses and intangible assets and $21 million of net cash payments from the settlement of derivative instruments.

During the nine months ended September 30, 2022, net cash provided by investing activities was $62 million. The primary drivers of the inflow were $121 million of net cash receipts from the settlement of derivative instruments and $61 million of net proceeds from the sale of our business in Russia in the third quarter of 2022, which were partially offset by $81 million of capital expenditures and $38 million of acquisitions of businesses and intangible assets.

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 nine months ended September 30, 2023, net cash used in financing activities was $418 million. The primary drivers of the outflow were the repurchases of our Common Stock of $575 million, dividends paid on our Common Stock of $400 million and net repayments of short-term borrowings of $90 million, which were partially offset by $741 million of net proceeds from the issuance of long-term debt. A portion of the proceeds from the long-term debt issuance will be used to fund the repayment at maturity of the €500 million 0.000% notes due November 12, 2023.

During the nine months ended September 30, 2022, net cash used in financing activities was $3.4 billion. The primary drivers of the outflow were the settlement in cash of the tender offer for shares of Zardoya Otis not previously owned (the "Tender Offer") for $1.8 billion, repurchases of our Common Stock of $700 million, repayments of long-term debt of $500 million and dividends paid on our Common Stock of $345 million.

For additional discussion of the Tender Offer, see Note 1 of the Company's audited consolidated financial statements and notes thereto included in our 2022 Form 10-K. For additional discussion of borrowing 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 nine months ended September 30, 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)						Nine Months Ended September 30, 2023
OWC Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						6
Income from consolidated subsidiaries						97
Income (loss) from operations excluding income from consolidated subsidiaries						(7)
Net income (loss) excluding income from consolidated subsidiaries						(86)

(dollars in millions)						September 30, 2023						December 31, 2022
OWC Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	601					$	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)						42						45
Current liabilities (intercompany payables to non-guarantor subsidiaries)						3,979						3,090
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						97						166
Noncurrent liabilities						5,869						5,186

(dollars in millions)						Nine Months Ended September 30, 2023
Highland Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						—
Income from consolidated subsidiaries						475
Income (loss) from operations excluding income from consolidated subsidiaries						—
Net income (loss) excluding income from consolidated subsidiaries						(136)

(dollars in millions)						September 30, 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)						43						195
Noncurrent assets (investments in consolidated subsidiaries)						15,711						12,524
Noncurrent assets (intercompany receivables from non-guarantor subsidiaries)						538						572
Noncurrent assets (excluding investments in consolidated subsidiaries)						—						—
Current liabilities (intercompany payables to non-guarantor subsidiaries)						—						—
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						537						532
Noncurrent liabilities (excluding intercompany payables to non-guarantor subsidiaries)						1,162						1,160
Noncurrent liabilities (intercompany payables to non-guarantor subsidiaries)						3,303						—

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 September 30, 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.