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Otis Worldwide Corp - Quarter Report: 2023 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ____________________________________ 
FORM 10-Q
____________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
____________________________________ 

logo_otis (2).jpg
OTIS WORLDWIDE CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________ 
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)
____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange
on which registered
Common Stock ($0.01 par value)OTISNew York Stock Exchange
0.000% Notes due 2023OTIS/23New York Stock Exchange
0.318% Notes due 2026OTIS/26New York Stock Exchange
0.934% Notes due 2031OTIS/31New 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  ¨.
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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 FilerýAccelerated 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 October 16, 2023 there were 409,258,823 shares of Common Stock outstanding.

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OTIS WORLDWIDE CORPORATION
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended September 30, 2023
 
 Page

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.
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PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 

 Quarter Ended September 30,
(dollars in millions, except per share amounts; shares in millions)20232022
Net sales:
Product sales$1,435 $1,447 
Service sales2,088 1,897 
3,523 3,344 
Costs and expenses:
Cost of products sold1,195 1,208 
Cost of services sold1,282 1,165 
Research and development36 37 
Selling, general and administrative452 417 
2,965 2,827 
Other income (expense), net13 12 
Operating profit571 529 
Non-service pension cost (benefit) 
Interest expense (income), net39 35 
Net income before income taxes532 493 
Income tax expense137 143 
Net income395 350 
Less: Noncontrolling interest in subsidiaries' earnings19 26 
Net income attributable to Otis Worldwide Corporation$376 $324 
Earnings per share (Note 2):
Basic$0.92 $0.77 
Diluted$0.91 $0.77 
Weighted average number of shares outstanding:
     Basic shares410.8418.5
     Diluted shares413.7421.2

See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 

 Nine Months Ended September 30,
(dollars in millions, except per share amounts; shares in millions)20232022
Net sales:
Product sales$4,346 $4,403 
Service sales6,243 5,843 
10,589 10,246 
Costs and expenses:
Cost of products sold3,621 3,689 
Cost of services sold3,843 3,597 
Research and development107 112 
Selling, general and administrative1,386 1,315 
8,957 8,713 
Other income (expense), net32 
Operating profit1,664 1,542 
Non-service pension cost (benefit)1 
Interest expense (income), net109 107 
Net income before income taxes1,554 1,433 
Income tax expense400 382 
Net income1,154 1,051 
Less: Noncontrolling interest in subsidiaries' earnings71 95 
Net income attributable to Otis Worldwide Corporation$1,083 $956 
Earnings per share (Note 2):
Basic$2.62 $2.27 
Diluted$2.60 $2.25 
Weighted average number of shares outstanding:
Basic shares412.6421.3
Diluted shares415.8424.3

See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Net income$395 $350 $1,154 $1,051 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments33 151 (71)56 
Pension and postretirement benefit plan adjustments  
Change in unrealized cash flow hedging2 (4)(1)(4)
Other comprehensive income (loss), net of tax35 149 (72)58 
Comprehensive income (loss), net of tax430 499 1,082 1,109 
Less: Comprehensive (income) loss attributable to noncontrolling interest(13)(7)(55)30 
Comprehensive income attributable to Otis Worldwide Corporation$417 $492 $1,027 $1,139 

See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(dollars in millions)September 30, 2023December 31, 2022
Assets
Cash and cash equivalents$1,636 $1,189 
Accounts receivable (net of allowance for expected credit losses of $126 and $152)
3,455 3,357 
Contract assets733 664 
Inventories624 617 
Other current assets301 316 
Total Current Assets6,749 6,143 
Future income tax benefits290 285 
Fixed assets (net of accumulated depreciation of $1,196 and $1,151)
708 719 
Operating lease right-of-use assets417 449 
Intangible assets, net336 369 
Goodwill1,547 1,567 
Other assets343 287 
Total Assets$10,390 $9,819 
Liabilities and Equity (Deficit)
Short-term borrowings and current portion of long-term debt$585 $670 
Accounts payable1,655 1,717 
Accrued liabilities1,725 1,794 
Contract liabilities2,784 2,662 
Total Current Liabilities6,749 6,843 
Long-term debt6,822 6,098 
Future pension and postretirement benefit obligations390 392 
Operating lease liabilities293 315 
Future income tax obligations 258 279 
Other long-term liabilities488 556 
Total Liabilities15,000 14,483 
Commitments and contingent liabilities (Note 16)
Redeemable noncontrolling interest123 135 
Shareholders' Equity (Deficit):
Common Stock and additional paid-in capital198 162 
Treasury Stock(2,155)(1,575)
Accumulated deficit(2,183)(2,865)
Accumulated other comprehensive income (loss)(648)(592)
Total Shareholders' Equity (Deficit)(4,788)(4,870)
Noncontrolling interest55 71 
Total Equity (Deficit)(4,733)(4,799)
Total Liabilities and Equity (Deficit)$10,390 $9,819 

See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

Common Stock and Additional Paid-In CapitalTreasury StockAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Shareholders'
(Deficit) Equity
Noncontrolling InterestTotal (Deficit) EquityRedeemable Noncontrolling Interest
(dollars in millions, except per share amounts)
Quarter Ended September 30, 2023
Balance as of June 30, 2023$183 $(1,927)$(2,419)$(689)$(4,852)$101 $(4,751)$126 
Net income  376  376 17 393 2 
Other comprehensive income (loss), net of tax   41 41 (2)39 (4)
Stock-based compensation and Common Stock issued under employee plans15    15  15  
Cash dividends declared ($0.34 per common share)
  (139) (139) (139) 
Repurchase of Common Shares (228)  (228) (228) 
Dividends attributable to noncontrolling interest     (61)(61) 
Acquisitions, disposals and other changes  (1) (1) (1)(1)
Balance as of September 30, 2023$198 $(2,155)$(2,183)$(648)$(4,788)$55 $(4,733)$123 
Quarter Ended September 30, 2022
Balance as of June 30, 2022$121 $(1,125)$(3,245)$(748)$(4,997)$109 $(4,888)$136 
Net income— — 324 — 324 24 348 
Other comprehensive income (loss), net of tax, and foreign currency reclassifications (Note 10)— — — 168 168 (9)159 (10)
Stock-based compensation and Common Stock issued under employee plans13 — — — 13 — 13 — 
Cash dividends declared ($0.29 per common share)
— — (121)— (121)— (121)— 
Repurchase of Common Shares— (300)— — (300)— (300)— 
Dividends attributable to noncontrolling interest— — — — — (68)(68)— 
Acquisitions, disposals and other changes— — — — — (4)(4)— 
Balance as of September 30, 2022$134 $(1,425)$(3,042)$(580)$(4,913)$52 $(4,861)$128 

See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

Common Stock and Additional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Shareholders'
(Deficit) Equity
Noncontrolling InterestTotal (Deficit) EquityRedeemable Noncontrolling Interest
Treasury Stock
(dollars in millions, except per share amounts)
Nine Months Ended September 30, 2023
Balance as of December 31, 2022$162 $(1,575)$(2,865)$(592)$(4,870)$71 $(4,799)$135 
Net income  1,083  1,083 64 1,147 7 
Other comprehensive income (loss), net of tax   (56)(56)(7)(63)(9)
Stock-based compensation and Common Stock issued under employee plans36  (1) 35  35  
Cash dividends declared ($0.97 per common share)
  (400) (400) (400) 
Repurchase of Common Shares (580)  (580) (580) 
Dividends attributable to noncontrolling interest     (70)(70)(9)
Acquisitions, disposals and other changes     (3)(3)(1)
Balance as of September 30, 2023$198 $(2,155)$(2,183)$(648)$(4,788)$55 $(4,733)$123 
Nine Months Ended September 30, 2022
Balance as of December 31, 2021$119 $(725)$(2,256)$(763)$(3,625)$481 $(3,144)$160 
Net income— — 956 — 956 82 1,038 13 
Other comprehensive income (loss), net of tax, and foreign currency reclassifications (Note 10)— — — 183 183 (17)166 (108)
Stock-based compensation and Common Stock issued under employee plans32 — (1)— 31 — 31 — 
Cash dividends declared ($0.82 per common share)
— — (345)— (345)— (345)— 
Repurchase of Common Shares— (700)— — (700)— (700)— 
Dividends attributable to noncontrolling interest— — — — — (80)(80)(11)
Reclassification of noncontrolling interest to forward purchase agreement and redeemable noncontrolling interest (Note 1)— — (1,482)— (1,482)(403)(1,885)1,476 
Acquisitions, disposals and other changes(17)— 86 — 69 (11)58 (1,402)
Balance as of September 30, 2022$134 $(1,425)$(3,042)$(580)$(4,913)$52 $(4,861)$128 


See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended September 30,
(dollars in millions)20232022
Operating Activities:
Net income$1,154 $1,051 
Adjustments to reconcile net income to net cash flows provided by operating activities, net of acquisitions and dispositions:
Depreciation and amortization145 145 
Deferred income tax expense (benefit)(34)
Stock compensation cost49 41 
Change in operating assets and liabilities:
Accounts receivable, net(214)(171)
Contract assets and liabilities, current68 143 
Inventories(8)(80)
Other current assets(4)(14)
Accounts payable(35)137 
Accrued liabilities(66)(166)
Pension contributions(32)(28)
Other operating activities, net7 32 
Net cash flows provided by (used in) operating activities1,030 1,096 
Investing Activities:
Capital expenditures(96)(81)
Acquisitions of businesses and intangible assets, net of cash (Note 6)(27)(38)
Dispositions of businesses, net of cash (Note 6) 61 
Proceeds from the sale of (investments in) marketable securities(2)(7)
Receipts (payments) on settlements of derivative contracts(21)121 
Other investing activities, net14 
Net cash flows provided by (used in) investing activities(132)62 
Financing Activities:
Net proceeds from (repayments of) borrowings (maturities of 90 days or less)(90)80 
Proceeds from issuance of long-term debt747 — 
Payment of debt issuance costs(6)— 
Repayment of long-term debt (500)
Dividends paid on Common Stock(400)(345)
Repurchases of Common Stock(575)(700)
Dividends paid to noncontrolling interest(76)(107)
Acquisition of Zardoya Otis shares  (1,802)
Other financing activities, net(18)(28)
Net cash flows provided by (used in) financing activities(418)(3,402)
Effect of exchange rate changes on cash and cash equivalents(34)(191)
Net increase (decrease) in cash, cash equivalents and restricted cash446 (2,435)
Cash, cash equivalents and restricted cash, beginning of year1,195 3,477 
Cash, cash equivalents and restricted cash, end of period1,641 1,042 
Less: Restricted cash5 
Cash and cash equivalents, end of period$1,636 $1,034 
See accompanying Notes to Condensed Consolidated Financial Statements.
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OTIS WORLDWIDE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: General

The Condensed Consolidated Financial Statements as of September 30, 2023 and for the quarters and nine months ended September 30, 2023 and 2022 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States ("U.S."). The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the Company's annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for fiscal year 2022 ("2022 Form 10-K" or "Form 10-K").

Unless the context otherwise requires, references to "Otis," "we," "us," "our" and "the Company" refer to Otis Worldwide Corporation and its subsidiaries.

There have been no changes to the Company's significant accounting policies described in the Company's 2022 Form 10-K that have a material impact on the Company's Condensed Consolidated Financial Statements and the related notes. Certain amounts presented in the prior period have been reclassified to conform to the current period presentation, which are immaterial.

Use of Estimates. The preparation of these Condensed Consolidated Financial Statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in the context of the information reasonably available to us and the unknown future impacts of macroeconomic developments, including inflationary pressures, higher interest rates and tighter credit conditions, as of September 30, 2023 and through the date of this report. The accounting matters assessed included, but were not limited to, our allowance for credit losses, the carrying value of our goodwill and other long-lived assets, financial assets and revenue recognition. While there was not a material impact to our Condensed Consolidated Financial Statements as of September 30, 2023 and for the quarters and nine months ended September 30, 2023 and 2022 resulting from our assessments of these matters, future assessment of our expectations of the magnitude and duration of these macroeconomic developments, as well as other factors, could result in material impacts to our Condensed Consolidated Financial Statements in future reporting periods.

We also assessed certain accounting matters as they relate to the ongoing conflict between Russia and Ukraine and the war in Israel and Gaza, including, but not limited to, our allowance for credit losses, the carrying value of long-lived assets, revenue recognition and the classification of assets. There was not a material impact to our Condensed Consolidated Financial Statements as of September 30, 2023 and for the quarters and nine months ended September 30, 2023 and 2022 resulting from our assessment of these matters. We continue to assess the impact on our results of operations, financial position and overall performance as the situations develop and any broader implications they may have on the global economy.

Supplier Finance Programs. On January 1, 2023, we adopted ASU No. 2022-04, Liabilities - Supplier Finance Programs (Topic 450-50): Disclosure of Supplier Finance Program Obligations that requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period.

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Certain Otis subsidiaries participate in supplier finance programs, under which we agree to pay third-party financial institutions the stated amounts of confirmed invoices from suppliers on the original maturity dates of the invoices, while the participating suppliers generally have the ability to sell, or otherwise pledge as collateral, their receivables from the Company to the participating financial institutions. Our obligations to suppliers, including the amounts due and scheduled payment dates, are not impacted by the suppliers' decisions to sell their receivables to the financial institutions, or otherwise pledge their receivables as collateral, under these arrangements. The Company is not a party to the arrangements between the suppliers and the financial institutions, and the Company's payment terms to the financial institutions, including the timing and amount of payments, are based on the original supplier invoices. Based on the applicable supplier agreements, the maturity dates of these supplier invoices can range between 30 and 120 days from the invoice date.

The outstanding obligations confirmed by the Company as valid to the financial institutions under our supplier finance programs were $537 million and $564 million as of September 30, 2023 and December 31, 2022, respectively. These obligations are included in Accounts payable in the Condensed Consolidated Balance Sheets, and all activity related to the obligations is presented within operating activities on the Condensed Consolidated Statements of Cash Flows.

The Company or the financial institutions may terminate the agreements with advanced notice. Otis has pledged no assets in connection with its supplier finance programs.

Note 2: Earnings per Share

 Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions, except per share amounts; shares in millions)2023202220232022
Net income attributable to Otis Worldwide Corporation$376 $324 $1,083 $956 
Impact of redeemable noncontrolling interest   — 
Net income attributable to common shareholders$376 $324 $1,083 $956 
Basic weighted average number of shares outstanding410.8 418.5 412.6 421.3 
Stock awards and equity units (share equivalent)2.9 2.7 3.2 3.0 
Diluted weighted average number of shares outstanding413.7 421.2 415.8 424.3 
Earnings Per Share of Common Stock:
Basic$0.92$0.77$2.62$2.27
Diluted$0.91$0.77$2.60$2.25

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the Common Stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted earnings per share excludes the effect of the potential exercise of stock awards when the awards' assumed proceeds exceed the average market price of the common shares during the period. There were 1.0 million of anti-dilutive stock awards excluded from the computation for the quarter and nine months ended September 30, 2023, and 2.4 million for the quarter and nine months ended September 30, 2022.

Note 3: Revenue Recognition

We account for revenue in accordance with Accounting Standards Codification ("ASC") Topic 606: Revenue from Contracts with Customers.

Contract Assets and Liabilities. Contract assets reflect revenue recognized in advance of customer billing. Contract liabilities are recognized when a customer pays consideration, or we have a right to receive an amount of unconditional consideration, in advance of the satisfaction of performance obligations under the contract. We typically receive progress payments from our customers as we perform our work over time.

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Total Contract assets and Contract liabilities as of September 30, 2023 and December 31, 2022 are as follows:

(dollars in millions)September 30, 2023December 31, 2022
Contract assets, current$733 $664 
Total contract assets733 664 
Contract liabilities, current2,784 2,662 
Contract liabilities, non-current (included within Other long-term liabilities)47 52 
Total contract liabilities 2,831 2,714 
Net contract liabilities$2,098 $2,050 

Contract assets increased by $69 million during the nine months ended September 30, 2023 as a result of the progression of current contracts and timing of billing on customer contracts. Contract liabilities increased by $117 million during the nine months ended September 30, 2023 primarily due to billings on contracts in excess of revenue earned.

In the nine months ended September 30, 2023 and 2022, we recognized revenue of $1.8 billion related to contract liabilities as of January 1, 2023 and 2022, respectively.

Remaining Performance Obligations ("RPO"). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of September 30, 2023, our total RPO was $17.8 billion. Of the total RPO as of September 30, 2023, we expect approximately 90% will be recognized as sales over the following 24 months.

Note 4: Accounts Receivable, Net

Accounts receivable, net consisted of the following as of September 30, 2023 and December 31, 2022:

(dollars in millions)September 30, 2023December 31, 2022
Trade receivables$3,295 $3,231 
Unbilled receivables123 103 
Miscellaneous receivables100 91 
Customer financing notes receivable63 84 
3,581 3,509 
Less: allowance for expected credit losses126 152 
Accounts receivable, net$3,455 $3,357 

The changes in allowance for expected credit losses related to Accounts receivable, net for the nine months ended September 30, 2023 and 2022, respectively, are as follows:

Nine Months Ended September 30,
(dollars in millions)20232022
Balance as of January 1$152 $175 
Provision for expected credit losses21 
Write-offs charged against the allowance for expected credit losses(42)(14)
Foreign exchange and other(5)(9)
Balance as of September 30$126 $156 

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Note 5: Inventories

Inventories consisted of the following as of September 30, 2023 and December 31, 2022:

(dollars in millions)September 30, 2023December 31, 2022
Raw materials and work-in-process$162 $166 
Finished goods462 451 
Total$624 $617 

Raw materials, work-in-process and finished goods are net of valuation write-downs of $89 million and $96 million as of September 30, 2023 and December 31, 2022, respectively.

Note 6: Business Acquisitions, Disposals, Goodwill and Intangible Assets

Business Acquisitions. Our acquisitions of businesses and intangible assets, net of cash, totaled $27 million and $38 million in the nine months ended September 30, 2023 and 2022, respectively, and were primarily in our Service segment. Transaction costs incurred were not considered significant.

Goodwill. Changes in our Goodwill balances during the nine months ended September 30, 2023 were as follows:

(dollars in millions)Balance as of December 31, 2022Goodwill Resulting
from Business Combinations
Foreign Currency
Translation 
and Other
Balance as of
September 30, 2023
New Equipment$292 $ $(5)$287 
Service1,275 6 (21)1,260 
Total$1,567 $6 $(26)$1,547 

Intangible Assets. Intangible assets cost and accumulated amortization were $2,010 million and $1,674 million, respectively, as of September 30, 2023, and $2,026 million and $1,657 million, respectively, as of December 31, 2022.

Amortization of intangible assets for the quarter and nine months ended September 30, 2023 was $17 million and $51 million, respectively, compared to $18 million and $55 million for the same periods in 2022. Excluding the impact of currency translation adjustments, there were no other significant changes in our Intangible assets during the quarters and nine months ended September 30, 2023 and 2022.

Held For Sale Assets and Liabilities. As of September 30, 2023 and December 31, 2022, assets held for sale were $11 million and $9 million, respectively, and are included in Other current assets in the Condensed Consolidated Balance Sheets.

In June 2022, we entered into an agreement to sell our business in Russia to a third party, which was then sold on July 27, 2022. As of June 30, 2022, our operations in Russia, primarily in the New Equipment segment, were classified as assets and liabilities held for sale of $157 million and $136 million, respectively. The Company recorded the loss on sale and related charges of $6 million and $24 million in Other expense (income), net in the Condensed Consolidated Statements of Operations for the quarter and nine months ended September 30, 2022, respectively, including an impairment loss of $18 million related to the net assets held for sale during the nine months ended September 30, 2022.

Note 7: Borrowings and Lines of Credit

(dollars in millions)September 30, 2023December 31, 2022
Commercial paper$ $94 
Other borrowings54 45 
Total short-term borrowings$54 $139 

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Commercial Paper. As of September 30, 2023, there were no borrowings outstanding under the Company's $1.5 billion commercial paper programs. We use our commercial paper borrowings for general corporate purposes including to finance acquisitions, pay dividends, repurchase shares and for debt refinancing. The need for commercial paper borrowings may arise if the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.

For details regarding the Company's short-term borrowing activity in 2022, refer to Note 10 of the Company's audited consolidated financial statements and notes thereto included in our 2022 Form 10-K.

Long-term debt. On March 10, 2023, the Company entered into a new credit agreement ("Credit Agreement") with various banks providing for a $1.5 billion unsecured, unsubordinated five-year revolving credit facility, with an interest rate on US Dollar denominated borrowings at Otis' option of the Term Secured Overnight Financing Rate ("SOFR") plus 0.10% or a base rate, and an interest rate on Euro denominated borrowings at Otis' option of the EURIBO rate or a daily simple Euro Short Term Rate ("ESTR"), plus, in each case, an applicable margin. The applicable margin initially is 1.25% for Term SOFR rate, EURIBO rate and daily simple ESTR rate borrowings, and 0.25% for base rate borrowings, and can fluctuate determined by reference to Otis' public debt ratings, as specified in the Credit Agreement. As of September 30, 2023, there were no borrowings under the Credit Agreement. The undrawn portion of the Credit Agreement serves as a backstop for the issuance of commercial paper. On March 10, 2023, we also terminated all commitments outstanding under the previous credit agreement, which was scheduled to expire on April 3, 2025.

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.

As of September 30, 2023, the Company is in compliance with all covenants in the revolving credit agreement and the indentures governing all outstanding long-term debt. Long-term debt consisted of the following:

(dollars in millions)September 30, 2023December 31, 2022
0.000% notes due 2023 (€500 million principal value)
$531 $531 
2.056% notes due 2025
1,300 1,300 
0.37% notes due 2026 (¥21.5 billion principal value)
145 163 
0.318% notes due 2026 (€600 million principal value)
637 638 
2.293% notes due 2027
500 500 
5.250% notes due 2028
750 — 
2.565% notes due 2030
1,500 1,500 
0.934% notes due 2031 (€500 million principal value)
531 531 
3.112% notes due 2040
750 750 
3.362% notes due 2050
750 750 
Other (including finance leases)4 
Total principal long-term debt7,398 6,671 
Other (discounts and debt issuance costs)(45)(42)
Total long-term debt7,353 6,629 
Less: current portion531 531 
Long-term debt, net of current portion$6,822 $6,098 

We may redeem any series of notes at our option pursuant to certain terms. For additional details regarding the Company's debt activity in 2022, refer to Note 10 of the Company's audited consolidated financial statements and notes thereto included in our 2022 Form 10-K.

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Debt discounts and debt issuance costs are presented as a reduction of debt on the Condensed Consolidated Balance Sheets and are amortized as a component of interest expense over the term of the related debt using the effective interest method. The Condensed Consolidated Statements of Operations for the quarters and nine months ended September 30, 2023 and 2022 reflects the following:

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Debt issuance costs amortization$2 $$5 $
Total interest expense on external debt38 35 105 106 

The unamortized debt issuance costs as of September 30, 2023 and December 31, 2022 were $43 million and $42 million, respectively.

The weighted average maturity of our long-term debt as of September 30, 2023 is approximately 7.5 years. The weighted average interest expense rate on our borrowings outstanding as of September 30, 2023 and December 31, 2022 was as follows:

September 30, 2023December 31, 2022
Short-term commercial paper—%4.7%
Total long-term debt2.3%2.0%

The weighted average interest expense rate on our borrowings during the quarters and nine months ended September 30, 2023 and 2022 was as follows:

Quarter Ended September 30,Nine Months Ended September 30,
2023202220232022
Short-term commercial paper5.4%2.5%5.0%1.3%
Total long-term debt2.1%2.0%2.0%2.0%

Note 8: Employee Benefit Plans

Pension and Postretirement Plans. The Company sponsors both funded and unfunded domestic and foreign defined benefit pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:

 Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Defined benefit plans$8 $$32 $28 
Defined contribution plans16 14 50 49 
Multi-employer pension and postretirement plans42 40 117 101 

The following table illustrates the components of net periodic benefit cost for the Company's defined benefit pension plans:

 Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Service cost$7 $10 $22 $30 
Interest cost8 24 13 
Expected return on plan assets(8)(8)(24)(21)
Recognized actuarial net loss  
Net settlement and curtailment (gain) loss  
Total net periodic benefit cost$7 $10 $22 $31 

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Postretirement Benefit Plans. The Company sponsors postretirement benefit plans that provide health benefits to eligible retirees. The postretirement plans are unfunded. The net periodic benefit cost was less than $1 million for the quarters and nine months ended September 30, 2023 and 2022, respectively.

Stock-based Compensation. The Company adopted the 2020 Long-Term Incentive Plan (the "Plan") effective April 3, 2020. As of September 30, 2023, approximately 23 million shares remain available for awards under the Plan.

Stock-based Compensation Expense

The Company measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the Condensed Consolidated Statements of Operations over the award's applicable vesting period. A forfeiture rate assumption is applied on grant date to adjust the expense recognition for awards that are not expected to vest.

Stock-based compensation expense and the resulting tax benefits were as follows:

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Stock-based compensation expense (Share Based)$15 $13 $49 $41 
Stock-based compensation expense (income) (Liability Awards) —  (1)
Total gross stock-based compensation expense15 13 49 40 
Less: future tax benefit2 6 
Stock-based compensation expense, net of tax$13 $11 $43 $35 

As of September 30, 2023, following our annual grant issuance on February 7, 2023, there was approximately $76 million of total unrecognized compensation cost related to non-vested equity awards granted under the Plan. This cost is expected to be recognized ratably over a weighted-average period of 1.9 years.

Note 9: Stock

Preferred Stock. There are 125 million shares of $0.01 par value Preferred Stock authorized, of which none were issued as of September 30, 2023 and December 31, 2022.

Common Stock. There are 2 billion shares of $0.01 par value Common Stock authorized. As of September 30, 2023, 436.9 million shares of Common Stock were issued, which includes 27.6 million shares of Treasury Stock. As of December 31, 2022, 435.6 million shares of Common Stock were issued, which included 20.8 million shares of Treasury Stock.

Treasury Stock. As of September 30, 2023, the Company was authorized by the Board of Directors to purchase up to $2.0 billion of Common Stock under a share repurchase program, of which approximately $1.4 billion was remaining at such time.

During the quarter and nine months ended September 30, 2023, the Company repurchased 2.6 million and 6.8 million shares, respectively, for $225 million and $575 million, respectively, compared to 3.8 million and 9.1 million shares in the same periods of 2022 for $300 million and $700 million, respectively. Beginning January 1, 2023, share repurchases in excess of issuances are subject to a 1% excise tax, which is included as part of the cost basis of the shares acquired in Treasury Stock on the Condensed Consolidated Balance Sheets as of September 30, 2023.

The Company's share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be purchased in the open market, in privately negotiated transactions, under accelerated share repurchase programs or under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

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Note 10: Accumulated Other Comprehensive Income (Loss)

A summary of the changes in each component of Accumulated other comprehensive income (loss), net of tax, for the quarters and nine months ended September 30, 2023 and 2022 is provided below:
(dollars in millions)Foreign
Currency
Translation
Defined Benefit
Pension and
Postretirement
Plans
Unrealized
Hedging Gains
(Losses)
Accumulated
Other
Comprehensive
Income (Loss)
Quarter Ended September 30, 2023
Balance as of June 30, 2023$(681)$(8)$ $(689)
Other comprehensive income (loss) before reclassifications, net39  1 40 
Amounts reclassified, pre-tax  1 1 
Tax benefit reclassified    
Balance as of September 30, 2023$(642)$(8)$2 $(648)
Nine Months Ended September 30, 2023
Balance as of December 31, 2022$(587)$(8)$3 $(592)
Other comprehensive income (loss) before reclassifications, net(56) (7)(63)
Amounts reclassified, pre-tax1  8 9 
Tax benefit reclassified  (2)(2)
Balance as of September 30, 2023$(642)$(8)$2 $(648)

(dollars in millions)Foreign
Currency
Translation
Defined Benefit
Pension and
Postretirement
Plans
Unrealized
Hedging Gains
(Losses)
Accumulated
Other
Comprehensive
Income (Loss)
Quarter Ended September 30, 2022
Balance as of June 30, 2022$(631)$(124)$$(748)
Other comprehensive income (loss) before reclassifications, net93 — (5)88 
Amounts reclassified, pre-tax77 81 
Tax benefit reclassified— (1)— (1)
Balance as of September 30, 2022$(461)$(122)$$(580)
Nine Months Ended September 30, 2022
Balance as of December 31, 2021$(642)$(128)$$(763)
Other comprehensive income (loss) before reclassifications, net173 — (2)171 
Amounts reclassified upon change in Otis' share of Zardoya Otis ownership(69)— — (69)
Amounts reclassified, pre-tax77 (2)83 
Tax benefit reclassified— (2)— (2)
Balance as of September 30, 2022$(461)$(122)$$(580)

Amounts reclassified that relate to defined benefit pension and postretirement plans include amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented. See Note 8, "Employee Benefit Plans" for additional information.

Amounts reclassified that relate to foreign currency translation in the quarter and nine months ended September 30, 2022 are related to our Russia business sold during the quarter ended September 30, 2022. See Note 6, "Business Acquisitions, Dispositions, Goodwill and Intangible Assets" for additional information regarding the sale of our Russia business.
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Note 11: Income Taxes

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.

Otis conducts business globally and, as a result, Otis or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the ordinary course of business, Otis could be subject to examination by taxing authorities throughout the world, including such major jurisdictions as Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Portugal, South Korea, Spain, Switzerland, the United Kingdom, and the United States. With a few exceptions, Otis is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2010.

A subsidiary of Otis engaged in tax-related litigation in Belgium received a favorable appellate court decision in 2018. The Belgian tax authorities appealed the decision to the Court of Cassation (the equivalent of the Supreme Court in Belgium). On December 4, 2020, the Court of Cassation overturned the decision of the appellate court and remanded the case to the appellate court for reconsideration. Following a hearing on March 20, 2023, the Antwerp Appellate Court ruled against the Company. Otis has decided not to appeal the decision, which marks the end of this litigation. Otis expects to receive the assessment for tax and interest in the quarter ending December 31, 2023. The associated tax and interest have been fully reserved and are included in the range below.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. The evaluation considers any additional worldwide uncertain tax positions, the closure of tax statutes or the re-valuation of current uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts. Based on the preceding factors, it is reasonably possible that within the next 12 months unrecognized tax benefits could change within the range of a $10 million increase to a $330 million decrease and associated interest could change within the range of a $5 million increase to a $140 million decrease.

See Note 16, “Contingent Liabilities” for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.

Note 12: Restructuring and Transformation Costs

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.

During the quarter ended September 30, 2023, we announced the UpLift program to transform our operating model. The program will include, among other aspects, the standardization of our processes and improving our supply chain procurement, as well as restructuring actions. During the quarter and nine months ended September 30, 2023, we incurred $4 million of incremental non-restructuring costs associated with the 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, "Subsequent Events," for discussion regarding UpLift restructuring actions approved following period-end.

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During the quarters and nine months ended September 30, 2023 and 2022, we recorded restructuring costs for new and ongoing restructuring actions as follows:

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
New Equipment$10 $$15 $18 
Service11 21 27 
Total $21 $$36 $45 

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Cost of products and services sold$9 $$11 $16 
Selling, general and administrative12 25 29 
Total $21 $$36 $45 

The restructuring expenses incurred during the quarter and nine months ended September 30, 2023 and 2022, were primarily the result of restructuring programs initiated during 2023 and 2022. We are targeting to complete by the end of 2024 the majority of remaining restructuring actions initiated in the quarter and nine months ended September 30, 2023 and the full year 2022, with certain utilization beyond 2023 due to legal requirements in the applicable jurisdictions. Expected total costs for the restructuring actions initiated are $120 million, including $43 million to New Equipment and $77 million to Service operating segments, respectively. Remaining costs to incur for the restructuring actions initiated are expected to be $28 million, including $6 million to New Equipment and $22 million to Service operating segments, respectively.

The following table summarizes the accrual balance and utilization for restructuring actions, which are primarily for severance costs and most will require cash payment:

(dollars in millions)
Restructuring accruals as of December 31, 2022$41 
Net restructuring costs36 
Utilization, foreign exchange and other costs(35)
Balance as of September 30, 2023$42 

Note 13: Financial Instruments

We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under ASC 815, Derivatives and Hedging. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, commodity prices and foreign exchange rates. These fluctuations can increase the costs of financing, investing in and operating the business. We may use derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, commodity price and interest rate exposures.

The four-quarter average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $4.3 billion and $3.9 billion as of September 30, 2023 and December 31, 2022, respectively. The four-quarter average of the notional amount of contracts hedging commodity purchases was $24 million and $20 million as of September 30, 2023 and December 31, 2022, respectively.

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The following table summarizes the fair value and presentation on the Condensed Consolidated Balance Sheets for derivative instruments as of September 30, 2023 and December 31, 2022:

(dollars in millions)Balance Sheet ClassificationSeptember 30, 2023December 31, 2022
Derivatives designated as Cash flow hedging instruments:
Asset Derivatives:
Foreign exchange contractsOther current assets$2 $
Foreign exchange contractsOther assets3 
Total asset derivatives$5 $
Liability Derivatives:
Foreign exchange contractsAccrued liabilities$(3)$(4)
Commodity contractsAccrued liabilities (1)
Foreign exchange contractsOther long-term liabilities(1)— 
Total liability derivatives$(4)$(5)
Derivatives not designated as Cash flow hedging instruments:
Asset Derivatives:
Foreign exchange contractsOther current assets$31 $25 
Foreign exchange contractsOther assets5 
Total asset derivatives$36 $28 
Liability Derivatives:
Foreign exchange contractsAccrued liabilities$(17)$(20)
Commodity contractsAccrued liabilities (4)
Foreign exchange contractsOther long-term liabilities(4)(2)
Total liability derivatives$(21)$(26)

Derivatives designated as Cash flow hedging instruments. The amounts of gain or (loss) attributable to foreign exchange and commodity contract activity reclassified from Accumulated other comprehensive income (loss) were immaterial for the quarters and nine months ended September 30, 2023 and 2022, respectively.

The effect of cash flow hedging relationships on Accumulated other comprehensive income (loss) as of September 30, 2023 and December 31, 2022 are presented in the table below:

(dollars in millions)September 30, 2023December 31, 2022
Gain (loss) recorded in Accumulated other comprehensive income (loss)$2 $

The Company utilizes the critical terms match method in assessing firm commitment derivatives and regression testing in assessing commodity derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.

Assuming current market conditions continue, a pre-tax loss of $1 million is expected to be reclassified from Accumulated other comprehensive income (loss) into Cost of products sold to reflect the fixed prices obtained from foreign exchange and commodity hedging within the next 12 months. All derivative contracts accounted for as cash flow hedges as of September 30, 2023 will mature by December 2028.

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Net Investment Hedges. We may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts) instruments to hedge portions of the Company's investment in foreign subsidiaries and manage foreign exchange risk. For instruments that are designated and qualify as hedges of net investments in foreign operations and that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in foreign currency translation within Other comprehensive income (loss) on the Condensed Consolidated Statements of Comprehensive Income, and will remain in Accumulated other comprehensive income (loss) until the hedged investment is sold or substantially liquidated. The remainder of the change in value of such instruments is recorded in earnings, including to the extent foreign currency denominated debt is not designated in or is de-designated from a net investment hedge relationship.

Our use of foreign exchange forward contracts designated as hedges of the Company's net investment in foreign subsidiaries can vary depending on the Company's desired foreign exchange risk coverage.

We have ¥21.5 billion of Japanese Yen denominated long-term debt, which qualifies as a net investment hedge against our investments in Japanese businesses, as well as notional amounts of foreign exchange forward contracts of €120 million and HK$2 billion which qualify as net investment hedges against our investments in certain European and Asian businesses, respectively. The net investment hedges are deemed to be effective. Additionally, we had a notional amount of a foreign exchange forward contract of €95 million that qualified as a net investment hedge, which matured during the quarter ended June 30, 2023 and the net investment hedge was deemed to be effective until maturity. The maturity dates of the current non-derivative and derivative instruments designated in net investment hedges range from 2024 to 2026.

The amounts of gains (losses) recognized in other comprehensive income (loss) related to non-derivative and derivative instruments designated as net investment hedges are as follows.

Quarter Ended September 30,Nine Months Ended September 30,
2023202220232022
Foreign currency denominated long-term debt$6 $10 $18 $40 
Foreign currency forward contracts2 — 3 — 
Total$8 $10 $21 $40 

Derivatives not designated as Cash flow hedging instruments. The net effect of derivatives not designated as Cash flow hedging instruments within Other income (expense) net, on the Condensed Consolidated Statements of Operations was as follows:

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
Foreign exchange contracts$4 $$16 $12 

The effects of derivatives not designated as Cash flow hedge instruments within Cost of products sold on the Condensed Consolidated Statements of Operations were gains of $1 million in the quarter ended September 30, 2023 and losses of $8 million in the nine months ended September 30, 2023, compared to losses of $3 million and $11 million in the same periods of 2022, respectively.

Note 14: Fair Value Measurements

Valuation Techniques. Our marketable securities include investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. The fair value gains or losses related to our marketable securities are recorded through net income. Our derivative assets and liabilities include foreign exchange and commodity contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks.

As of September 30, 2023, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.

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Due to their short-term nature, the carrying value approximated fair value for the current portion of the Company’s financial instruments not carried at fair value. The fair value of receivables, including customer financing notes receivable, net, that were issued long-term are based on the discounted values of their related cash flows at interest rates reflecting the attributes of the counterparties, including geographic location. Customer-specific risk, including credit risk, is already considered in the carrying value of those receivables. Our notes, as described in Note 7, "Borrowings and Lines of Credit," are measured at fair value using closing bond prices from active markets.

Recurring Fair Value Measurements. In accordance with the provisions of ASC 820: Fair Value Measurements, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and non-recurring basis in our Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022: 

September 30, 2023
(dollars in millions)TotalLevel 1Level 2Level 3
Recurring fair value measurements:
Marketable securities$31 $31 $ $ 
Derivative assets41  41  
Derivative liabilities(25) (25) 

December 31, 2022
(dollars in millions)TotalLevel 1Level 2Level 3
Recurring fair value measurements:
Marketable securities$30 $30 $— $— 
Derivative assets33 — 33 — 
Derivative liabilities(31)— (31)— 

Fair Value of Financial Instruments. The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value as of September 30, 2023 and December 31, 2022:

 September 30, 2023December 31, 2022
(dollars in millions)Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Long-term receivables, net$49 $49 $55 $53 
Customer financing notes receivable, net31 27 55 51 
Short-term borrowings(54)(54)(139)(139)
Long-term debt, including current portion (excluding leases and other)(7,394)(6,343)(6,663)(5,661)
Long-term liabilities, including current portion(197)(184)(222)(197)

The following tables provide the valuation hierarchy classification of assets and liabilities that are not carried at fair value in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022:

September 30, 2023
(dollars in millions)TotalLevel 1Level 2Level 3
Long-term receivables, net$49 $ $49 $ 
Customer financing notes receivable, net27  27  
Short-term borrowings(54) (54) 
Long-term debt, including current portion (excluding leases and other)(6,343) (6,343) 
Long-term liabilities, including current portion(184) (184) 
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December 31, 2022
(dollars in millions)TotalLevel 1Level 2Level 3
Long-term receivables, net$53 $— $53 $— 
Customer financing notes receivable, net51 — 51 — 
Short-term borrowings(139)— (139)— 
Long-term debt, including current portion (excluding leases and other)(5,661)— (5,661)— 
Long-term liabilities, including current portion(197)— (197)— 


Note 15: Guarantees

The Company provides service and warranty on its products beyond normal service and warranty policies. The changes in the carrying amount of service and product guarantees for the nine months ended September 30, 2023 and 2022 are as follows:

(dollars in millions)20232022
Balance as of December 31$13 $20 
Warranties3 
Settlements made(5)(7)
Foreign exchange and other(1)(1)
Balance as of September 30$10 $13 

The Company provides certain financial guarantees to third parties. As of September 30, 2023, Otis has stand-by letters of credit with maximum potential payment totaling $128 million. We accrue costs associated with guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts, and where no amount within a range of estimates is more likely, the minimum is accrued. In accordance with ASC Topic 460: Guarantees, we record these liabilities at fair value. As of September 30, 2023, Otis has determined there are no estimated costs probable under these guarantees.

Note 16: Contingent Liabilities

Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. In addition to the specific amounts noted below, where we have recorded loss contingency accruals for the below and other matters, the amounts in aggregate are not material. Legal costs generally are expensed when incurred.

Environmental. As previously disclosed, the Company's operations are subject to environmental regulation by authorities with jurisdiction over its operations. The Company has accrued for the costs of environmental remediation activities, including, but not limited to, investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassesses these amounts. Management believes that the likelihood of incurring losses materially in excess of amounts accrued is remote. The outstanding liability for environmental obligations was $5 million as of September 30, 2023 and December 31, 2022, and is principally included in Other long-term liabilities on the Condensed Consolidated Balance Sheets.

Legal Proceedings.

German Tax Litigation

As previously disclosed, we have been involved in administrative review proceedings with the German Tax Office, which concern approximately €215 million (approximately $229 million as of September 30, 2023) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of our operations in Germany. Upon audit, these tax benefits were disallowed by the German Tax Office. We estimate interest associated with the aforementioned tax benefits is an additional approximately €118 million (approximately $126 million as of September 30, 2023).

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In August 2012, a suit was filed in the local German Tax Court (Berlin-Brandenburg). In 2015, our former parent United Technologies Corporation ("UTC"), now RTX Corporation ("RTX"), made tax and interest payments to German tax authorities of €275 million (approximately $300 million) in order to avoid additional interest accruals pending final resolution of this matter. In March 2016, the local German Tax Court dismissed the suit, and we appealed this decision to the German Federal Tax Court. Following a hearing in July 2018, the German Federal Tax Court remanded the matter to the local German Tax Court for further proceedings. In December 2020, the local German Tax Court ruled against the Company.

On January 26, 2021, the Company filed an appeal with the German Federal Tax Court. On February 8, 2022, the Company received the decision of the German Federal Tax Court, in which the Court remanded the case for reconsideration by the local German Tax Court. The local German Tax Court held a hearing on June 12, 2023, and issued a decision in favor of Otis on July 21, 2023. On September 14, 2023, the German tax authorities filed an appeal to the German Federal Tax Court. The German Federal Tax Court is expected to rule on the appeal in 2024. As a result of the appeal filing, this matter remains contested, and the Company cannot assess the ultimate outcome of this case.

Pursuant to the Tax Matters Agreement ("TMA") with our former parent, UTC, the Company retains the liability associated with the remaining interest, and has recorded an interest accrual of €45 million (approximately $47 million as of September 30, 2023), net of payments and other deductions, included within Accrued liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2023. If the Company prevails in this matter, any recoveries would be allocated between RTX and the Company pursuant to the terms of the TMA.

Asbestos Matters

As previously disclosed, we have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos. While we have never manufactured any asbestos-containing component parts, and no longer incorporate asbestos in any current products, certain of our historical products have contained components manufactured by third parties incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or were covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos-related claims were not material individually or in the aggregate as of and for the periods ended September 30, 2023 and December 31, 2022.

The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $21 million to $43 million as of September 30, 2023 and December 31, 2022. Since no amount within the range of estimates is more likely to occur than any other, we have recorded the minimum amount of $21 million, which is principally recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022. Amounts are on a pre-tax basis, not discounted, and exclude the Company's legal fees to defend the asbestos claims (which will continue to be expensed as they are incurred). In addition, the Company has an insurance recovery receivable for probable asbestos-related recoveries of approximately $5 million, which is principally included in Other assets on our Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.

Putative Class Action Lawsuit

On August 12, 2020, a putative class action lawsuit, (Geraud Darnis et al. v. Raytheon Technologies Corporation et al.), was filed in the United States District Court for the District of Connecticut (the "Court") against Otis, RTX, Carrier Global Corporation ("Carrier"), each of their directors, and various incentive and deferred compensation plans in connection with the separation of Otis and Carrier from UTC (the "Separation") in April 2020. On September 13, 2021, plaintiffs filed an amended complaint against the three company defendants only. The named plaintiffs are former employees of UTC and its current and former subsidiaries, including Otis and Carrier. They seek to recover monetary damages, as well as related declaratory and equitable relief, based on claimed decreases in the value of long-term incentive awards and deferred compensation under nonqualified deferred compensation plans allegedly caused by the formula used to calculate the adjustments to such awards and deferred compensation from RTX, Carrier, and Otis following the spin-offs of Carrier and Otis and the subsequent combination of UTC and Raytheon Company. On September 30, 2022, in response to motions to dismiss filed by the defendants, the Court dismissed the class action in its entirety with prejudice. The plaintiffs appealed the decision on October 26, 2022. On August 24, 2023, the Second Circuit Court of Appeals entered judgment in defendants’ favor, upholding the trial court’s decision. This action is concluded.

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Other. As previously disclosed, we have commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based on a range of possible outcomes. If no amount within this range is a better estimate than any other, we accrue the minimum amount. While it is not possible to determine the ultimate disposition of each of these claims and whether they will be resolved consistent with our beliefs, we expect that the outcome of such claims, individually or in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows or results of operations.

As previously disclosed, in certain European countries, claims for overcharges on elevators and escalators related to civil cartel cases have been made, which we have accrued for based on our evaluation of the claims. While it is not possible to determine the ultimate disposition of each of these claims and whether they will be resolved consistent with our beliefs, historical settlement experience of these cases has not been material to the business, financial condition, cash flows or results of operations. However, the future outcome of these cases cannot be determined.

As previously disclosed, in the ordinary course of business, the Company is also routinely a defendant in, party to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.

Note 17: Segment Financial Data

Our operations are classified into two operating segments: New Equipment and Service. Through the New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators as well as escalators and moving walkways to customers in the residential and commercial building and infrastructure projects. The Service segment provides maintenance and repair services for both our products and those of other manufacturers, and provides modernization services to upgrade elevators and escalators. The operating segments are generally based on the management structure of the Company, how management allocates resources, assesses performance and makes strategic and operational decisions.

Segment Information. Segment information for the quarters ended September 30, 2023 and 2022 are as follows:

Net SalesOperating ProfitOperating Profit Margin
(dollars in millions)202320222023202220232022
New Equipment$1,435 $1,447 $94 $100 6.6 %6.9 %
Service2,088 1,897 507 446 24.3 %23.5 %
Total segments3,523 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 %

Segment information for the nine months ended September 30, 2023 and 2022 are as follows:
Net SalesOperating ProfitOperating Profit Margin
(dollars in millions)202320222023202220232022
New Equipment$4,346 $4,403 $277 $292 6.4 %6.6 %
Service6,243 5,843 1,475 1,328 23.6 %22.7 %
Total segments10,589 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 %
Total assets are not presented for each segment as they are not presented to, or reviewed by, the Chief Operating Decision Maker.
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Geographic Sales. Geographic Net sales are attributed to the geographic regions based on their location of origin. With the exception of the U.S. and China, there were no individually significant countries with sales exceeding 10% of Net sales during the quarters and nine months ended September 30, 2023 and 2022.

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
United States Operations$1,004 $943 $3,015 $2,873 
International Operations
  China596 672 1,832 1,951 
  Other 1,923 1,729 5,742 5,422 
Total$3,523 $3,344 $10,589 $10,246 

Disaggregated Sales by Type. Segment Net sales disaggregated by product and service type for the quarters and nine months ended September 30, 2023 and 2022 are as follows:

Quarter Ended September 30,Nine Months Ended September 30,
(dollars in millions)2023202220232022
New Equipment$1,435 $1,447 $4,346 $4,403 
Maintenance and Repair1,715 1,555 5,116 4,784 
Modernization373 342 1,127 1,059 
Total Service2,088 1,897 6,243 5,843 
Total$3,523 $3,344 $10,589 $10,246 

Major Customers. There were no customers that individually accounted for 10% or more of the Company's consolidated Net sales for the quarters and nine months ended September 30, 2023 and 2022.

Note 18: Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early application permitted. The Company adopted ASU 2021-08 effective January 1, 2023. The adoption of this ASU did not have a material impact on our Condensed Consolidated Financial Statements.

In September 2022, the FASB issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Topic 450-50): Disclosure of Supplier Finance Program Obligations, which requires entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, except for the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted ASU 2022-04 effective January 1, 2023. The adoption of this ASU did not have a material impact on our Condensed Consolidated Financial Statements, as disclosed in Note 1, "General."

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In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Additionally, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ("ASU 2022-06"), which allows ASU 2020-04 to be adopted and applied prospectively to contract modifications made on or before December 31, 2024. We do not expect the adoption of this standard to have a material impact on our Condensed Consolidated Financial Statements.

In August 2023, the FASB issued ASU 2023-05, Business Combinations - Joint Ventures Formations (Subtopic 805-60): Recognition and initial measurement ("ASU 2023-05"), which requires that joint ventures, upon formation, apply a new basis of accounting by initially measuring assets and liabilities at fair value. The amendments in ASU 2023-05 are effective for joint ventures that are formed on or after January 1, 2025. Early adoption is permitted. We are currently evaluating the impact of this standard, however we do not expect it to have a material impact on our Condensed Consolidated Financial Statements.

Other new accounting pronouncements issued but not effective until after September 30, 2023 did not and are not expected to have a material impact on our financial position, results of operations or liquidity.

Note 19: Subsequent Events

Following period end, on October 5, 2023, UpLift restructuring actions of approximately $55 million were approved, which are expected to be incurred beginning in the fourth quarter of 2023 through 2024. These are primarily severance related costs. We expect these actions to be mostly completed and cash to be paid by the end of 2024, with certain actions to be completed beyond 2024 due to legal requirements in the applicable jurisdictions.
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With respect to the unaudited condensed consolidated financial information of Otis Worldwide Corporation for the quarters and nine months ended September 30, 2023 and 2022, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated October 26, 2023, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional review procedures beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended ("the Act") for its report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of Otis Worldwide Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Otis Worldwide Corporation and its subsidiaries (the “Company”) as of September 30, 2023, and the related condensed consolidated statements of operations, of comprehensive income, and of changes in equity for the three-month and nine-month periods ended September 30, 2023 and 2022 and of cash flows for the nine-month periods ended September 30, 2023 and 2022, including the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2022, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 3, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut
October 26, 2023
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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.

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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 macroe