# Otis Worldwide Corp (OTIS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Otis Worldwide Corp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1781335/000178133524000013/otis-20231231.htm
Accession: 0001781335-24-000013
Filing date: 2024-02-02
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OTIS/
All MD&A years: /company/OTIS/mda/
Previous year: /company/OTIS/mda/fy2022/ (FY 2022)
Next year: /company/OTIS/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

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 that 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 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 function under a centralized operating model whereby we pursue a global strategy set around New Equipment and Service, in large measure, because we seek to grow our maintenance portfolio, in part, through the conversion of new elevator and escalator installations into service contracts. Accordingly, we benefit from an integrated global strategy, which sets priorities and establishes accountability across the full product lifecycle.

For additional discussion of our business, refer to Item 1 in this Form 10-K.

UpLift

Announced in July 2023, UpLift is a program with the goal of transforming our operating model. UpLift will include the standardization of our processes and improvement of our supply chain procurement, among other aspects of the program, as well as restructuring actions. We expect UpLift to generate approximately $150 million in annual savings by mid-year 2025, with restructuring and other incremental costs to complete the transformation ("UpLift transformation costs") over that period of approximately the same amount.

UpLift costs incurred are as follows:

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023"],["UpLift restructuring action costs","","$","25"],["UpLift transformation costs","","16"],["Total UpLift costs","","$","41"]]
[[/GREPCENT_TABLE]]

UpLift restructuring action costs in 2023 were primarily severance costs, and are recorded in Selling, general and administrative in the Consolidated Statements of Operations. For further details, refer to the discussion on restructuring costs in the "Results of Operations," as well as "Note 16: Restructuring and Transformation Costs" to the Consolidated Financial Statements in Item 8 in this Form 10-K.

UpLift transformation costs in 2023 were primarily consulting and incremental personnel costs, and are recorded in Other income (expense), net in the Consolidated Statements of Operations.

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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. 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 in 2024, 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 and Service 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 of this item of this Form 10-K for further detail and Item 1A in this Form 10-K for macroeconomic risks related to our business.

Risks Associated with Ongoing Conflicts

The ongoing conflict between Russia and Ukraine has resulted in worldwide geopolitical and macroeconomic uncertainty, including volatile commodity markets, foreign exchange fluctuations, supply chain disruptions, increased risk of cyber-security 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 2023, 2022 and 2021 revenue and operating profit. As previously disclosed, we sold our business in Russia, which represented approximately 1% and 2% of both our revenue and operating profit in 2022 and 2021, respectively, to a third party on July 27, 2022. The operations were comprised mostly of New Equipment. We recorded losses from the sale and conflict-related charges totaling $28 million, primarily in Other income (expense), net in the Consolidated Statements of Operations in 2022. See "Note 8: Business Acquisitions, Dispositions, Goodwill and Intangible Assets" in Item 8 in this Form 10-K for further details.

Additionally, we do not have operations or material net sales in Israel or Gaza. Although we transport products through the Red Sea, we currently do not expect the recent hostilities in that 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 period of time or expand to other countries, and depending on the ultimate outcomes of these conflicts, which remain uncertain, they could heighten certain risks disclosed in Item 1A in this 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.

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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 a discussion of risks associated with ESG matters, see Item 1A in this Form 10-K.

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

Zardoya Otis Tender Offer

As previously disclosed, the Company announced the Tender Offer to acquire all issued and outstanding shares of Zardoya Otis not owned by Otis, at an offer price of €7.07 per share in cash, after adjusting for dividends. The results of the Tender Offer were announced on April 7, 2022, with tenders of 45.49% of the shares outstanding accepted. The shares tendered to the Company were settled in cash on April 12, 2022 for approximately €1.5 billion from the Company's restricted cash held in escrow, resulting in the Company owning 95.51% of Zardoya Otis. The acquisition and settlement of the remaining issued and outstanding shares not owned by the Company for approximately €150 million (based on the adjusted tender price of €7.07 per share) and the automatic delisting of Zardoya Otis shares both occurred during the second quarter of 2022. Zardoya Otis was renamed Otis Mobility upon completion of the Tender Offer and delisting.

See "Note 1: Business Overview" and "Note 9: Borrowings and Lines of Credit" in Item 8 in this Form 10-K for further details regarding this transaction and financing arrangements entered into in connection with the Tender Offer.

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RESULTS OF OPERATIONS

Net Sales

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Net sales","","$","14,209","","","$","13,685","","","$","14,298"],["Percentage change year-over-year","","3.8","%","","(4.3)","%","","12.1","%"]]
[[/GREPCENT_TABLE]]

The factors contributing to the total percentage change year-over-year in total Net sales are as follows:

[[GREPCENT_TABLE]]
[["","","2023","","2022"],["Organic volume","","5.6","%","","2.5","%"],["Foreign currency translation","","(1.2)","%","","(5.9)","%"],["Acquisitions and divestitures, net","","(0.6)","%","","(0.9)","%"],["Total % change","","3.8","%","","(4.3)","%"]]
[[/GREPCENT_TABLE]]

The Organic volume increase of 5.6% for 2023 was driven by an increase in organic sales of 7.7% in Service and 2.6% in New Equipment.

The Organic volume increase of 2.5% for 2022 was driven by an increase of 6.0% in Service, offset by a decrease of (1.7)% 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 "Segment Review" below for a discussion of Net sales by segment.

Cost of Products and Services Sold

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Cost of products and services sold","","$","10,016","","","$","9,765","","","$","10,105"],["Percentage change year-over-year","","2.6","%","","(3.4)","%","","12.6","%"]]
[[/GREPCENT_TABLE]]

The factors contributing to the percentage change year-over-year in total cost of products and services sold are as follows:

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Organic volume","4.8","%","","3.7","%"],["Foreign currency translation","(1.3)","%","","(6.1)","%"],["Acquisitions and divestitures, net and Other","(0.9)","%","","(1.0)","%"],["Total % change","2.6","%","","(3.4)","%"]]
[[/GREPCENT_TABLE]]

The organic increase in total cost of products and services sold in 2023 was primarily driven by the organic sales increases noted above and inflationary pressures, including annual wage increases and higher Service-related material costs, partially offset by productivity and lower commodity prices, primarily steel.

The organic increase in total cost of products and services sold in 2022 was primarily driven by the organic sales increases noted above and inflationary pressures, including higher commodity prices of $107 million, primarily driven by steel, higher freight and fuel costs and annual wage increases, partially mitigated by productivity.

The decrease in Total cost of products and services sold 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.

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Gross Margin

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Gross margin","","$","4,193","","","$","3,920","","","$","4,193"],["Gross margin percentage","","29.5","%","","28.6","%","","29.3","%"]]
[[/GREPCENT_TABLE]]

Gross margin percentage increased 90 basis points in 2023 compared to 2022, due to the benefit from favorable pricing, Service sales growing faster than New Equipment sales, lower commodity prices, and the benefits from productivity, partially offset by the inflationary pressures described above.

Gross margin percentage decreased 70 basis points in 2022 compared to 2021, due to the inflationary pressures described above, partially offset by favorable Service pricing, productivity and the benefit from Service sales growing faster than New Equipment sales.

Research and Development

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Research and development","","$","144","","","$","150","","","$","159"],["Percentage of Net sales","","1.0","%","","1.1","%","","1.1","%"]]
[[/GREPCENT_TABLE]]

Research and development was relatively flat in 2023 compared to 2022 and 2021. Research and development includes product development and innovation, including for IoT and developing the next generation of connected elevators and escalators.

Selling, General and Administrative

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Selling, general and administrative","","$","1,884","","","$","1,763","","","$","1,948"],["Percentage of Net sales","","13.3","%","","12.9","%","","13.6","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased $121 million in 2023 compared to 2022, driven by annual wage increases, higher other employment-related costs, higher restructuring costs and higher credit loss reserves, partially offset by favorable foreign exchange impacts of $8 million.

Selling, general and administrative expenses decreased $185 million in 2022 compared to 2021, as other employment-related cost reductions, cost containment actions, lower credit loss reserves, as well as the impact from foreign exchange of $104 million, were partially offset by annual wage increases.

Selling, general and administrative expenses as a percentage of Net sales increased 40 basis points in 2023 compared to 2022, and decreased 70 basis points in 2022 compared to 2021.

Restructuring Costs

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["UpLift restructuring action costs","","$","25","","$","\u2014","","$","\u2014"],["Other restructuring action costs","","42","","60","","56"],["Total restructuring costs","","$","67","","$","60","","$","56"]]
[[/GREPCENT_TABLE]]

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.

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UpLift restructuring action costs were $25 million in 2023, which are recorded in Selling, general and administrative in the Consolidated Statements of Operations. We also incurred $16 million of UpLift transformation costs in 2023, primarily consulting and incremental personnel costs, which are recorded in Other income (expense), net in the Consolidated Statements of Operations.

Other restructuring action costs were $42 million in 2023 and included $38 million of costs related to 2023 actions and $4 million of costs related to 2022 actions.

Most of the expected restructuring 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 year ended December 31, 2023, and the expected cash payments to complete the actions announced:

[[GREPCENT_TABLE]]
[["(dollars in millions)","","UpLift Actions","","Other Actions","","Total Restructuring"],["Cash outflows during the year ended December 31, 2023","","$","12","","","$","47","","","$","59"],["Expected cash payments remaining to complete actions announced","","38","","","65","","","103"]]
[[/GREPCENT_TABLE]]

The approved UpLift restructuring actions are expected to generate approximately $50 million in annual recurring savings by 2025, primarily in Selling, general and administrative expenses, and of which approximately $5 million was realized during the year ended December 31, 2023.

For other restructuring actions, we generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $42 million for the 2023 actions and $63 million for the 2022 actions, of which approximately $15 million was realized for the 2023 actions and $63 million for the 2022 actions during the year ended December 31, 2023.

For additional discussion of restructuring and transformation costs, see "Note 16: Restructuring and Transformation Costs" in Item 8 in this Form 10-K.

Other Income (Expense), Net

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Other income (expense), net","","$","21","","$","26","","$","22"]]
[[/GREPCENT_TABLE]]

Other income (expense), net primarily includes the impact of changes in the fair value and settlement of derivatives, gains or losses on sale of businesses and fixed assets, earnings from equity method investments, fair value changes on equity securities, impairments, UpLift transformation costs, non-recurring Separation-related expenses and certain other operating items.

The change in Other income (expense), net of $5 million in 2023 compared to 2022 was primarily driven by UpLift transformation costs of $16 million and the absence of the settlement of certain legal matters in 2022, partially offset by the impact of foreign currency mark-to market adjustments and the absence of the loss on the sale of our Russia business and related charges when compared to 2022.

The change in Other income (expense), net of $4 million in 2022 compared to 2021 was primarily driven by favorable foreign currency mark-to-market adjustments, lower non-recurring Separation-related costs and settlement of certain legal matters, partially offset by the impact of the loss on the sale of our Russia business.

See "Note 1: Business Overview" in Item 8 in this Form 10-K for further discussion on costs related to the Separation.

Interest Expense (Income), Net

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Interest expense (income), net","","$","150","","$","143","","$","136"]]
[[/GREPCENT_TABLE]]

Interest expense (income), net primarily relates to interest expense on our external debt, offset by interest income earned on cash balances and short-term investments.

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Interest expense (income), net increased $7 million for 2023, compared to 2022, primarily driven by higher interest expense related to the $750 million unsecured, unsubordinated debt issued in August 2023, partially offset by higher interest income.

Interest expense (income), net increased $7 million in 2022 compared to 2021, primarily driven by interest expense related to the financing of the Tender Offer for Zardoya Otis.

The average interest rate on our external debt for 2023, 2022 and 2021 was 2.1%, 2.0% and 2.3%, respectively.

For additional discussion of borrowings, see "Note 9: Borrowings and Lines of Credit" in Item 8 in this Form 10-K.

Income Taxes

[[GREPCENT_TABLE]]
[["","","2023","","2022","","2021"],["Effective tax rate","","26.2","%","","27.5","%","","27.6","%"]]
[[/GREPCENT_TABLE]]

The 2023, 2022 and 2021 effective tax rates are higher than the statutory U.S. rate primarily due to higher international tax rates as compared to the lower U.S. federal statutory rate.

The 2023 effective tax rate is lower than the 2022 effective tax rate primarily due to the absence of the tax impact related to the sale of our Russia business recorded in the year ended December 31, 2022, as well as the release of valuation allowances on non-U.S. losses and U.S. foreign tax credits, reduction in the deferred tax liability related to lower withholding tax on repatriation of certain foreign earnings, and reversal of tax reserves related to the U.S. foreign tax credit regulations, all recorded in the year ended December 31, 2023.

The 2022 effective tax rate is lower than the 2021 effective tax rate primarily due to the elimination of Base Erosion Anti Abuse Tax ("BEAT") in the U.S., and the release of a tax reserve related to a forward transfer pricing agreement with a European tax authority. This is partially offset by the absence of a reduction in the deferred tax liability related to repatriation of foreign earnings recorded in the year ended December 31, 2021, and the absence of a favorable income tax settlement related to the Separation recorded in the year ended December 31, 2021.

For additional discussion of income taxes and the effective income tax rate, see "Note 15: Income Taxes" in Item 8 in this Form 10-K.

Noncontrolling Interest in Subsidiaries' Earnings and Net Income Attributable to Otis Worldwide Corporation

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Noncontrolling interest in subsidiaries' earnings","","$","92","","$","116","","$","174"],["Net income attributable to Otis Worldwide Corporation","","$","1,406","","$","1,253","","$","1,246"]]
[[/GREPCENT_TABLE]]

Noncontrolling interest in subsidiaries' earnings decreased in 2023 in comparison to 2022 primarily driven by Otis' increased ownership in Otis Mobility (formerly Zardoya Otis) in the second quarter of 2022, as well as impacts of foreign exchange, partially offset by higher 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: Business Overview" in Item 8 in this Form 10-K.

Noncontrolling interest in subsidiaries' earnings decreased in 2022 in comparison to 2021 primarily due to Otis' acquisition of the remaining outstanding shares in Otis Mobility in the second quarter of 2022.

Net income attributable to Otis Worldwide Corporation increased in 2023 compared to 2022, due to higher operating profit (including the unfavorable impact of foreign exchange rates), lower noncontrolling interest in subsidiaries' earnings, and a lower effective tax rate.

Net income attributable to Otis Worldwide Corporation was relatively flat in 2022 compared to 2021, as lower noncontrolling interest in subsidiaries’ earnings and the benefit of a lower effective tax rate were offset by lower operating profit (including the impact of foreign exchange rates) and higher interest expense.

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Segment Review

Summary performance for our operating segments for the years ended December 31, 2023, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","Net Sales","","Operating Profit","","Operating Profit Margin"],["(dollars in millions)","2023","","2022","","2021","","2023","","2022","","2021","","2023","","2022","","2021"],["New Equipment","$","5,812","","$","5,864","","$","6,428","","$","358","","$","358","","$","459","","6.2","%","","6.1","%","","7.1","%"],["Service","8,397","","7,821","","7,870","","1,972","","1,789","","1,762","","23.5","%","","22.9","%","","22.4","%"],["Total segment","14,209","","13,685","","14,298","","2,330","","2,147","","2,221","","16.4","%","","15.7","%","","15.5","%"],["General corporate expenses and other","\u2014","","\u2014","","\u2014","","(144)","","(114)","","(113)","","\u2014","","","\u2014","","","\u2014"],["Total","$","14,209","","$","13,685","","$","14,298","","$","2,186","","$","2,033","","$","2,108","","15.4","%","","14.9","%","","14.7","%"]]
[[/GREPCENT_TABLE]]

New Equipment

The New Equipment segment designs, manufactures, sells and installs a wide range of passenger and freight elevators, as well as escalators and moving walkways in residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers and general contractors who develop and/or design buildings for residential, infrastructure, commercial, retail or mixed-use activity. We sell directly to customers as well as through agents and distributors. We also sell New Equipment to government agencies to support infrastructure projects, such as airports, railways or metros.

Summary performance for New Equipment for the years ended December 31, 2023, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","","","Total Increase (Decrease) Year-Over-Year for:"],["(dollars in millions)","","2023","","2022","","2021","","2023 compared with 2022","","2022 compared with 2021"],["Net sales","","$","5,812","","","$","5,864","","","$","6,428","","","$","(52)","","(0.9)","%","","$","(564)","","(8.8)","%"],["Cost of sales","","4,843","","","4,949","","","5,293","","","(106)","","(2.1)","%","","(344)","","(6.5)","%"],["","","969","","","915","","","1,135","","","54","","5.9","%","","(220)","","(19.4)","%"],["Operating expenses","","611","","","557","","","676","","","54","","9.7","%","","(119)","","(17.6)","%"],["Operating profit","","$","358","","","$","358","","","$","459","","","$","\u2014","","\u2014","%","","$","(101)","","(22.0)","%"],["Operating profit margin","","6.2","%","","6.1","%","","7.1","%"]]
[[/GREPCENT_TABLE]]

Summary analysis of the Net sales change for New Equipment for the years ended December 31, 2023 and 2022 compared with the prior years was as follows:

[[GREPCENT_TABLE]]
[["Components of Net sales change:","","2023","","2022"],["Organic","","2.6","%","","(1.7)","%"],["Foreign currency translation","","(2.1)","%","","(4.9)","%"],["Acquisitions/Divestitures, net and Other","","(1.4)","%","","(2.2)","%"],["Total % change","","(0.9)","%","","(8.8)","%"]]
[[/GREPCENT_TABLE]]

2023 Compared with 2022

The organic sales increase of 2.6% was driven by mid single-digit organic sales growth in EMEA and low single-digit organic sales growth in Americas and 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.

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New Equipment operating profit was flat, including $(26) 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 increased 10 basis points.

2022 Compared with 2021

Organic sales declined (1.7)% as a 10% decline in China was partially offset by high single-digit growth in Asia Pacific and mid single-digit growth in EMEA.

New Equipment operating profit decreased $(101) million. Lower volume of $(37) million, under absorption from lower volume, unfavorable mix, higher commodity costs of ($107) million, primarily steel, and increased freight costs were partially mitigated by favorable productivity and lower selling, general and administrative expenses. Operating profit was also impacted by the sale of our Russia business of $(40) million. Operating margin decreased 100 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 years ended December 31, 2023, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","","","Total Increase (Decrease) Year-Over-Year for:"],["(dollars in millions)","","2023","","2022","","2021","","2023 compared with 2022","","2022 compared with 2021"],["Net sales","","$","8,397","","","$","7,821","","","$","7,870","","","$","576","","7.4","%","","$","(49)","","(0.6)","%"],["Cost of sales","","5,173","","","4,816","","","4,812","","","357","","7.4","%","","4","","0.1","%"],["","","3,224","","","3,005","","","3,058","","","219","","7.3","%","","(53)","","(1.7)","%"],["Operating expenses","","1,252","","","1,216","","","1,296","","","36","","3.0","%","","(80)","","(6.2)","%"],["Operating profit","","$","1,972","","","$","1,789","","","$","1,762","","","$","183","","10.2","%","","$","27","","1.5","%"],["Operating profit margin","","23.5","%","","22.9","%","","22.4","%"]]
[[/GREPCENT_TABLE]]

Summary analysis of the Net sales change for Service for the years ended December 31, 2023 and 2022 compared with the prior years was as follows:

[[GREPCENT_TABLE]]
[["Components of Net sales change:","","2023","","2022"],["Organic","","7.7","%","","6.0","%"],["Foreign currency translation","","(0.4)","%","","(6.7)","%"],["Acquisitions/Divestitures, net and Other","","0.1","%","","0.1","%"],["Total % change","","7.4","%","","(0.6)","%"]]
[[/GREPCENT_TABLE]]

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2023 Compared with 2022

Net Sales

The organic sales increase of 7.7% is due to organic sales increases in maintenance and repair of 7.8% and modernization of 7.3%.

[[GREPCENT_TABLE]]
[["Components of Net sales change:","","Maintenance and Repair","","Modernization"],["Organic","","7.8","%","","7.3","%"],["Foreign currency translation","","(0.3)","%","","(0.8)","%"],["Acquisitions/Divestitures, net and Other","","\u2014","%","","0.4","%"],["Total % change","","7.5","%","","6.9","%"]]
[[/GREPCENT_TABLE]]

Operating profit

Service operating profit increased $183 million including foreign exchange tailwinds of $4 million, primarily driven by higher volume, improved pricing on maintenance contracts and productivity, which were partially offset by annual wage increases and other inflationary pressures, including higher material costs. Operating margin increased 60 basis points.

2022 Compared with 2021

Net Sales

The organic sales increase of 6.0% is due to organic sales increases in maintenance and repair of 5.6%, and modernization of 8.1%.

[[GREPCENT_TABLE]]
[["Components of Net sales change:","","Maintenance and Repair","","Modernization"],["Organic","","5.6","%","","8.1","%"],["Foreign currency translation","","(6.8)","%","","(6.5)","%"],["Acquisitions/Divestitures, net and Other","","\u2014","%","","0.5","%"],["Total % change","","(1.2)","%","","2.1","%"]]
[[/GREPCENT_TABLE]]

Operating Profit

Service operating profit increased $27 million due to higher volume of $144 million, favorable pricing on maintenance contracts, productivity and other employment-related cost reductions, partially offset by foreign exchange headwinds of $(143) million, annual wage increases and other inflationary pressures, including higher fuel costs. Operating margin increased 50 basis points.

General Corporate Expenses and Other

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["General corporate expenses and other","","$","(144)","","$","(114)","","$","(113)"]]
[[/GREPCENT_TABLE]]

General corporate expenses and other increased $30 million in 2023 compared to 2022, primarily due to the UpLift related transformation costs of $16 million and higher corporate costs, partially offset by the impact of foreign currency mark-to market adjustments and the absence of the loss on the sale of our Russia business and related charges when compared to 2022.

General corporate expenses and other increased $1 million in 2022 compared to 2021, which includes the impact of the loss on the sale of our Russia business, offset by favorable foreign currency mark-to-market adjustments and lower non-recurring Separation-related costs.

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LIQUIDITY AND FINANCIAL CONDITION

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 the capital markets.

As of December 31, 2023, we had cash and cash equivalents of approximately $1.3 billion, of which approximately 97% was held by the Company's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost-effectiveness with which those funds can be accessed. On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions and divestitures or other legal obligations. The amount of such restricted cash was $6 million as of December 31, 2023 and 2022.

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 December 31, 2023 permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future could be impacted by many factors, including (1) our credit ratings or absence of a credit rating, (2) the liquidity of the overall capital markets and (3) the current state of the economy, including tighter credit conditions. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.

The following table contains several key measures of our financial condition and liquidity:

[[GREPCENT_TABLE]]
[["(dollars in millions)","","December 31, 2023","","December 31, 2022"],["Cash and cash equivalents","","$","1,274","","","$","1,189"],["Total debt","","6,898","","","6,768"],["Net debt (total debt less cash and cash equivalents)","","5,624","","","5,579"],["Total equity","","(4,855)","","","(4,799)"],["Total capitalization (total debt plus total equity)","","2,043","","","1,969"],["Net capitalization (total debt plus total equity less cash and cash equivalents)","","769","","","780"],["Total debt to total capitalization","","338","%","","344","%"],["Net debt to net capitalization","","731","%","","715","%"]]
[[/GREPCENT_TABLE]]

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.

Borrowings and Lines of Credit

The following is a summary of the long-term debt issuances and repayments in 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["(dollars in millions)"],["Issuance Date","","Description of Debt","","Aggregate Principal Balance"],["August 16, 2023","","5.25% notes due 2028","","$","750"],["November 12, 2021","","0.000% notes due 2023 (\u20ac500 million principal value)","","572"],["November 12, 2021","","0.318% notes due 2026 (\u20ac600 million principal value)","","687"],["November 12, 2021","","0.934% notes due 2031 (\u20ac500 million principal value)","","572"],["March 11, 2021","","0.37% notes due 2026 (\u00a521,500 million principal value)","","199"],["Repayment Date","","Description of Debt","","Aggregate Principal Paid"],["November 13, 2023","","0.000% notes due 2023 (\u20ac500 million principal value)","","$","534"],["January 14, 2022","","LIBOR plus 45 bps floating rate notes due 2023","","500"]]
[[/GREPCENT_TABLE]]

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The proceeds from the August 2023 issuance of $750 million notes listed above were used to fund the repayments of Otis' commercial paper and €500 million 0.000% notes that were due in November 2023, with the remainder used for other general corporate purposes. The proceeds from the November 2021 issuance of the Euro notes listed above were used to fund the Tender Offer in 2022. The proceeds from the March 2021 issuance of Japanese Yen notes listed above were used to fund the repayment of a portion of Otis' commercial paper.

There is no commercial paper outstanding as of December 31, 2023. For additional discussion of borrowings, see "Note 9: Borrowings and Lines of Credit" in Item 8 of this Form 10-K.

Share Repurchase Program

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 $1.2 billion was remaining as of December 31, 2023. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs or under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.

Discussion of Cash Flows

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

[[GREPCENT_TABLE]]
[["(dollars in millions)","","2023","","2022","","2021"],["Net cash flows provided by (used in):"],["Operating activities","","$","1,627","","$","1,560","","$","1,750"],["Investing activities","","(183)","","(33)","","(89)"],["Financing activities","","(1,350)","","(3,652)","","58"],["Effect of exchange rate changes on cash and cash equivalents","","(9)","","(157)","","(43)"],["Net increase (decrease) in cash and cash equivalents and restricted cash","","$","85","","$","(2,282)","","$","1,676"]]
[[/GREPCENT_TABLE]]

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 increase in net cash provided by operating activities in 2023 compared to 2022 was primarily driven by changes in working capital balances during the periods, including an increase in Accrued liabilities in 2023 compared to a decrease in 2022 due to the timing of income tax payments in the periods, as well as a decrease in Inventories in 2023 compared to an increase in 2022. These were offset by a smaller increase in Accounts payable in 2023 compared to 2022 due to the timing of payments to suppliers and higher balances due as of December 31, 2022 compared to December 31, 2021 and other working capital changes.

The decrease in net cash provided by operating activities in 2022 compared to 2021 was primarily driven by working capital balances during the periods, including a larger increase in Accounts receivable due to increased volume and the timing of billings and a decrease in Accrued liabilities in 2022 compared to an increase in 2021 due to the timing of payments of employee-related benefits, income taxes and other accruals. These were partially offset by a larger increase in Accounts payable in 2022 compared to 2021 due to the timing of payments to suppliers.

During 2023, net cash provided by operating activities was $1.6 billion. The primary driver of the inflow related to $1.5 billion of net income and an increase in Accounts payable. These were partially offset by an increase in Accounts receivable, net, due to the volume and timing of billings.

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During 2022, net cash provided by operating activities was $1.6 billion. The primary driver of the inflow related to $1.4 billion of net income and an increase in Accounts payable due to the timing of payments to suppliers. An increase in Accounts receivable, net, due to increased volume and 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 and to mitigate supply chain disruptions 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.

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.

The increase in net cash used in investing activities in 2023 compared to 2022 was primarily driven by net cash payments from the settlement of derivative instruments in 2023 compared to net cash receipts in 2022, as well as the absence of net proceeds from the sale of our business in Russia in 2022. The decrease in net cash used in investing activities in 2022 compared to 2021 was primarily driven by the net proceeds from the sale of our business in Russia in 2022.

During 2023, net cash used in investing activities was $183 million. The primary drivers of the outflow related to $138 million of capital expenditures, $36 million of acquisitions of businesses and intangible assets and $28 million of net cash payments from the settlement of derivative instruments.

During 2022, net cash used in investing activities was $33 million. The primary drivers of the outflow were $115 million of capital expenditures and $46 million of acquisitions of businesses and intangible assets, which were partially offset by $65 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. See "Note 8: Business Acquisitions, Dispositions, Goodwill and Intangibles" in Item 8 of this Form 10-K for further details regarding the sale of our business in Russia.

As discussed in "Note 17: Financial Instruments" in Item 8 in this Form 10-K, 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.

The decrease in net cash used in financing activities in 2023 compared to 2022 was primarily due to the absence of the settlement of the Tender Offer in 2022. The net cash used in financing activities in 2022 compared to net cash provided by financing activities in 2021 was primarily driven by the settlement of the Tender Offer in 2022 compared to the receipt of the net proceeds from the debt issued in 2021 to fund the Tender Offer.

During 2023, net cash used in financing activities was $1.4 billion. The primary drivers of the outflow were the repurchases of our Common Stock of $800 million and dividends paid on our Common Stock of $539 million. Additionally, net repayments of short-term borrowings of $113 million and repayments of long-term debt of $534 million were funded by $741 million of net proceeds from the issuance of long-term debt.

During 2022, net cash used in financing activities was $3.7 billion. The primary drivers of the outflow were the settlement in cash of the Tender Offer for $1.8 billion (€1,663 million), repurchases of our Common Stock of $850 million, repayments of long-term debt of $500 million and dividends paid on our Common Stock of $465 million.

For additional discussion of the Tender Offer and of borrowing activity, see "Note 1: Business Overview" and "Note 9: Borrowings and Lines of Credit", respectively, in Item 8 in this Form 10-K.

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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 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 9: Borrowings and Lines of Credit" in Item 8 in this 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 years ended December 31, 2023 and 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.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in millions)","","2023","","2022"],["OWC Statement of Operations - Standalone and Unconsolidated"],["Revenue","","$","\u2014","","$","\u2014"],["Cost of revenue","","\u2014","","\u2014"],["Operating expenses","","9","","1"],["Income from consolidated subsidiaries","","143","","70"],["Income (loss) from operations excluding income from consolidated subsidiaries","","(11)","","(2)"],["Net income (loss) excluding income from consolidated subsidiaries","","(119)","","(109)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(dollars in millions)","","2023","","2022"],["OWC Balance Sheet - Standalone and Unconsolidated"],["Current assets (intercompany receivables from non-guarantor subsidiaries)","","$","\u2014","","$","\u2014"],["Current assets (excluding intercompany receivables from non-guarantor subsidiaries)","","63","","94"],["Noncurrent assets (investments in consolidated subsidiaries)","","1,236","","1,236"],["Noncurrent assets (excluding investments in consolidated subsidiaries)","","43","","45"],["Current liabilities (intercompany payables to non-guarantor subsidiaries)","","3,753","","3,090"],["Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)","","119","","166"],["Noncurrent liabilities","","5,880","","5,186"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in millions)","","2023","","2022"],["Highland Statement of Operations - Standalone and Unconsolidated"],["Revenue","","$","\u2014","","$","\u2014"],["Cost of revenue","","\u2014","","\u2014"],["Operating expenses","","1","","\u2014"],["Income from consolidated subsidiaries","","477","","1,242"],["Income (loss) from operations excluding income from consolidated subsidiaries","","(1)","","\u2014"],["Net income (loss) excluding income from consolidated subsidiaries","","(196)","","(10)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(dollars in millions)","","2023","","2022"],["Highland Balance Sheet - Standalone and Unconsolidated"],["Current assets (intercompany receivables from non-guarantor subsidiaries)","","$","75","","$","195"],["Current assets (excluding intercompany receivables from non-guarantor subsidiaries)","","\u2014","","\u2014"],["Noncurrent assets (investments in consolidated subsidiaries)","","15,711","","12,524"],["Noncurrent assets (intercompany receivables from non-guarantor subsidiaries)","","518","","572"],["Noncurrent assets (excluding investments in consolidated subsidiaries)","","\u2014","","\u2014"],["Current liabilities (intercompany payables to non-guarantor subsidiaries)","","\u2014","","\u2014"],["Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)","","1","","532"],["Noncurrent liabilities (intercompany payables to non-guarantor subsidiaries)","","3,467","","\u2014"],["Noncurrent liabilities (excluding intercompany payables to non-guarantor subsidiaries)","","1,199","","1,160"]]
[[/GREPCENT_TABLE]]

CRITICAL ACCOUNTING ESTIMATES

Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. "Note 2: Summary of Significant Accounting Policies" in Item 8 in this Form 10-K describes the significant accounting policies used in preparation of the Consolidated Financial Statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management’s estimates.

Revenue Recognition from Contracts with Customers

We recognized revenue in accordance with FASB ASC Topic 606: Revenue from Contracts with Customers and its related amendments, (referred to, collectively, as "ASC 606”). For new equipment and modernization contracts, equipment and installation are typically procured in a single contract providing the customer with a complete installed elevator or escalator unit. The combination of equipment and installation promises are typically a single performance obligation. For these performance obligations, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress. Contract costs are usually incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. Contract costs included in the calculation are comprised of labor, materials, subcontractors’ costs or other direct costs and indirect costs, which include indirect labor costs.

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The long-term nature of the contracts, the complexity of the products and the scale of the projects can affect our ability to estimate costs precisely. We review cost estimates on significant new equipment and modernization contracts on a quarterly basis and, for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method and we review changes in contract estimates for their impact on net sales or operating profit in the Consolidated Financial Statements. Modifications are recognized as a cumulative catch-up or treated as a separate accounting contract if the modification adds distinct goods or services and the modification is priced at its stand-alone selling price.

See "Note 2: Summary of Significant Accounting Policies" in Item 8 in this Form 10-K.

Income Taxes

The future tax benefit arising from deductible temporary differences and tax carryforwards was $618 million as of December 31, 2023 and $588 million as of December 31, 2022. Management estimates that our earnings during the periods when the temporary differences become deductible will be generally sufficient to realize the related future income tax benefits, which may be realized over an extended period of time. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.

In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made.

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. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. See "Note 3: Earnings Per Share" and "Note 14: Accumulated Other Comprehensive Income (Loss)" in Item 8 in this Form 10-K for further discussion. Additionally, see "Note 21: Contingent Liabilities" in Item 8 in this Form 10-K for discussion of administrative review proceedings with the German Tax Office.

Goodwill

We have generated goodwill as a result of our acquisitions. At the time of acquisition, we account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

We review our goodwill for impairment on an annual basis at July 1 or more frequently if events or a change in circumstances indicate that the carrying amount may not be recoverable. We test goodwill for impairment at a level within the Company referred to as the reporting unit, which is one level below the operating segment level. We have determined there are three reporting units within each business segment.

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In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, we initially perform a qualitative assessment (commonly known as “step zero”) to determine whether further impairment testing is necessary before performing the two-step test. The qualitative assessment requires judgments by management about economic conditions including the entity’s operating environment, its industry and other market considerations, entity-specific events related to financial performance or loss of key personnel and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required. If we determine, based on this assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative goodwill impairment test by comparing the reporting unit’s fair value with its carrying value. An impairment loss is recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment loss is recognized if the fair value of the reporting unit exceeds its carrying value.

We completed the annual goodwill impairment test for all of our reporting units as of July 1, 2023 and determined that no adjustment to goodwill was necessary as the fair value of each reporting unit was in excess of the carrying value of each reporting unit.

Contingent Liabilities

Otis is party to litigation related to a number of matters as described in "Note 21: Contingent Liabilities" in Item 8 in this Form 10-K. In particular, they may include risks associated with contractual, regulatory and other matters, which may arise in the ordinary course of business. The outcome of these matters may have a material effect on the financial position, results of operations or cash flows. Management regularly analyzes current information about these matters and accrues for contingent losses that are probable and reasonably estimable. To assess the exposure to potential liability, we consult with relevant internal and external counsel. In making the decision regarding the need for loss accruals, management considers the degree of probability of an unfavorable outcome and the ability to make a sufficiently reliable estimate of the amount of loss. See Part I, Item 1A in this Form 10-K for further discussion.

Employee Benefit Plans

We sponsor domestic and international defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels and mortality rates. Assumptions are determined based on company data and appropriate market indicators, and are evaluated each year as of December 31. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the Consolidated Financial Statements.

In the following table, we show the sensitivity of our pension plan liabilities to a 25 basis point change in the discount rates for benefit obligations, as of December 31, 2023:

[[GREPCENT_TABLE]]
[["(dollars in millions)","","Increase in Discount Rate of 25 bps","","Decrease in Discount Rate of 25 bps"],["Projected benefit obligation","","$","(21)","","$","23"]]
[[/GREPCENT_TABLE]]

The impact on the net periodic pension (benefit) cost, the accumulated postretirement benefit obligation and the net periodic postretirement (benefit) cost is each less than $1 million.

Pension expense is also sensitive to changes in the expected long-term rate of asset return. An increase or decrease of 25 basis points in the expected long-term rate of asset return would have decreased or increased 2023 pension expense by approximately $2 million.

The weighted-average discount rates used to measure pension liabilities and costs utilize each plan’s specific cash flows and are then compared to high-quality bond indices for reasonableness. Global market interest rates decreased in 2023 as compared with 2022, and, as a result, the weighted-average discount rate used to measure pension liabilities was 3.4% in 2023 and 3.8% in 2022.

See "Note 12: Employee Benefit Plans" in Item 8 in this Form 10-K for further discussion.

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Off-Balance Sheet Arrangements and Contractual Obligations

We extend a variety of financial guarantees to third parties in support of our business. We also have obligations arising from environmental, health and safety, tax and employment matters. Circumstances that could cause the contingent obligations and liabilities arising from these arrangements to come to fruition include changes in the underlying transaction, non-performance under a contract or deterioration in the financial condition of the guaranteed party.

Otis' contractual obligations and commitments as of December 31, 2023 are discussed below. See also "Note 12: Employee Benefit Plans" in Item 8 of this Form 10-K for further discussion of our expected pension and postretirement contributions.

Long-term Debt

See "Note 9: Borrowings and Lines of Credit" in Item 8 of this Form 10-K for further discussion of our long-term debt principal payments as of December 31, 2023. In the following table, we show the timing of payments of interest on long-term debt as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","","","","Payments Due by Period"],["(dollars in millions)","","Total","","2024","","2025-2026","","2027-2028","","Thereafter"],["Long-term debt - future interest","","$","1,629","","$","172","","$","304","","$","269","","$","884"]]
[[/GREPCENT_TABLE]]

Purchase Obligations

Purchase obligations include amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders. Where it is not practically feasible to determine the legally enforceable portion of our obligation under certain of our long-term purchase agreements, we include additional expected purchase obligations beyond what may be legally enforceable. We enter into contractual purchase commitments with suppliers and service vendors to support our information technology that are either necessary to operate our business or result from implementing strategic initiatives. In the following table, we show the timing of payments of total purchase obligations as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","","","","Payments Due by Period"],["(dollars in millions)","","Total","","2024","","2025-2026","","2027-2028","","Thereafter"],["Purchase obligations","","$","1,179","","$","1,137","","$","35","","$","6","","$","1"]]
[[/GREPCENT_TABLE]]

Other Long-term Liabilities

Other long-term liabilities in the table below includes obligations related to product service and warranty policies, estimated remediation costs and contractual indemnities, and are included in Other long-term liabilities on the "Consolidated Balance Sheets" in Item 8 of this Form 10-K. The timing of expected cash flows associated with these obligations is based upon management's estimates over the terms of these agreements and is largely based upon historical experience and were as follows as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","","","","Payments Due by Period"],["(dollars in millions)","","Total","","2024","","2025-2026","","2027-2028","","Thereafter"],["Other long-term liabilities","","$","281","","$","24","","$","170","","$","9","","$","78"]]
[[/GREPCENT_TABLE]]

The balance above includes $149 million of non-current contractual payables due to RTX for reimbursement of tax payments that RTX is responsible to pay after the Separation pursuant to the TMA. Otis will reimburse RTX for those tax payments through 2026.

Unrecognized Tax Benefits

Otis has unrecognized tax benefits of $394 million as of December 31, 2023. The timing of when such unrecognized tax benefits will become payable is uncertain. See "Note 15: Income Taxes" in Item 8 in this Form 10-K for additional discussion on unrecognized tax benefits.

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