Otis Worldwide (OTIS), an elevator and escalator manufacturer, is inflating operating income by changing how it calculates it. In the past, Otis excluded items like the impact of foreign currency translation, acquisitions and divestitures, and restructuring costs. In its latest 10-Q, Otis revealed it will now include these items in its operating income calculation:

“...we will discuss the impact of foreign currency translation, acquisitions and divestitures and restructuring to the extent they are meaningful to understanding our performance. We believe this changed approach aligns better with how we measure our performance.”

Under the new calculation method, Otis reported a 33.5% increase in quarterly operating income. Without the change, Otis grew operating income by just 25.4%, which strips out a 7.9% gain from foreign currency translation and a 0.2% gain from acquisitions and divestitures.

The new calculation method better reflects Otis’ income from operations. Two-thirds of the company’s 2020 sales occurred outside the U.S., so currency translation is a fact of life. Likewise, the company regularly takes restructuring charges of $50-$70 million annually and makes acquisitions and divestitures. However, the timing of the calculation change is suspect as these inputs currently add to operating income. Expect Otis to revert back to the old calculation when they begin negatively impacting the new operating income calculation.