OTIS WORLDWIDE CORPORATION
Annual Report on Form 10-K for
Year Ended December 31, 2020
Whenever reference is made in this Form 10-K to specific sections of Otis Worldwide Corporation's 2020 Annual Report to Shareholders (2020 Annual Report), those sections are incorporated herein by reference and are included in Exhibit 13 to this Form 10-K. Otis Worldwide Corporation 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 product 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-K are provided for convenience only. Information available through these websites is not incorporated by reference into this Form 10-K.
Our Company
Otis is the world’s leading elevator and escalator manufacturing, installation and service company. We serve customers in over 200 countries and territories around the world. Otis has global scale and local focus, with over 1,400 branches and offices, and a direct physical presence in approximately 80 countries. The following description of our business should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report, including the information contained therein under the heading "Business Overview."
Otis is a Delaware corporation and was incorporated on March 1, 2019 in connection with the separation and distribution ("Separation") of each of Otis and Carrier Global Corporation ("Carrier") from United Technologies Corporation, subsequently renamed Raytheon Technologies Corporation ("UTC" or "RTX", as applicable) into separate independent publicly-traded companies. The Separation occurred on April 3, 2020. References to "UTC" relate to pre-Separation matters, and references to "RTX" relate to post-Separation matters.
The Separation was completed pursuant to a Separation and Distribution Agreement ("Separation Agreement") and other agreements with UTC related to the Separation, including but not limited to a transition services agreement ("TSA"), a tax matters agreement ("TMA"), an employee matter agreement ("EMA") and an intellectual property agreement (the "Intellectual Property Agreement"). For further discussion of these agreements, see “Item 1A. Risk Factors” and "Item 15. Exhibits and Financial Statement Schedule" in this Form 10-K and "Note 1: Business Overview and Separation from United Technologies Corporation" to the Consolidated Financial Statements in our 2020 Annual Report.
For the year ended December 31, 2020, our net sales and our operating profit were approximately $12.8 billion and $1.6 billion, respectively. Our international operations represented approximately 73 percent of our net sales for the year ended December 31, 2020.
For discussions of the impact of the COVID-19 global pandemic on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading "Business Overview" and "Note 2, Summary of Significant Accounting Policies" to the Consolidated Financial Statements in our 2020 Annual Report.
This Form 10-K and our quarterly reports on Form-10-Q, current reports on Form 8-K and any amendments to those reports are available free of charge through the Investors section of our Internet website (http://www.otis.com) under the heading "SEC Filings" as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. In addition, the SEC maintains a website (http://www.sec.gov) containing reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Description of Business by Segment
Our Company is organized into two segments, New Equipment and Service, which, for the year ended December 31, 2020, contributed 42 percent and 58 percent of our net sales, and 16 percent and 84 percent of our segment operating profit, respectively.
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, commercial and infrastructure projects. In 2020, our New Equipment segment had sales of $5.4 billion and operating profit of $318 million. In 2020, our New Equipment unit sales in China represented over half of our global New Equipment sales by unit volume.
We have developed a range of elevator and escalator solutions to meet the varying needs and objectives of our diverse customers. Our primary elevator and escalator solutions are described below.
Otis’ next-generation, digitally native Gen360 elevator, piloted in 2020, allows us to move from a predominantly mechanical system to an electronic architecture. Gen360 offers a compact design and footprint that frees up space in buildings combined with built-in Otis ONE connectivity providing proactive, predictive and transparent information to our technicians and customers. This technology combination helps to reduce entrapments, expands predictive and remote maintenance capabilities and leads to improved elevator up-time and service productivity. Otis also offers a range of passenger experience enhancements such as eView and Otis eCall. eView is an in-car display providing customized passenger content and communications. Otis eCall enables passengers within a building to call an elevator using an app on their mobile devices.
The Gen2 system is the basis for our principal low-and mid-rise elevator solution. The Gen2 system relies on compact elevator components that can fit within the elevator hoistway and can eliminate the need for a machine-room, which releases rentable or usable space. During 2020, we continued to expand this product offering, launching Gen2 Prime in India and other developing countries for the low-rise, entry-level segment. Since its inception in 2000, Otis has sold over one million Gen2 units.
We enhance the effectiveness of our elevator solutions by offering our proprietary Compass destination dispatch management system. Compass groups passengers by their desired destination and directs them to an assigned car that minimizes waiting and ride time. The system's algorithms anticipate traffic demand within a building and improves traffic flow.
In addition to elevator solutions, we also offer escalators and moving walkways. With a range of finishes and aesthetics, Otis escalators integrate easily with building designs. Our smart design and features enhance sustainability and passenger safety, such as sensor-equipped escalators and moving walkways that efficiently run only when passengers approach, or operate at reduced speeds to conserve energy when there are no riders.
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 also sell New Equipment to government agencies to support infrastructure projects, such as airports, railways or metros. We generally sell directly to our customers through our New Equipment sales personnel. In China, due to the large and widespread nature of the customer base, our direct sales force is augmented by agents and distributors. We also rely on agents and distributors to sell our new equipment in certain countries and territories. Given the breadth of our customer base and the large number of customers to whom we deliver new equipment on an annual basis, we are not dependent on any single customer and do not have any material contracts with any single customer. Our network of agents and distributors is broad and geographically dispersed, and we do not rely on or have any material contracts with any single agent or distributor.
New Equipment customers typically engage with us at an early stage during the construction cycle. The timing of order placement depends on factors including project complexity and customer requirements. Elevator installation usually occurs midway through building construction.
Most New Equipment orders are delivered within 12 months of booking, though larger projects can take longer to deliver based on customer construction schedules. Component lead-time is generally not a constraining factor. When placing New Equipment orders, customers typically make an advance payment to cover costs including design and contract engineering. These advance payments are typically followed by periodic progress payments at specified milestones, such as delivery of materials at the job site and completion of installation and equipment commissioning. Installation is carried out by our installation technicians or through subcontractors, in which case we typically complete the final inspection and commissioning to ensure that our quality standards are met. Revenues are recognized based on percentage of completion. Once commissioned, New Equipment units are typically supported by a warranty for a limited period of time.
Through our Service segment, we perform maintenance and repair services, as well as modernization services to upgrade elevators and escalators. We have a maintenance portfolio of over 2 million units globally, which includes Otis equipment manufactured and sold by us, as well as equipment from other original equipment manufacturers. Through our network of service sales personnel, we sell our services directly to customers in all significant elevator and escalator end-segments around the world. In 2020, our Service segment had net sales of $7.4 billion and operating profit of $1.6 billion.
Service customers typically comprise building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed. Customers securing services for elevators are frequently different from those who initially make purchasing decisions with respect to New Equipment solutions. With over 2 million maintenance units under contract globally, we have a wide range of customers in our Service segment and do not have any single material service contract. Contract duration depends on a number of factors, including customer needs, regulatory requirements and industry/geography dynamics. We work closely with our customers to renew these contracts as appropriate. Certain types of customers, such as those owning or operating large properties or portfolios of properties, tend to execute long-term maintenance agreements.
We grow our maintenance portfolio through conversion of newly installed units into maintenance contracts, through prospecting and winning units already in service from customers using another service provider and through acquisitions. Our Service sales personnel seek to win service contracts upon the expiration or termination of existing service contracts from customers by offering a superior value proposition through service excellence, an engaged and technically sophisticated group of field service technicians, a streamlined customer experience and strong elevator and escalator operating performance.
Our services include inspections, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs. A basic maintenance contract provides for inspection consistent with local regulatory needs. We also provide customers with repair services to address equipment and component wear and tear, as well as breakdowns. We offer incremental, tiered maintenance and service offerings, with varying levels of coverage up to and including comprehensive component replacement coverage.