Otis' Business Overview and History
Otis Worldwide Corporation (OTIS) is the world's leading elevator and escalator manufacturing, installation, and service company. The company was founded in 1853 and is headquartered in Farmington, Connecticut. Otis has a global presence, operating in over 200 countries and territories, and employs approximately 72,000 people, including 44,000 field professionals.
Otis operates through two main segments: New Equipment and Service. The New Equipment segment designs, manufactures, sells, and installs a wide range of passenger and freight elevators, as well as escalators and moving walkways, primarily for residential and commercial buildings. The Service segment provides maintenance and repair services for Otis' products as well as those of other manufacturers, and also offers modernization services to upgrade elevators and escalators.
Otis has a rich history, dating back to the invention of the safety elevator by Elisha Otis in 1853. The company installed the first commercial passenger elevator in 1857 in a New York City department store, quickly establishing itself as the go-to provider of safe and reliable elevator systems. Over the following decades, Otis continued to innovate and expand globally, becoming the world's largest manufacturer of elevators and escalators. In 1976, Otis was acquired by United Technologies Corporation (now Raytheon Technologies), which further strengthened its capabilities and market position. The company remained a subsidiary of United Technologies until 2020, when it was spun off as an independent publicly traded company. This spin-off allowed Otis to focus on its core elevator and escalator business and execute its own strategic vision, although it also presented challenges as the company had to establish its own infrastructure, processes, and culture separate from its former parent company. Despite these obstacles and the disruptions caused by the COVID-19 pandemic, Otis has proven its resilience by continuing to innovate and maintain its leadership position in the global elevator and escalator market.
Financial Performance and Ratios
Otis has consistently delivered strong financial performance since its spin-off. In the fiscal year 2024, the company reported net sales of $14.26 billion and net income of $1.65 billion, or $4.07 per share. Otis' financial ratios paint a picture of a financially stable and well-managed company:
- Gross Profit Margin: 29.9% - Operating Profit Margin: 14.2% - Net Profit Margin: 11.5% - Return on Assets: 14.5% - Return on Equity: -33.2% - Current Ratio: 0.99 - Quick Ratio: 0.92 - Cash Ratio: 0.30
The company's strong service business, which accounted for 58% of total revenue in 2024, has been a key driver of its financial performance, with the Service segment reporting a 24.6% operating profit margin for the full year.
In the most recent quarter, Otis reported revenue of $3.675 billion, net income of $337 million, operating cash flow of $690 million, and free cash flow of $651 million. The quarter saw revenue growth year-over-year, driven by strong performance in the Service segment with organic maintenance and repair sales up 5.6% and organic modernization sales up 17.5%.
Otis has a solid liquidity position with $827 million in cash on hand and access to a $1.5 billion unsecured, unsubordinated five-year revolving credit facility, with no borrowings outstanding as of the most recent quarter.
Segment Performance
New Equipment Segment: For the quarter ended September 30, 2024, the New Equipment segment reported net sales of $1.31 billion, a decrease of 8.8% compared to the same period in 2023. The organic sales decrease of 8.2% was primarily driven by a greater than 20% decline in China, partially offset by low single-digit organic sales growth in the Americas and Asia Pacific regions. New Equipment operating profit was $84 million, a decrease of 19.2% year-over-year, with the impacts of lower volume and unfavorable regional and product mix being partially offset by favorable price, productivity, and commodity tailwinds. The New Equipment segment's operating profit margin decreased 80 basis points to 6.4%.
For the nine months ended September 30, 2024, the New Equipment segment reported net sales of $4.01 billion, a decrease of 7.7% compared to the same period in 2023. The organic sales decrease of 6.3% was driven by a greater than 20% decline in China, partially offset by mid single-digit organic sales growth in the Americas and Asia Pacific regions. New Equipment operating profit was $265 million, a decrease of 9.2% year-over-year, including foreign exchange headwinds of $7 million. The New Equipment segment's operating profit margin decreased 10 basis points to 6.6%.
Service Segment: For the quarter ended September 30, 2024, the Service segment reported net sales of $2.24 billion, an increase of 7.2% compared to the same period in 2023. The organic sales increase of 7.7% was due to organic sales increases of 6.4% in maintenance and repair and 13.7% in modernization. Service operating profit was $555 million, an increase of 7.1% year-over-year, with higher volume, improved pricing on maintenance contracts, and productivity being partially offset by inflationary pressures, including annual wage increases and higher material costs. The Service segment's operating profit margin was flat at 24.8%.
For the nine months ended September 30, 2024, the Service segment reported net sales of $6.58 billion, an increase of 5.3% compared to the same period in 2023. The organic sales increase of 6.4% was due to organic sales increases of 5.7% in maintenance and repair and 9.7% in modernization. Service operating profit was $1.62 billion, an increase of 8.0% year-over-year. The Service segment's operating profit margin increased 60 basis points to 24.6%.
Navigating the Maturing China Market
Otis has had a significant presence in China, which has historically been a high-growth market for the company. However, the China market has now matured, with the new equipment market peaking in 2021 at around 650,000 units and then declining by approximately 35% to 420,000 units in 2024. Otis expects the China new equipment market to stabilize in late 2025 between 350,000 and 400,000 units.
To adapt to the changing market dynamics in China, Otis has been proactively transforming its business model in the country. The company is shifting its focus from new equipment sales to deriving value from the lifetime of the customer through its margin-accretive Service and Modernization businesses.
Otis is investing in its Service business in China to profitably grow its portfolio through conversions and recaptures. The company is targeting low-teens annual performance portfolio growth in China, with a focus on quality and margin expansion. Otis is also engaging its New Equipment agent and distributor network to accelerate growth in the Modernization business, targeting more than 20% annual Modernization order growth.
In addition to the strategic shift in its business model, Otis is also consolidating its China operations, rationalizing its product portfolio, and simplifying its organizational structure. These initiatives are expected to drive approximately $20 million in cost savings in 2025, with a $30 million annual run rate by the end of the year.
Outlook and Risks
For the fiscal year 2025, Otis is guiding for net sales of $14.1 billion to $14.4 billion, with organic sales growth of 2% to 4%. The company expects adjusted operating profit to be between $2.4 billion and $2.5 billion, representing a 6% increase at the midpoint. Adjusted earnings per share is expected to be in the range of $4.00 to $4.10, up 4% to 7% year-over-year. Adjusted free cash flow is expected to be approximately $1.6 billion.
Otis plans to repurchase approximately $800 million in shares in 2025, grow their dividend payout, and pursue approximately $100 million of bolt-on M&A.
Risks facing Otis include continued macroeconomic headwinds, such as global inflationary pressures, rising interest rates, and supply chain disruptions, which could impact both its New Equipment and Service segments. Additionally, the company's ability to successfully execute its China transformation strategy will be crucial to its long-term success.
Industry Trends
The global elevator and escalator market is expected to grow at a CAGR of around 5-6% over the next 5 years, driven by increased construction activity, infrastructure development and rising demand for modernization services. Otis is well-positioned to capitalize on these industry trends given its market-leading position, strong service capabilities and focus on innovation.
Conclusion
Otis Worldwide has demonstrated its ability to navigate challenging market conditions, as evidenced by its resilient financial performance and its proactive strategy to adapt to the changing dynamics in the China market. The company's focus on its high-margin Service business and its efforts to drive growth in Modernization have positioned it well for continued success. While the company faces certain risks, Otis' strong market position, innovative capabilities, and service-driven business model make it a compelling investment opportunity in the elevator and escalator industry.