Carrier Global Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Carrier is a global provider of HVAC, refrigeration, fire and security products and services. The prior-year comparison includes pre-separation carve-out results; Carrier became an independent public company on April 3, 2020, so periods are not fully comparable in basis.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $4.699 billion | $3.888 billion | +21% (17% organic) |
| Gross margin | $1.394 billion; 29.7% | $1.122 billion; 28.9% | +24%; margin +0.8 percentage points |
| Operating profit | $571 million; 12.2% of sales | $315 million; 8.1% of sales | +81% |
| Net income attributable to common shareowners | $384 million | $96 million | +300% |
| Diluted EPS | $0.43 | $0.11 | Up $0.32 |
| Operating cash flow | $184 million | $47 million | +$137 million |
| Capital expenditures | $53 million | $48 million | +$5 million |
- Segment sales and operating profit: HVAC $2.486 billion and $365 million; Refrigeration $1.005 billion and $127 million; Fire & Security $1.304 billion and $150 million. Segment operating margins were 14.7%, 12.6% and 11.5%, respectively.
- Cash flow and liquidity: Cash and equivalents were $2.599 billion at quarter-end, down from $3.115 billion at year-end 2020. Operating, investing and financing cash flows were +$184 million, -$49 million and -$643 million, respectively. Working-capital movements included a $248 million inventory increase and $83 million increase in receivables.
- Debt: Total debt was $9.730 billion, down from $10.227 billion; net debt was $7.131 billion. Debt to total capitalization was 59%. No commercial paper or revolving-credit-facility borrowings were outstanding. Carrier prepaid $500 million of 1.923% notes, incurring a $17 million make-whole premium and writing off $2 million of financing costs.
- Tax: Effective tax rate was 21.0%, versus 65.4% a year earlier, primarily reflecting a $21 million favorable German tax adjustment and the absence of significant prior-year tax charges.
Changes, outlook and risks
- Sales growth reflected improved global end-markets and strong operational performance. HVAC benefited particularly from North American residential and light commercial demand; Refrigeration and Fire & Security also improved from pandemic-affected prior-year levels.
- Management reported higher volumes, cost containment and improved material and factory productivity. These benefits were partly offset by rising commodity and component costs, supply-chain inefficiencies and freight costs. SG&A and R&D spending increased as operations returned toward pre-pandemic levels.
- The filing provides no specific numerical full-year earnings or revenue guidance. Management said available cash and operating cash flows should be sufficient for operating needs and that overall liquidity was adequate, while noting uncertainty from COVID-19 and the wider economy.
- A $2.0 billion revolving facility and $2.0 billion commercial-paper program were available, with no outstanding borrowings under either at quarter-end. Modified credit-facility covenant terms defer leverage testing until June 30, 2021 and impose liquidity and other restrictions during the modification period. Carrier reported compliance at March 31, 2021. S&P’s outlook was negative; Moody’s and Fitch outlooks were stable.
- Key uncertainties include COVID-19 effects, demand and seasonality, commodity inflation and supply disruption, foreign exchange, debt and financing access, and legal contingencies. More than 900 AFFF-related cases were disclosed; Carrier said it could not assess liability probability or reasonably estimate potential damages. Environmental reserves were $235 million and asbestos liabilities were $243 million, with $102 million of asbestos-related recoveries recorded.
- Unusual comparison items include the $71 million prior-year impairment of a minority-owned joint venture and lower separation-related costs in 2021 ($16 million versus $45 million). The transition services agreement expired March 31, 2021.
- Subsequent events: the board declared a $0.12-per-share dividend payable May 24, 2021. Carrier also announced an agreement to acquire a controlling stake in China-based HVAC manufacturer Guangdong Giwee Group, subject to customary closing conditions and regulatory approvals.
Important facts for investors to verify
- Whether sales and margin gains persist after the unusually weak, pandemic-affected Q1 2020 comparison, especially in HVAC.
- Whether inventory growth, commodity inflation, freight costs and supply constraints affect future margins and cash conversion.
- Debt-covenant requirements and liquidity under the modified facility terms, along with refinancing and credit-rating developments.
- Potential exposure from AFFF litigation and other contingencies, and the terms, timing and financing of the proposed Giwee acquisition.