Carrier Global Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Carrier provides HVAC, refrigeration, fire and security products and related services. The statements are unaudited, combined carve-out statements reflecting operations historically managed within United Technologies Corporation (UTC); they may not represent results as a standalone company.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $3.888 billion | $4.323 billion |
| Operating profit / margin | $315 million / 8.1% | $500 million / 11.6% |
| Net income attributable to common shareowners | $96 million | $400 million |
| Diluted EPS | $0.11 | $0.46 |
| Gross margin | $1.122 billion / 28.9% | $1.226 billion / 28.4% |
| Operating cash flow | $47 million | $(183) million |
| Capital expenditures | $48 million | $41 million |
Sales decreased 10% year over year: 9% organically and 1% from foreign currency translation. Gross margin improved 50 basis points, primarily from material productivity and commodities, partly offset by lower volume, productivity and mix. Net income included a $71 million non-cash joint-venture impairment, approximately $50 million of pre-tax separation-related costs, and $97 million of tax adjustments. The effective tax rate was 65.4%, versus 25.8%.
Segments and material changes
- HVAC: Sales of $1.959 billion, down 10%; operating profit of $167 million, down 43%. Lower residential sales reflected a warmer winter and prior-year furnace demand; commercial sales were also affected by COVID-19.
- Refrigeration: Sales of $808 million, down 16%; operating profit of $99 million, down 22%. Weak truck/trailer demand and COVID-related installation-site closures weighed on sales.
- Fire & Security: Sales of $1.206 billion, down 7%; operating profit of $120 million, down 9%. Facility shutdowns, delayed activity and lower field service sales contributed to the decline.
Operating cash flow improved by $230 million year over year, supported by working-capital inflows, including collections and deferred foreign tax payments. Investing cash outflow was $128 million, compared with $43 million a year earlier; financing cash outflow was $76 million.
Debt, liquidity and separation
Carrier issued $9.25 billion of notes and drew a $1.75 billion term loan in connection with its separation from UTC. Approximately $10.9 billion was transferred to UTC. At March 31, total debt was $11.247 billion, cash and equivalents were $768 million, and net debt was $10.479 billion; debt was $319 million at December 31, 2019. About 93% of cash was held by foreign subsidiaries. The $2.0 billion revolving credit facility became available after the April 3 separation; a $2.0 billion commercial-paper program was in place but unused as of quarter-end. Management stated that it expected operating cash flows and financing access to meet needs for the next 12 months, including anticipated COVID-19 effects.
The notes mature from 2023 to 2050; average debt maturity was approximately 11 years and the reported average borrowing rate approximately 2.7%. Annual interest payments were expected to be about $320 million. The credit agreements include customary covenants and a net-leverage test beginning with the quarter ending September 30, 2020. Carrier became an independent public company on April 3, 2020, after quarter-end. Management estimated standalone recurring annual corporate costs would be $80 million to $110 million above costs historically allocated by UTC.
Outlook, risks and unusual items
- COVID-19 caused temporary facility closures or reduced production, lower demand and supply-chain disruption. Most affected facilities were operating, but the company anticipated continued temporary reductions at some sites. No quantified earnings or revenue guidance is provided in the filing.
- Management described actions to preserve liquidity, including lower discretionary spending and capital investment, pay freezes or cuts, furloughs, hiring suspension and assessment of dividend timing and amount. The company said it was evaluating available COVID-19 relief measures.
- Goodwill and intangible assets were not found impaired in the quarter. One reporting unit, with $966 million of goodwill, had fair value only 20% above carrying value; a 100-basis-point increase in the discount rate would imply an estimated impairment of approximately $175 million.
- The $71 million impairment related to a minority-owned joint venture exposed to oil and gas market deterioration and COVID-19 impacts. Tax charges included a $51 million UK deferred-tax valuation allowance and a $46 million decision-related charge on certain foreign earnings.
- Recorded environmental obligations were $218 million. The estimated asbestos liability through 2059 was $255 million to $290 million; $255 million was recorded, with a related probable insurance recovery receivable of approximately $104 million. Management said it did not expect resolution of disclosed contingencies to materially adversely affect the company.
- Other risks include pandemic duration and severity, customer and supplier disruption, demand and economic conditions, foreign exchange, debt and refinancing access, separation costs and tax treatment of the separation. The interim financial statements received a limited review, not an audit.
Investor verification points
- Track post-separation standalone costs against management’s $80 million–$110 million annual estimate and assess whether UTC transition services affect costs or operations.
- Monitor COVID-19 effects on segment demand, production, suppliers, working capital and the company’s ability to sustain liquidity.
- Review debt service, variable-rate exposure, credit ratings and compliance with leverage covenants when testing begins in Q3 2020.
- Assess the assumptions and headroom underlying the reporting unit’s goodwill valuation, and any subsequent impairment indicators.
- Follow tax examinations, separation-related tax obligations, asbestos and environmental claims, and the collectability of receivables and customer-credit exposures.