Carrier Global Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The interim financial statements are unaudited and were reviewed by PwC, which did not express an audit opinion. Carrier supplies HVAC, refrigeration, fire and security products and related services. Results include Toshiba Carrier Corporation (TCC) from its August 2022 acquisition; prior-period comparisons are affected by the January 2022 Chubb divestiture.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $5.273 billion | $4.654 billion | +13%; organic +4% |
| Gross margin | $1.378 billion; 26.1% | $1.293 billion; 27.8% | +7% in dollars; down 170 basis points as a share of sales |
| Operating profit | $555 million | $1.737 billion | −68% |
| Net income attributable to common shareowners | $373 million | $1.379 billion | −73% |
| Diluted EPS | $0.44 | $1.58 | −72% |
| Cash from operating activities | $120 million | $(202) million | Improved by $322 million |
| Capital expenditures | $70 million | $56 million | — |
The earnings comparison is heavily affected by the approximately $1.1 billion Chubb sale gain recorded in Q1 2022. In Q1 2023, sales growth reflected 4% organic growth, a net 11% contribution from acquisitions and divestitures, and a 2% foreign-currency headwind. Gross margin benefited from pricing, demand and productivity, but remained under pressure from commodities, components, freight and supply constraints. TCC-related inventory step-up and amortization reduced gross margin percentage by 240 basis points.
Segments and material changes
- HVAC: Sales rose 22% to $3.622 billion, including 6% organic growth and an 18% acquisition contribution, principally TCC. Operating profit fell 7% to $435 million; margin was 12.0% versus 15.8%. Commercial HVAC growth and pricing were offset by weaker North American residential volumes, costs and acquired-intangible amortization.
- Refrigeration: Sales declined 8% to $898 million, including a 5% organic decline. Operating profit was $108 million, up 1%; the quarter included a $24 million gain on sale of a transport refrigeration business. Management cited weaker commercial refrigeration demand and container-market softness.
- Fire & Security: Sales increased 6% to $869 million, including 9% organic growth. Operating profit was $93 million versus $1.218 billion, largely because the prior-year period included the Chubb sale gain. Excluding that comparison effect, management said operating profit was flat, with pricing and productivity offsetting cost pressures.
Cash, debt and liquidity
At March 31, 2023, cash and cash equivalents were $3.347 billion, down from $3.520 billion at year-end 2022. Total debt was $8.850 billion, resulting in net debt of $5.503 billion. Total debt to total capitalization was 51%; net debt to net capitalization was 39%. Current and long-term debt were $142 million and $8.708 billion, respectively. No borrowings were outstanding under the $2.0 billion revolving credit facility or $2.0 billion commercial paper program; Carrier reported compliance with debt covenants.
Operating cash flow was positive at $120 million, principally reflecting a more moderate working-capital increase than in the prior-year quarter. Investing activities used $100 million, including $70 million of capital expenditures. Financing activities used $213 million, including $154 million of dividends and $62 million of share repurchases. Management said available cash and operating cash flows should be sufficient for future operating needs, while noting financing access depends on credit ratings, capital-market liquidity and economic conditions.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said inflationary pressures had begun to moderate but remained elevated, and supply-chain challenges could continue for the foreseeable future. It cited pricing, supplier coordination, dual sourcing, automation and localized manufacturing as mitigation efforts.
- After quarter-end, Carrier announced an agreement to acquire Viessmann’s climate solutions business for approximately €12 billion: 20% of the price in Carrier stock and 80% in cash, subject to adjustments. The company expects to fund the cash portion with cash and debt and anticipates closing around year-end 2023, subject to approvals and other conditions. It entered a €7 billion forward contract to mitigate currency exposure.
- Carrier also announced plans to exit its Fire & Security and Commercial Refrigeration businesses during 2024, with proceeds intended to reduce leverage and support capital allocation. The company identified certain businesses that would not be included in the planned exits.
- The most significant disclosed litigation uncertainty is AFFF-related litigation: more than 3,800 individual lawsuits and more than 370 state, municipal and water-utility lawsuits were reported. Carrier said it could not assess the probability of liability or reasonably estimate potential damages; future exposure could be material. It is pursuing indemnification and insurance coverage.
- Other disclosed matters include $233 million of environmental reserves and $227 million of asbestos liabilities, partly offset by $94 million of asbestos-related recovery receivables. Carrier stated it did not expect resolution of its matters generally to materially adversely affect results, cash flows or financial condition.
- Carrier recorded $17 million of restructuring costs in the quarter. It also reported a possible $50–$65 million net decrease in unrecognized tax benefits within 12 months. The $417 million transition-tax obligation to UTC is scheduled for annual installments through April 2026, including $49 million due in 2023.
Important facts for investors to verify
- Underlying earnings and margins excluding the prior-year Chubb gain, and the continuing effect of TCC acquisition accounting on comparable results.
- Viessmann transaction financing, share issuance, regulatory approvals, closing timing and resulting leverage.
- Scope, timing and proceeds of the planned Fire & Security and Commercial Refrigeration exits, including which businesses are excluded.
- Developments in AFFF litigation, insurance and indemnification recoveries, and whether potential exposure can be estimated.
- Whether operating cash flow, margins and demand withstand persistent inflation, supply constraints and weaker refrigeration end markets.