Carrier Global Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Carrier provides HVAC, refrigeration, fire, security and building-automation products and related services. Results include Toshiba Carrier Corporation (TCC) from its August 1 acquisition date; Chubb Fire & Security was sold January 3, 2022. These portfolio changes limit comparability with 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $5.451B | $5.341B | $15.316B | $15.480B |
| Gross margin | $1.477B; 27.1% | $1.601B; 30.0% | $4.217B; 27.5% | $4.614B; 29.8% |
| Operating profit | $1.526B | $828M | $4.082B | $2.182B |
| Net income attributable to common shareowners | $1.312B | $469M | $3.264B | $1.340B |
| Diluted EPS | $1.53 | $0.53 | $3.78 | $1.50 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $620M | $1.324B |
- Q3 sales rose 2%, with organic growth of 8%; nine-month sales fell 1% despite 9% organic growth, primarily reflecting divestitures and currency translation.
- Gross margin declined 290 basis points in Q3 and 230 basis points year to date. Management cited higher commodity, component and freight costs, supply constraints, and TCC purchase-accounting costs; pricing and productivity provided offsets.
- Reported profit benefited materially from unusual gains: a $732M non-cash gain on remeasurement of Carrier’s previously held TCC interest and a $1.1B gain on the Chubb sale. These gains contributed to the sharp reported profit increases and lower effective tax rates (Q3 9.4%; nine months 15.6%).
- Nine-month segment sales / operating profit: HVAC $10.092B / $2.369B; Refrigeration $2.940B / $370M; Fire & Security $2.610B / $1.494B. Fire & Security profit includes the Chubb sale gain; segment comparisons are affected by the divestiture.
Liquidity, debt and capital returns
- At September 30, cash and cash equivalents were $2.985B; total debt was $8.889B and net debt was $5.904B. Debt was down from $9.696B at year-end 2021. Total debt to capitalization was 54%, versus 58% at year-end.
- Current assets were $9.740B and current liabilities $6.013B. The $2.0B revolving credit facility and $2.0B commercial-paper program had no borrowings outstanding; Carrier reported compliance with debt covenants.
- Nine-month operating cash flow declined to $620M, primarily due to higher working capital, including inventory and receivables. Investing cash flow was $2.045B, principally reflecting $2.9B net proceeds from Chubb; financing cash flow was negative $2.584B, including $1.261B of share repurchases and $384M of common dividends.
- Carrier repurchased 28.9M shares for $1.3B during the first nine months. In October, the board authorized a further $2.0B increase to the repurchase program and declared a $0.15-per-share dividend.
Outlook, commentary and risks
- The filing provides no specific financial guidance. Management said demand remained strong in several markets and pricing improvements more than offset inflationary impacts, while supply-chain and logistics challenges were expected to affect the business for the foreseeable future.
- Management cited component shortages, freight delays, inflation, foreign-exchange movements and weaker end-market conditions in parts of Europe and China. The Russia-Ukraine conflict may further disrupt global markets and supply chains; Carrier suspended new business in Russia and said it remained on track to cease all Russian operations during 2022.
- Carrier reported more than 2,800 individual and more than 250 governmental or public-utility AFFF lawsuits, plus other related actions. The company said it could not assess the probability of liability or reasonably estimate potential damages; it is pursuing indemnification and insurance, but cannot assure future exposure will not be material.
- Environmental reserves totaled $232M; asbestos liabilities were $231M with $96M of related recovery receivables. Carrier stated it did not believe resolution of disclosed matters would materially adversely affect its financial condition, results or cash flows. The UTC equity-awards lawsuit was dismissed with prejudice in September 2022, with judgment entered in October.
- The interim financial statements were reviewed, not audited, by PwC. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported earnings reflects the TCC remeasurement and Chubb divestiture gains versus recurring operations.
- Whether pricing and productivity can sustain margins as input, freight and supply-chain pressures continue, and how TCC performs after consolidation.
- Working-capital trends and cash conversion, given the year-over-year decline in operating cash flow.
- Potential financial exposure and developments in AFFF litigation, including bellwether proceedings and insurance or indemnification recoveries.
- Capital-allocation plans following the expanded repurchase authorization, alongside debt obligations and ongoing investment needs.