Carrier Global Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Carrier provides HVAC, refrigeration, fire and security products and services. Amounts below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $5.731bn | $5.451bn | $16.996bn | $15.316bn |
| Gross margin | $1.816bn; 31.7% | $1.477bn; 27.1% | $4.949bn; 29.1% | $4.217bn; 27.5% |
| Operating profit | $645m | $1.526bn | $1.689bn | $4.082bn |
| Net income attributable to common shareowners | $357m | $1.312bn | $929m | $3.264bn |
| Diluted EPS | $0.42 | $1.53 | $1.09 | $3.78 |
| Operating cash flow | — | $1.545bn | $620m |
Gross margin expanded year over year, which management attributed mainly to pricing, customer demand and productivity, partly offset by elevated commodity and component costs. Revenue growth was driven principally by HVAC; TCC acquisition contributions also increased reported sales.
For the nine months, investing cash flow was an outflow of $431m and financing cash flow was an outflow of $688m. Capital expenditures were $236m. Operating cash flow less capital expenditures was approximately $1.309bn, a simple calculation and not a company-reported free-cash-flow measure. Cash and cash equivalents were $3.902bn at September 30, 2023, versus $3.520bn at year-end 2022.
Total debt was $8.785bn, including $134m current and $8.651bn long-term; net debt was $4.883bn. The company reported $2.0bn revolving-credit capacity and a $2.0bn commercial-paper program, with no borrowings under either at quarter-end. It was in compliance with debt covenants. Current assets were $10.511bn and current liabilities $6.349bn.
Material changes and notable items
- Sales grew 5% in Q3 and 11% year to date. Management reported organic growth of 3% and 4%, respectively; acquisition and divestiture effects contributed 1% and 8%. TCC contributed materially to year-to-date growth.
- Reported operating profit fell 58% in Q3 and 59% year to date; common-shareowner net income fell 73% and 72%, respectively. Comparisons were affected by large nonrecurring and valuation items in both periods.
- Q3 2023 included a $257m mark-to-market loss on euro forward contracts for the proposed Viessmann acquisition. Year-to-date, the loss was $368m. The nine-month period also included a $297m loss upon deconsolidation of Kidde-Fenwal, Inc. (KFI), following its Chapter 11 filing.
- Comparative 2022 results included a $732m non-cash gain from remeasuring Carrier’s previously held TCC interest and a $1.1bn gain on the Chubb sale. These items make year-over-year profit comparisons less representative of underlying operations.
- Q3 effective tax rate was 35.9%, versus 9.4%; the nine-month rate was 34.4%, versus 15.6%. The increase reflected, among other things, nondeductible hedge and KFI losses and a $33m tax charge related to foreign earnings.
- Segment picture was mixed: Q3 HVAC sales rose 7% and operating profit declined 42%; Refrigeration sales were flat and profit fell 8%; Fire & Security sales rose 2% and profit rose 15%. Year-to-date Refrigeration sales declined 5%; Fire & Security operating profit was $100m versus $1.494bn, with the prior period including the Chubb gain and the current period including the KFI deconsolidation loss.
Outlook, strategy and risks
- Carrier expected the approximately €12bn acquisition of Viessmann’s climate solutions business to close around year-end 2023, subject to regulatory approvals and customary conditions. The stated consideration was 20% Carrier stock and 80% cash; financing was expected from cash and new debt. This filing does not provide a broader quantified earnings or revenue forecast.
- Carrier planned to exit its Fire & Security and Commercial Refrigeration businesses during 2024, with proceeds intended to reduce leverage and support capital allocation and general corporate purposes. The planned exits exclude specified businesses, including UTEC, Fire & Security controls for residential HVAC, and Sensitech monitoring.
- Management said supply-chain and inflationary pressures had moderated but remained elevated and could continue to affect results. Risks cited include economic and end-market weakness, component shortages, commodity costs, currency movements and access to financing on acceptable terms.
- KFI’s bankruptcy automatically stayed litigation against KFI; an agreement also effectively stayed AFFF litigation against Carrier, other subsidiaries and RTX. Carrier said it could not assess the probability of liability or reasonably estimate a possible loss range, and noted future exposure could be material. The filing reported more than 5,000 individual and more than 600 public-entity AFFF lawsuits.
- Other disclosed matters include environmental reserves of $220m and asbestos liabilities of $223m, partly offset by $94m of recorded asbestos-related recoveries. Management did not believe the resolution of disclosed proceedings would materially adversely affect results, cash flows or financial condition, but AFFF losses could not be estimated.
- Disclosure controls were assessed as effective at September 30, 2023; no material change in internal control over financial reporting was reported. The interim financial statements received a review, not an audit, from PwC.
Investor verification priorities
- Track the Viessmann transaction’s closing, final financing mix, debt impact and integration costs, alongside execution of the planned 2024 business exits.
- Assess underlying earnings excluding the euro-hedge mark-to-market loss, KFI deconsolidation loss and prior-year TCC and Chubb gains; verify how these items affect segment comparisons.
- Monitor AFFF litigation and KFI bankruptcy developments, including whether the current stays change and whether a loss range becomes estimable.
- Check whether operating cash generation and working-capital improvements persist, particularly given the $368m hedge-related working-capital adjustment noted by management.
- Follow segment demand, margins, pricing and cost pressures—especially Refrigeration markets and HVAC residential demand—and confirm debt, covenant and liquidity capacity after any acquisition financing.