Carrier Global Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Carrier supplies HVAC, refrigeration, fire and security, and building services globally. Results include three segments: HVAC, Refrigeration, and Fire & Security. The filing was reviewed by PwC, which expressed no audit opinion on the interim statements.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $5.211B | $5.440B | $9.865B | $10.139B |
| Gross margin | $1.447B; 27.8% | $1.619B; 29.8% | $2.740B; 27.8% | $3.013B; 29.7% |
| Operating profit | $819M | $783M | $2.556B | $1.354B |
| Net income attributable to common shareowners | $573M | $487M | $1.952B | $871M |
| Diluted EPS | $0.67 | $0.55 | $2.25 | $0.98 |
| Operating cash flow | Not separately provided | Not separately provided | $(170)M | $745M |
Q2 sales fell 4% year over year, although organic sales rose 7%; foreign exchange reduced sales 3%, and net acquisitions/divestitures reduced them 8%. Gross margin declined 200 basis points, reflecting the Chubb divestiture and ongoing commodity, component, supply-chain, and freight pressures. Operating profit increased 5%; lower expenses associated with Chubb’s absence and other items helped offset lower gross margin. Q2 operating margin was approximately 15.7%, versus 14.4% a year earlier.
For the first half, sales decreased 3% despite 9% organic growth. Operating profit and EPS rose sharply, but the comparison is heavily affected by the $1.1B gain on the Chubb sale, recognized in the first quarter. The six-month operating profit margin was approximately 25.9%, versus 13.4% in 2021; this is not representative of recurring operating performance. The lower six-month effective tax rate, 19.3% versus 27.5%, also benefited from the tax treatment of the Chubb gain and other tax adjustments.
Segments and material changes
- HVAC: Q2 sales increased 9% to $3.388B; operating profit rose 2% to $585M. Strong North American demand and pricing supported results, partly offset by input and logistics costs.
- Refrigeration: Q2 sales increased 2% to $1.041B; operating profit increased 20% to $147M, supported by pricing and volume.
- Fire & Security: Q2 sales fell 37% to $887M, primarily because Chubb was sold. Excluding Chubb, sales increased 4%. Operating profit decreased 9% to $134M.
- Chubb sale: Completed January 3, 2022, for $2.9B net proceeds. The business was included in prior-period results but not consolidated after the sale, limiting comparability.
Cash, debt, and liquidity
- Cash and cash equivalents were $3.017B at June 30, 2022, compared with $2.987B at year-end 2021. Total debt was $8.567B, down from $9.696B; net debt was $5.550B, down from $6.709B.
- Net cash from operations was negative $170M for the first half, versus positive $745M in 2021. Management attributed the decline primarily to higher working capital, including increased inventory and receivables.
- Investing activities provided $2.645B, primarily from Chubb sale proceeds. Financing activities used $2.434B, including $1.15B of debt tender offers, $1.014B of share repurchases, and $257M of common dividends.
- The $2.0B revolving credit facility and $2.0B commercial paper program had no borrowings outstanding at quarter-end. The company reported compliance with debt covenants. Total debt to total capitalization was 55%; net debt to net capitalization was 44%.
- Carrier repurchased 22.7M shares for approximately $1.0B during the first half; approximately $557M remained under the authorization at June 30.
Outlook, risks, and unusual items
- No specific full-year revenue, earnings, or cash-flow guidance is provided in the supplied filing text. Management reported strong demand and pricing, while expecting supply-chain challenges to continue for the foreseeable future.
- Inflation in commodities and components, shortages, freight costs, and transportation delays may continue to pressure sales and margins. Management cited supplier engagement, pricing, productivity measures, dual sourcing, and localized manufacturing as mitigations.
- Carrier suspended new business activity in Russia in March and planned to cease all Russian operations during 2022. Russia and Ukraine were described as less than 1% of total assets and revenue, but the conflict could affect markets, costs, and supply chains.
- COVID-19-related uncertainty remains, including potential impacts from renewed outbreaks and restrictions, particularly in China.
- The company agreed to acquire a majority interest in Toshiba Carrier Corporation for approximately $900M, with closing expected in early August subject to conditions. After quarter-end, Carrier borrowed approximately $400M under a yen-denominated term loan and said it would use the proceeds toward the acquisition.
- Material contingent matters include more than 2,400 individual and 200 government or utility AFFF lawsuits. Carrier says it cannot assess the probability of liability or reasonably estimate potential damages; it is pursuing indemnification and insurance, but future exposure could be material. Environmental reserves were $216M and asbestos liabilities were $232M, partly offset by $97M of recorded asbestos recoveries.
- Other notable items include the $1.1B Chubb sale gain, a $22M litigation charge in Q2, and a $33M net gain on the first-quarter debt tender offers. Chubb working-capital and transaction adjustments remained under finalization at June 30.
Investor verification priorities
- Separate recurring operating performance from the Chubb gain and divestiture-driven comparison effects; confirm any final Chubb sale adjustments.
- Track working-capital conversion and whether operating cash flow recovers from the first-half outflow.
- Monitor gross-margin trends, pricing versus inflation, supply-chain availability, and segment performance excluding Chubb.
- Review Toshiba Carrier closing, financing, and integration details, including the post-quarter yen loan and foreign-exchange hedges.
- Follow developments in AFFF litigation, indemnification and insurance coverage, as well as other environmental and asbestos contingencies.