Carrier Global Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Carrier provides HVAC, refrigeration, fire and security products and related services through three operating segments. Comparisons are against 2020 periods, when COVID-19 had significantly depressed demand and activity.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $5.44bn | $3.97bn | $10.14bn | $7.86bn |
| Gross margin | $1.62bn; 29.8% | $1.14bn; 28.7% | $3.01bn; 29.7% | $2.26bn; 28.8% |
| Operating profit | $783m | $442m | $1.35bn | $757m |
| Net income attributable to common shareowners | $487m | $261m | $871m | $357m |
| Diluted EPS | $0.55 | $0.30 | $0.98 | $0.41 |
- Q2 sales rose 37% year over year: organic growth of 31%, favorable currency translation of 5%, and net acquisitions/divestitures of 1%. First-half sales rose 29%, including 24% organic growth and 5% currency benefit.
- Q2 consolidated gross margin expanded 110 basis points; first-half margin expanded 90 basis points. Management attributed improvement to higher volumes, operations and cost actions, partly offset by commodity and component inflation, supply-chain inefficiencies and freight costs.
- Q2 operating profit increased 77%; first-half operating profit increased 79%. Segment operating margins in Q2 were HVAC 18.4% (15.6% prior year), Refrigeration 12.0% (8.7%), and Fire & Security 10.5% (10.0%).
- Interest expense, net was $71m in Q2 and $164m in the first half. First-half effective tax rate was 27.5%, versus 44.6% a year earlier; Q2 rate was 32.0%, versus 28.2%. The Q2 rate included a $43m deferred tax charge from the UK tax-rate increase.
Cash flow, debt and liquidity
- First-half operating cash flow was $745m, compared with $556m in 2020. Investing cash outflow was $301m, including $167m for acquisitions and $132m of capital expenditures. Financing cash outflow was $898m, including debt repayment, $209m of common dividends and $130m of share repurchases.
- Cash and cash equivalents were $2.63bn at June 30, 2021, down from $3.12bn at year-end 2020. Total debt was $9.73bn; net debt was $7.10bn. Total debt to total capitalization was 58%, down from 61% at year-end.
- Carrier reported no borrowings under its $2bn revolving credit facility or $2bn commercial paper program and was in compliance with debt covenants. It stated that cash and operating cash flows should be sufficient for future operating needs, while noting that future financing access depends on credit ratings, capital-market liquidity and economic conditions.
Material changes, outlook and risks
- Growth was broad-based as markets recovered from pandemic-related weakness. HVAC led first-half segment growth, with strong North American residential and light-commercial demand and improving commercial markets. Refrigeration and Fire & Security also benefited from improving end markets.
- Carrier acquired a 70% controlling stake in China-based HVAC maker Giwee on June 1 for part of first-half acquisition spending. It planned to acquire the remaining 30% in 2021. Purchase-price allocation remained preliminary.
- After quarter-end, Carrier agreed to sell Chubb Fire & Security to APi Group for $3.1bn enterprise value, subject to adjustments and closing conditions. Closing was expected late Q4 2021 or early Q1 2022. Carrier expected to recover the disposal group’s carrying value based on stated assumptions. The Board also increased the existing $350m repurchase authorization by $1.75bn on July 27, 2021.
- No numerical financial guidance is provided in the supplied filing text. Management cited long-term opportunities from urbanization, climate change, food safety, innovation and energy efficiency, while continuing investment in products and digital controls.
- Key operating risks include ongoing COVID-19 uncertainty, supplier delays and supply disruption, rising commodity/component and freight costs, foreign-exchange movements, economic and end-market changes, and execution risks from acquisitions and divestitures.
- Legal contingencies include more than 1,300 AFFF-related cases and related claims. Carrier said it could not assess the probability of liability or reasonably estimate potential damages; it stated future exposure could be material. Environmental reserves were $234m. The company also reported asbestos liabilities of $240m and related recoveries of $101m.
- Other notable items: first-half restructuring charges were $39m, with $48m accrued at June 30 and expected to be paid within one year. A $17m make-whole premium and $2m write-off accompanied repayment of $500m of notes in February. The interim financial statements received a limited review, not an audit opinion.
Important facts for investors to verify
- Whether sales and margin momentum persists after the unusually weak 2020 comparison period, particularly as input, logistics and supply-chain pressures continue.
- Cash conversion and working-capital trends: first-half receivables and inventory uses of cash were partly offset by higher payables and accrued liabilities.
- Debt, covenant compliance and the effect of the expanded $2.1bn share-repurchase authorization on liquidity and capital allocation.
- Completion, final proceeds and any adjustments or costs related to the Chubb sale, and integration and remaining-stake purchase plans for Giwee.
- Developments in AFFF litigation and other contingencies, including any change in the company’s ability to estimate potential exposure.