Carrier Global Corporation — 2020 Form 10-K
Business context and reporting period. Carrier provides HVAC, refrigeration, fire and security products and services. This annual report covers the year ended December 31, 2020; Carrier became an independent public company on April 3, 2020. Pre-separation results are carve-out financials based on UTC’s records and allocations, so comparisons with 2020 stand-alone operations have limitations.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $17.456 billion | $18.608 billion |
| Gross margin | $5.109 billion; 29.3% | $5.419 billion; 29.1% |
| Operating profit | $3.083 billion; 17.7% margin | $2.491 billion; 13.4% margin |
| Net income attributable to common shareholders | $1.982 billion | $2.116 billion |
| Diluted EPS | $2.25 | $2.44 |
| Cash from operating activities | $1.692 billion | $2.063 billion |
| Capital expenditures | $312 million | $243 million |
| Cash and cash equivalents at year-end | $3.115 billion | $952 million |
| Total debt at year-end | $10.227 billion | $319 million |
Operating cash flow less capital expenditures was approximately $1.380 billion in 2020, compared with $1.820 billion in 2019. Working capital was $3.414 billion. The $2.0 billion revolving credit facility was undrawn at year-end; the company also had no commercial paper outstanding. Net debt was $7.112 billion, and total debt to total capitalization was 61%.
Revenue fell 6% organically, reflecting pandemic-related lower volumes across all segments. Product sales were $14.347 billion and service sales were $3.109 billion. By segment, HVAC sales were $9.478 billion, Refrigeration $3.333 billion and Fire & Security $4.985 billion. Segment operating profit was $2.462 billion, $357 million and $584 million, respectively; HVAC’s result includes the Beijer divestiture gain described below.
Fourth-quarter results
In Q4 2020, net sales were $4.594 billion, versus $4.501 billion in Q4 2019. Operating profit was $1.245 billion versus $557 million, and net income attributable to common shareholders was $884 million versus $440 million. Diluted EPS was $1.00 versus $0.50. Q4 2020 operating profit included an $871 million gain on the sale of the remaining Beijer shares, so reported profit growth is not a measure of underlying operating improvement.
Material changes and unusual items
- Carrier sold its Beijer Ref equity interest in two transactions during 2020, receiving approximately $1.4 billion in total and recognizing a $1.123 billion pre-tax gain. The sale materially boosted reported operating profit.
- Reported operating profit increased while net income declined, reflecting the gain alongside higher net interest expense and a higher tax rate. Interest expense, net was $288 million versus net interest income of $27 million; the effective tax rate was 29.7% versus 19.4%.
- Sales declined in each segment: HVAC 2%, Refrigeration 12% and Fire & Security 9%. COVID-19 reduced commercial activity, transport refrigeration demand, field service and installation activity. North American residential HVAC was a partial offset.
- Gross margin improved 20 basis points to 29.3%, primarily from material productivity, partly offset by lower volumes. SG&A rose to $2.820 billion, including separation and stand-alone company costs.
- Separation-related costs were approximately $141 million in 2020. Management estimated stand-alone corporate costs would run about $75 million annually above expenses historically allocated by UTC.
- Cash from operations declined $371 million year over year. Management attributed the decrease mainly to lower net income, partly offset by $446 million of working-capital cash benefits, including payment timing.
Liquidity, debt and capital allocation
Carrier issued $11.0 billion of debt in connection with the separation and transferred approximately $10.9 billion to UTC. It issued a further $750 million of 2.700% notes due 2031 in June 2020 and fully prepaid its $1.75 billion term loan in Q4. Year-end debt was primarily fixed-rate notes, with an average maturity of approximately 13 years and a weighted-average borrowing rate of approximately 2.7%. The company reported covenant compliance at year-end. Its investment-grade ratings included a negative S&P outlook; Moody’s and Fitch outlooks were stable.
The company said operating cash flows and anticipated capital-market access should provide sufficient liquidity for the next 12 months, while noting that financing access and cost depend on economic conditions, credit ratings and COVID-19 developments. A $350 million share repurchase authorization was approved on February 4, 2021, after year-end. The filing reported 2020 dividends declared of $0.28 per share.
Outlook, management commentary and risks
- No specific 2021 revenue, earnings or cash-flow guidance is provided in the filing. Management’s strategy emphasizes organic growth, product and geographic expansion, and growth in services and digital offerings.
- The cost-reduction initiative’s target was increased from $600 million to $700 million over three years. The filing does not provide a quantified earnings or cash-flow outlook for these savings.
- COVID-19’s future effects remained uncertain, including possible renewed restrictions, customer payment difficulties, supplier disruption and demand changes. Manufacturing had resumed, and the company reported no significant manufacturing disruptions at the time of filing.
- Key exposures include high debt, foreign-exchange and commodity movements, seasonality and weather, supplier concentration and tariffs, climate-related product regulation, cybersecurity, pension assumptions, product liability, and execution of the transition to stand-alone systems and functions.
- Carrier faces more than 700 AFFF-related cases alleging injury and environmental contamination. It says it has meritorious defenses but cannot assess liability probability or reasonably estimate any damages allocated to Carrier; future exposure could be material.
- Asbestos liabilities were estimated at $245–$276 million through 2059; $245 million was accrued, with a $103 million receivable for probable insurance recoveries. Environmental obligations totaled $239 million.
- The SEC informed Carrier in December 2020 that it had concluded its investigation into certain historical third-party payments involving the AHI-Carrier joint venture and did not intend to recommend enforcement action.
- Goodwill totaled $10.139 billion. No goodwill impairment was recorded, but one reporting unit with $917 million of goodwill had only 13% fair-value headroom; a 100-basis-point increase in its discount rate was estimated to cause an $84 million impairment.
- The financial statements were audited and received an unqualified opinion. Management concluded disclosure controls were effective, but the filing did not include management’s internal-control-over-financial-reporting assessment or auditor attestation under the transition relief for newly public companies.
Most important facts for investors to verify
- Underlying profitability excluding the $1.123 billion Beijer gain and other unusual items, especially the Q4 contribution to operating profit and EPS.
- Whether pandemic-related volume weakness and the working-capital benefit to 2020 operating cash flow persist or reverse.
- Debt repayment capacity, interest burden, covenant requirements and the terms governing dividends and repurchases.
- Progress and realized savings from the $700 million, three-year cost-reduction program, weighed against stand-alone costs and separation execution.
- Developments in AFFF litigation, environmental and asbestos claims, tax matters under the separation agreements, and goodwill headroom in the sensitive reporting unit.
- Comparability of reported results, given pre-April 3, 2020 carve-out accounting and post-separation stand-alone costs and financing.