Carrier Global Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Carrier provides HVAC, refrigeration, and fire and security products and services. It completed its spin-off from United Technologies Corporation (UTC) on April 3, 2020; pre-separation 2020 results are carve-out results, while post-separation results are standalone. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $5.002 billion | $4.822 billion | $12.862 billion | $14.107 billion |
| Gross margin | 31.2% | 30.0% | 29.7% | 29.4% |
| Operating profit | $1.081 billion | $629 million | $1.838 billion | $1.934 billion |
| Net income attributable to common shareowners | $741 million | $492 million | $1.098 billion | $1.676 billion |
| Diluted EPS | $0.84 | $0.57 | $1.25 | $1.94 |
| Operating cash flow | Not separately presented | Not separately presented | $1.493 billion | $989 million |
- Q3 sales increased 4% year over year, including 3% organic growth and 1% favorable currency translation. Nine-month sales declined 9%, including an 8% organic decrease.
- Q3 gross margin improved 120 basis points, which management attributed to higher HVAC volumes and improved logistics and material productivity. Nine-month gross margin increased 30 basis points despite lower volume.
- Q3 operating profit includes a $252 million pretax gain from selling Beijer Ref shares; the prior-year quarter included a $108 million impairment charge on a minority-owned joint venture. These items materially affect the comparison. Nine-month operating profit declined 5%.
- Nine-month net income fell 34.5%; the comparison also reflects a $149 million prior-year tax benefit, as well as 2020 tax charges and other items. Effective tax rates were 25.9% in Q3 and 33.4% for the nine months, versus 25.8% and 18.3%, respectively, in 2019.
- Nine-month operating cash flow was $1.493 billion; capital expenditures were $151 million, implying cash flow after capital expenditures of approximately $1.342 billion. Management said the year-over-year cash-flow increase primarily reflected timing of working-capital and tax payments.
Liquidity, debt, and balance sheet
- At September 30, cash and cash equivalents were $3.848 billion, versus $952 million at December 31, 2019. Total debt was $11.974 billion, versus $319 million; net debt was $8.126 billion. Total equity was $5.437 billion.
- Debt includes $1.75 billion drawn under a term loan and multiple note issues, including $750 million issued in June. The notes and term loan largely funded approximately $10.9 billion distributed to UTC in connection with the separation. Weighted-average borrowing cost for Q3 was approximately 2.7%; management estimated annual interest payments of approximately $285 million.
- The company had no borrowings under its $2.0 billion revolving credit facility or commercial paper program at quarter-end. It reported compliance with debt covenants. Covenant amendments defer leverage-ratio testing until June 2021 and impose liquidity requirements and restrictions through the modification period.
- Management believed operating cash flow and anticipated capital-market access would provide sufficient liquidity for commitments over the next 12 months. Credit ratings included S&P BBB with a negative outlook, Moody’s Baa3 stable, and Fitch BBB- stable.
Material changes and segment trends
- HVAC Q3 sales rose 11% to $2.892 billion; nine-month sales fell 5% to $7.142 billion. North American residential demand was strong, while commercial and light-commercial markets were weaker.
- Refrigeration Q3 sales declined 5% to $876 million; nine-month sales fell 16% to $2.384 billion, reflecting lower transport demand, the prior-year cyclical peak, and COVID-related disruption.
- Fire & Security Q3 sales declined 6% to $1.324 billion; nine-month sales fell 12% to $3.587 billion. The pandemic affected product and field-service demand, including hospitality, industrial, and project activity.
- Carrier recognized $92 million of separation-related costs in the first nine months of 2020. Management estimated recurring standalone corporate costs could be $75–$95 million per year above costs historically allocated by UTC.
- Remaining performance obligations were approximately $5.6 billion, up from $4.7 billion at December 31, 2019; the company expected to recognize about 73% as sales over the next 12 months.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management described long-term demand drivers including urbanization, energy efficiency, food safety, and environmental regulation, while emphasizing uncertainty from COVID-19 and economic conditions.
- COVID-19 had reduced demand and caused temporary factory closures earlier in the year. Manufacturing had resumed, and the company reported no significant manufacturing disruptions at the filing date, but future effects depend on the pandemic, customer activity, supply chains, and government measures.
- Management cited cost containment, furloughs, pay freezes and cuts, reduced discretionary spending, and restructuring. Most remaining 2020 restructuring actions were targeted for completion in 2021.
- Goodwill testing found no impairment, but one reporting unit with $917 million of goodwill had only a 13% fair-value cushion; a 100-basis-point increase in the discount rate could result in an estimated $84 million impairment.
- Contingencies include an estimated $250 million accrued asbestos liability, with a $104 million insurance recovery receivable, and environmental liabilities of $233 million. The company also disclosed litigation challenging the conversion of UTC equity awards; it considers the claims against Carrier without merit.
- Other notable items include a $71 million impairment of a minority-owned joint venture in Q1, an $11 million litigation charge in Q3, and tax charges related to UK deferred tax assets and previously unremitted foreign earnings. A $0.08-per-share dividend was declared after quarter-end.
Investor facts to verify
- How much of Q3 earnings growth reflects recurring operating performance versus the Beijer gain and prior-year impairment?
- Whether working-capital timing benefits to cash flow persist, and how COVID-19 affects collections, customer demand, and supplier resilience.
- Debt-service capacity, covenant and liquidity requirements, and the effect of standalone costs on margins and cash generation.
- Progress in restoring Refrigeration and Fire & Security demand, and the sensitivity of goodwill valuations to weaker forecasts or higher discount rates.
- Potential developments in the equity-award litigation, asbestos claims, tax matters, and other disclosed contingencies.