Carrier Global Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Carrier sells HVAC, refrigeration, fire and security products and services through three segments. Interim financial statements were reviewed by PwC, not audited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $5.992B | $5.211B | $11.265B | $9.865B |
| Gross margin | $1.755B; 29.3% | $1.447B; 27.8% | $3.133B; 27.8% | $2.740B; 27.8% |
| Operating profit | $489M | $819M | $1.044B | $2.556B |
| Net income attributable to common shareowners | $199M | $573M | $572M | $1.952B |
| Diluted EPS | $0.23 | $0.67 | $0.67 | $2.25 |
| Operating cash flow | Not provided separately | Not provided separately | $504M | $(170)M |
- Q2 sales grew 15%; organic growth was 6%. For the six-month period, sales grew 14%, including 5% organic growth, a 10% contribution from acquisitions and divestitures net, and a 1% foreign-exchange headwind. TCC, acquired in August 2022, contributed materially to reported growth.
- Q2 gross margin increased 150 basis points year over year; first-half gross margin was unchanged. Management cited demand, pricing and productivity gains, partly offset by elevated commodity, component and freight costs.
- Q2 operating profit fell 40% and first-half operating profit fell 59%. Results include substantial unusual items: Q2 2023 included a $293M loss on KFI deconsolidation and a $111M mark-to-market loss on euro forward contracts; first-half 2022 included a $1.1B gain on the Chubb sale. The periods are therefore not directly comparable.
- Q2 operating profit by segment: HVAC $742M (17.6% margin), Refrigeration $112M (11.5%), and Fire & Security $(157)M (negative 16.8%). Fire & Security’s result included the KFI deconsolidation loss. Six-month segment operating profit was HVAC $1.177B, Refrigeration $220M and Fire & Security $(64)M.
- Six-month cash flow: operating activities provided $504M, investing activities used $296M and financing activities used $506M. The prior-year investing inflow of $2.645B was largely related to Chubb sale proceeds. Cash and cash equivalents were $3.209B at June 30, down from $3.520B at year-end.
- Total debt was $8.789B, versus $8.842B at December 31, 2022; net debt was $5.580B. Current assets were $10.141B and current liabilities $6.234B. No borrowings were outstanding under the $2B revolving facility or $2B commercial-paper program; the company reported compliance with debt covenants.
Material changes, outlook and risks
- Carrier agreed to acquire Viessmann’s climate solutions business for approximately €12B, expected to close around year-end 2023 subject to customary conditions and regulatory approvals. Payment is structured as 20% Carrier stock and 80% cash. Financing plans include cash and new debt, with bridge and delayed-draw facilities arranged. The company also entered €7B of euro forward contracts; their Q2 mark-to-market loss was $111M.
- Carrier plans to exit its Fire & Security and Commercial Refrigeration businesses during 2024, with proceeds expected to support deleveraging, capital allocation and general corporate purposes. The filing provides no earnings guidance or quantified forecast.
- Kidde-Fenwal, Inc. filed for Chapter 11 on May 14, 2023. Carrier deconsolidated KFI, recorded a $293M loss and a $134M investing cash outflow, and retained an interest valued at zero. KFI litigation is stayed; KFI has sought a broader stay of related claims against Carrier and others.
- AFFF litigation includes thousands of personal-injury and property/water-contamination cases. Carrier says it cannot assess the probability of liability or reasonably estimate a possible loss range; it cautions that future exposure could be material. Other disclosed matters include asbestos, environmental obligations and pending litigation. Management does not expect resolution of disclosed matters overall to materially harm results, cash flows or financial condition.
- Management said supply-chain and inflation pressures had moderated but remained ongoing, with potential for further disruption. Other sensitivities include end-market weakness, commodity and currency movements, financing availability and regulatory changes. The company reported no material change in risk factors from its 2022 Form 10-K.
Investor verification points
- Track Viessmann closing conditions, final consideration, financing mix, resulting leverage and any integration or transaction costs.
- Verify the timing, proceeds and debt-reduction effects of the planned Fire & Security and Commercial Refrigeration exits.
- Assess subsequent developments in KFI’s bankruptcy and AFFF litigation, including whether courts extend a litigation stay to Carrier and the potential financial exposure.
- Separate underlying operating trends from the KFI charge, euro-hedge mark-to-market loss, TCC consolidation and the prior-year Chubb gain when comparing earnings and segment margins.
- Monitor operating cash conversion, working-capital requirements, debt service and the company’s ability to maintain liquidity as acquisition financing is drawn.