Carrier Global Corporation (NYSE: CARR) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Carrier completed its spin-off from United Technologies Corporation (UTC) on April 3, 2020. Pre-spin-off results are carve-out financials derived from UTC records; results after separation reflect Carrier as a standalone company, limiting comparability.
Business context and financial performance
Carrier provides HVAC, refrigeration, and fire and security products and services through three segments: HVAC, Refrigeration, and Fire & Security. COVID-19-related shutdowns, lower demand, site-access restrictions, and supply-chain disruption affected all three segments.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $3,972 | $4,962 | $7,860 | $9,285 |
| Operating profit | $442 | $805 | $757 | $1,305 |
| Operating margin | 11.1% | 16.2% | 9.6% | 14.1% |
| Gross margin | 28.7% | 29.7% | 28.8% | 29.1% |
| Net income attributable to common shareowners | $261 | $784 | $357 | $1,184 |
| Diluted EPS | $0.30 | $0.91 | $0.41 | $1.37 |
| Operating cash flow | Not separately presented by quarter | $556 | $371 |
Q2 sales fell 20% year over year, primarily from lower volumes; six-month sales fell 15%. Segment Q2 sales and operating profit were: HVAC $2,291 and $358 (down 16% and 34%); Refrigeration $700 and $61 (down 27% and 50%); Fire & Security $1,057 and $106 (down 24% and 42%). Lower volume and unfavorable mix pressured profitability; cost containment partly offset the declines.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $2,704, total debt was $12,029, and net debt was $9,325. Long-term debt, net of current portion, was $11,728; current debt was $301.
- Six-month operating cash flow was $556, capital expenditures were $94, and investing cash outflow was $103. Operating cash flow increased from $371 in the prior-year period, which management attributed mainly to working-capital and tax-payment timing.
- Cash increased by $1,751 over the six months. Financing cash flow was $1,315, including new debt and a $590 cash contribution from UTC; Carrier also transferred approximately $10.9 billion to UTC in connection with the separation.
- Carrier had $2.0 billion of revolving-credit capacity, with no borrowings, and no commercial-paper borrowings at June 30. It reported covenant compliance. Amendments defer leverage-covenant testing until June 30, 2021, raise the leverage limit through December 31, 2021, and impose liquidity and restricted-payment requirements during the modification period.
Changes, outlook, risks, and unusual items
- COVID-19 was the principal operating headwind. By June 30, manufacturing facilities and nearly all suppliers had resumed operations, with 95% of production capacity available. The duration and financial effects of the pandemic remained uncertain.
- Management did not provide numerical earnings or sales guidance. It said operating cash flows and anticipated capital-market access were expected to meet commitments over the next 12 months, while noting financing availability and cost were uncertain.
- Carrier issued $750 million of 2.700% notes due 2031 in June to enhance liquidity and financial flexibility. Total debt rose sharply from $319 at December 31, 2019, largely reflecting the spin-off financing.
- Standalone public-company costs are expected to add approximately $75–$95 million annually versus costs historically allocated by UTC. Six-month separation-related costs were approximately $68 million in the financial statement note; MD&A cites $73 million pre-tax, reflecting a different presentation. The filing reports $23 million for Q2.
- Six-month results included a $71 million non-cash impairment of a minority-owned joint venture, a $97 million tax adjustment, and separation costs. The six-month effective tax rate was 44.6%, versus 14.6% in 2019; the Q2 rates were 28.2% and 7.6%, respectively. Q2 2019 included a $149 million tax benefit that did not recur.
- Management found no impairment of goodwill or intangible assets, but disclosed that a 100-basis-point increase in the discount rate for one reporting unit could cause an estimated $175 million goodwill impairment. Its fair value exceeded carrying value by 20% in the March assessment, whose assumptions management reaffirmed at June 30.
- Other matters include $230 million of environmental liabilities and $251 million of accrued asbestos liabilities, with a separate $104 million probable insurance-recovery receivable. Management stated it did not expect resolution of disclosed contingencies to materially adversely affect the company.
Important facts for investors to verify
- Whether demand, production, and customer-site access recover from COVID-19 disruption, and whether the goodwill valuation assumptions remain supportable.
- Debt service capacity, compliance with amended covenants and liquidity requirements, and access to refinancing or capital markets.
- Whether lower sales volumes and mix continue to weigh on segment margins, especially in Refrigeration and Fire & Security.
- The realized level of standalone costs relative to management’s $75–$95 million annual estimate, and the remaining separation and restructuring costs.
- Potential tax obligations under the tax matters agreement, including risks to tax-free treatment of the separation, and developments in tax examinations.
- Changes in expected credit losses, environmental remediation costs, asbestos liabilities, and the collectability of related insurance recoveries.
The interim financial statements were reviewed, not audited, by the independent registered public accounting firm.