Business context and reporting period
Carrier Global Corporation, a global provider of HVAC, refrigeration, fire and security products and services, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Comparisons are with the corresponding 2020 periods; 2020 includes pre-separation carve-out reporting before Carrier became independent on April 3, 2020.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $5.341B | $5.002B | $15.480B | $12.862B |
| Gross margin | $1.601B; 30.0% | $1.561B; 31.2% | $4.614B; 29.8% | $3.824B; 29.7% |
| Operating profit | $828M | $1.081B | $2.182B | $1.838B |
| Net income attributable to common shareowners | $469M | $741M | $1.340B | $1.098B |
| Diluted EPS | $0.53 | $0.84 | $1.50 | $1.25 |
| Operating cash flow | Not separately presented for the quarter | $1.324B | $1.493B |
Q3 sales increased 7% year over year, while operating profit fell 23% and attributable net income fell 37%. Gross margin declined 1.2 percentage points. For the first nine months, sales rose 20%, operating profit 19%, and attributable net income 22%; gross margin was broadly stable. Management attributed sales growth to recovery in end markets, volume and pricing, while commodity, component and freight inflation and supply constraints weighed on margins. Nine-month operating cash flow declined mainly because of higher working-capital needs, including inventory built amid strong demand and supply constraints.
Balance sheet and liquidity
At September 30, 2021, cash and cash equivalents were $2.671B, total debt $9.688B and net debt $7.017B. Debt to total capitalization was 57%, compared with 61% at December 31, 2020; net debt to net capitalization was 49%, compared with 52%. Cash declined from $3.115B at year-end 2020. No borrowings were outstanding under the $2.0B revolving credit facility or commercial paper program, and the company reported compliance with debt covenants. Management said available cash and operating cash flows should cover future operating needs.
Material changes and business developments
- Q3 2020 operating results included a $252M gain on the sale of the Beijer REF investment; its absence in 2021 is a major reason reported Q3 operating profit was lower. For the nine-month comparison, 2020 also included a $71M joint-venture impairment charge.
- Carrier agreed to sell Chubb Fire & Security to APi Group for $3.1B enterprise value. Closing was expected in late Q4 2021 or early Q1 2022, subject to approvals and customary conditions. Chubb assets of $3.148B and liabilities of $1.102B were classified as held for sale; the company expected to recover their carrying value at closing.
- Carrier acquired HVAC manufacturer Giwee, completing the acquisition of its remaining 30% interest in September. Acquisition cash paid, net of acquired cash, totaled $214M for the nine-month period.
- Q3 segment sales were higher in HVAC, Refrigeration and Fire & Security. Segment operating profit rose in Refrigeration but declined in HVAC and Fire & Security. HVAC’s Q3 segment margin fell to 18.8% from 29.0%, reflecting the prior-year investment gain and current cost pressures.
- The board expanded the share repurchase authorization by $1.75B in July, on top of the existing $350M program. Carrier repurchased $276M of shares and paid $313M in common dividends during the first nine months.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expects global supply-chain challenges, including component shortages, transportation delays and inflationary cost pressures, to continue for the foreseeable future. The company is pursuing pricing actions, cost savings, supplier engagement, dual sourcing and localized manufacturing where feasible. Management cited favorable long-term demand trends, including urbanization, climate change and food safety needs, but warned that COVID-19 resurgence and related restrictions could affect operations and demand.
Risks include supplier concentration and disruption, semiconductor shortages, raw-material inflation, labor availability and potential effects of vaccination requirements on the company and its suppliers. The filing also identifies uncertainty from the COVID-19 pandemic and access to future financing. AFFF-related litigation remained unresolved: Carrier reported 1,629 individual and 149 governmental or utility lawsuits as of September 30, 2021, and said it could not assess liability probability or reasonably estimate potential damages. It is seeking indemnification and insurance coverage. Environmental reserves were $221M; asbestos liabilities were $238M, with $98M in related recoveries. Carrier stated it did not expect the resolution of disclosed matters to have a material adverse effect, while noting the AFFF exposure could not be estimated.
Q3’s effective tax rate was 37.5%, versus 25.9% a year earlier, including a $136M net tax charge primarily related to Chubb subsidiary reorganizations ahead of the sale. The nine-month effective rate was 31.4%, including that charge and a $43M UK deferred tax charge, partly offset by tax benefits. The interim financial statements received a limited review by PwC, not an audit.
Important facts for investors to verify
- Whether the Chubb sale closes on the expected timetable and how final working-capital and other purchase-price adjustments affect proceeds.
- How sustained supply constraints, inflation and pricing actions affect volumes, margins and working capital.
- How much of the Q3 profit decline reflects the nonrecurring 2020 Beijer gain versus ongoing operating performance.
- Future cash conversion, inventory levels, debt reduction and the pace of share repurchases and dividends.
- Developments in AFFF litigation, indemnification and insurance recovery, and any change in the company’s ability to estimate exposure.