CARRIER GLOBAL CORPORATION OnApril 3, 2020, UTC completed the Separation through the Distribution of all of the outstanding common stock of the Company to UTC shareownerswho held shares of UTC common stock as of the close of business onMarch 19, 2020 , the record date for the Distribution. UTC distributed 866,158,910 shares of Carrier common stock in the Distribution, which was effective at the Effective Time. As a result of the Distribution, UTC shareowners of record received one share of the Company's common stock for every one share of UTC common stock and Carrier became an independent public company and our common stock is listed under the symbol "CARR" on theNew York Stock Exchange . In connection with the Separation, Carrier issued an aggregate principal balance of$11.0 billion of debt and transferred approximately$10.9 billion of cash to UTC onFebruary 27, 2020 andMarch 27, 2020 . OnApril 1, 2020 andApril 2, 2020 , Carrier received cash contributions totaling$590 million from UTC related to the Separation. See Note 10 - Borrowings and Lines of Credit and Note 3 - Earnings Per Share to the Unaudited Condensed Consolidated Financial Statements for additional information. These Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by GAAP for complete financial statements. Prior to the Separation, the Unaudited Condensed Consolidated Financial Statements reflect the financial position, results of operations and cash flows of the Company for the periods presented as historically managed within UTC. For the periods prior to the Separation, the Unaudited Condensed Consolidated Financial Statements are derived from the consolidated financial statements and accounting records of UTC and thus are prepared on a "carve-out" basis, as described below. The Company's financial statements for the period fromApril 3, 2020 throughJune 30, 2020 are consolidated financial statements based on the reported results of Carrier as a stand-alone company. The Unaudited Condensed Consolidated Financial Statements include all revenues and costs directly attributable to Carrier, including costs for facilities, functions and services used by Carrier. Prior to the Separation, costs for certain functions and services performed by UTC were directly charged to Carrier based on specific identification when possible or based on a reasonable allocation driver such as net sales, headcount, proportionate usage or other allocation methods. The results of operations include allocations of costs for administrative functions and services performed on behalf of Carrier by centralized groups within UTC. We entered into theTSA with UTC andOtis in connection with the Separation pursuant to which UTC provides us with certain services and we provide certain services to UTC for a limited time to help ensure an orderly transition following the Separation. The services we receive include, but are not limited to, information technology services, technical and engineering support, application support for operations, legal, payroll, finance, tax and accounting, general administrative services and other support services. Because costs for these services historically were included in our operating results based on allocations from UTC, we do not expect the costs associated with theTSA to be materially different and, therefore, we do not expect such costs to materially affect our results of operations or cash flows after we became an independent publicly traded company nor do we expect such costs to be materially different when these services are transitioned from UTC to Carrier. Subsequent to the Separation, we have and will continue to incur expenditures consisting primarily of employee-related costs, costs to establish certain stand-alone functions and information technology systems and other transaction-related costs. Additionally, we will incur increased costs as a result of becoming an independent, publicly traded company, primarily from establishing or expanding corporate support for our businesses, including information technology, human resources, treasury, tax, internal audit, risk management, accounting and financial reporting, investor relations, governance, legal, procurement and other services. Our preliminary estimates of these additional recurring costs expected to be incurred annually are approximately$75 million to$95 million greater than the expenses historically allocated to us from UTC, and primarily relate to Selling, general and administrative expenses. We believe our cash flow from operations will be sufficient to fund these additional corporate expenses. In connection with the Separation, we entered into the TMA with UTC andOtis that governs the parties' respective rights, responsibilities and obligations with respect to tax matters (including responsibility for taxes, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other tax matters). Subject to certain exceptions set forth in the TMA, Carrier generally is responsible for federal, state and foreign taxes imposed on a separate return basis upon Carrier (or any of its subsidiaries) with respect to taxable periods (or portions thereof) that ended on or prior to the date of the Distribution. The TMA provides special rules that allocate responsibility for tax liabilities arising from a failure of the 30 -------------------------------------------------------------------------------- Table of Contents Separation transactions to qualify for tax-free treatment based on the reasons for such failure. The TMA also imposes restrictions on each of Carrier andOtis during the two-year period following the Distribution that are intended to prevent certain transactions from failing to qualify as transactions that are generally tax-free. For additional discussion, see "Certain Relationships and Related Party Transactions," in the Information Statement. In connection with the Separation, we also entered into an employee matters agreement and intellectual property agreement with UTC andOtis . These agreements are not expected to have a material impact on the financial results of Carrier. For additional discussion, see "Certain Relationships and Related Party Transactions" in the Information Statement. Business Summary Carrier is a leading global provider of HVAC, refrigeration, fire and security solutions. We also provide a broad array of related building services, including audit, design, installation, system integration, repair, maintenance and monitoring. Our innovative solutions promote smarter, safer and more sustainable buildings and infrastructure, and help to effectively preserve the freshness, quality and safety of perishables across a wide variety of industries. Our comprehensive range of products and services, reputation for quality and innovation and our industry-leading brands make us a trusted provider for our customers' critical applications in the construction, transportation, security, food, retail, pharmaceutical and other industries. Our worldwide operations are affected by industrial, economic and political factors on both a regional and global level. This includes the mega-trends of urbanization, climate change and increasing requirements for food safety driven by the food needs of our growing global population, rising standards of living and increasing energy and environmental regulation. We believe that growth in our businesses is supported by favorable secular trends, including these mega-trends, which underpin growth across our HVAC, Refrigeration and Fire & Security businesses. We also believe that we are well positioned to benefit from these long-term trends as a result of the strength of our industry-leading brands and track record of innovation. The effects of climate change, such as extreme weather conditions, create financial risks to our business. For example, the demand for our products and services, such as residential air conditioning equipment, may be affected by unseasonable weather conditions. Demand for our HVAC products and services, representing our largest segment by sales, is seasonal and affected by the weather. Cooler than normal summers depress our sales of replacement air conditioning products and services. Similarly, warmer than normal winters have the same effect on our heating products. Our business is also affected by changes in the general level of economic activity, such as changes in business and consumer spending, construction activity and shipping activity. A change in building and remodeling activity also can affect our financial performance. In addition, our financial performance may be influenced by the production and utilization of transport equipment, including truck production cycles inNorth America andEurope . Impact of the COVID-19 pandemic COVID-19 surfaced inWuhan, China in late 2019 and has since spread throughout the rest of the world. InMarch 2020 , COVID-19 was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government . The pandemic has negatively affected theU.S. and global economies, disrupted global supply chains and financial markets, resulted in significant travel restrictions, mandated facility closures, and shelter-in-place orders. Carrier is taking all prudent measures to protect the health and safety of our employees and has implemented work from home requirements, where possible, social distancing where working from home is not feasible, including in our manufacturing facilities, deep cleaning protocols at all of our facilities and travel restrictions, among other measures. We have also taken appropriate measures to work with our customers to minimize potential disruption and to support the communities that we serve to address the challenges posed by the pandemic. The full extent of the impact of the COVID-19 pandemic on the Company's operational and financial performance will depend on future developments, including the duration and spread of the pandemic, as well as any worsening of the pandemic and whether there will be additional outbreaks of the pandemic, and related containment and mitigation actions taken by theU.S. , state and local and international governments to prevent disease spread. The extent of the pandemic's impact on Carrier will also depend upon our employees' ability to work safely in our facilities, our customers' ability to continue to operate or receive our products, the ability of our suppliers to continue to operate, and the level of activity and demand for the ultimate product and services of our customers or their customers. 31 -------------------------------------------------------------------------------- Table of Contents During the three months endedMarch 31, 2020 , we temporarily closed or reduced production at manufacturing facilities inNorth America ,Asia andEurope for safety reasons and in response to lower demand for our products, however, as ofJune 30, 2020 , our manufacturing facilities (and nearly all of our suppliers) had resumed operations and 95% of our production capacity was available and, where appropriate, we initiated return-to-work protocols at our non-manufacturing facilities where employees were previously working remotely. During the three months endedMarch 31, 2020 , we considered the outbreak and subsequent impacts to be a trigger to reassess our goodwill and intangible asset valuations. In order to evaluate these impacts, we made forecast assumptions regarding future business activity that are subject to a wide range of uncertainties, including those noted in the prior paragraph. Based upon qualitative and, in certain cases, quantitative analyses, we determined that our goodwill and intangible assets were not impaired. For the period endedJune 30, 2020 , we reviewed the assumptions used in ourMarch 31, 2020 assessment and determined that they remain appropriate. We continue to focus on navigating the challenges COVID-19 presents by preserving our liquidity and managing our cash flows through preemptive actions to enhance our ability to meet our liquidity needs over the next twelve months. Such actions include, but are not limited to modifying the financial covenants in our revolving and term loan credit agreements and issuing$750 million of unsecured, unsubordinated long-term debt (see Note 10 - Borrowings and Lines of Credit for additional information), reducing our discretionary spending, our capital investments and general and administrative costs by implementing pay freezes and cuts, employee furloughs and the suspension of non-critical hiring, and participation in global COVID-19 relief measures, including the CARES Act, which provides for payroll tax deferrals and credits, income tax payment deferrals, and an increase in the income tax interest deduction limitation. Business Segments Our operations are organized into three segments: HVAC, Refrigeration and Fire & Security. Our HVAC segment provides products, controls, services and solutions to meet the heating and cooling needs of residential and commercial customers. Our Refrigeration segment provides refrigeration and monitoring systems for trucks, trailers, shipping containers, intermodal and rail, as well as commercial refrigeration products. Our Fire & Security products encompass a wide range of residential and commercial building systems and security and service solutions. Our customers are in both the public and private sectors, and our businesses reflect extensive geographic diversification. See Note 19 - Segment Financial Data to the Unaudited Condensed Consolidated Financial Statements for additional discussion of sales attributed to geographic regions. Our earnings growth strategy contemplates earnings from organic sales growth, including growth from new product development and product improvements, structural cost reductions, operational improvements and incremental earnings from acquisitions. Both acquisition and restructuring costs associated with business combinations are expensed as incurred. Depending on the nature and level of acquisition activity, our earnings could be adversely impacted due to acquisition and restructuring actions initiated in connection with the integration of businesses acquired. For additional discussion of acquisitions and restructuring, see "Liquidity and Financial Condition," "Restructuring Costs," Note 10 - Borrowings and Lines of Credit and Note 15 - Restructuring Costs to the Unaudited Condensed Consolidated Financial Statements. CRITICAL ACCOUNTING ESTIMATES Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe that the most complex and sensitive judgments, because of their potential significance to the Unaudited Condensed Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. In "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Information Statement, we describe the significant accounting estimates and policies used in the preparation of the Unaudited Condensed Consolidated Financial Statements. There have been no significant changes in our critical accounting estimates. However, in the three months endedMarch 31, 2020 , we reassessed our goodwill asset valuations as a result of the impact of the COVID-19 pandemic on our operational and financial performance. We test our reporting units' goodwill for impairment by comparing the estimated fair value of each reporting unit to its carrying amount. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. The financial forecast used to estimate the fair value of our reporting units incorporates assumptions and estimates regarding our future plans, as well as industry, economic and regulatory conditions. The significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, cost of products and services sold, selling, general and administrative expenses, depreciation 32 -------------------------------------------------------------------------------- Table of Contents and amortization, working capital and capital expenditures), income tax rates, long-term growth rates and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. In the three months endedMarch 31, 2020 , we qualitatively determined that the goodwill for all but one of our reporting units was not impaired. For one reporting unit with goodwill of$966 million , we performed a quantitative analysis and selected the assumptions used in the financial forecasts to estimate the reporting unit's fair value using historical data, supplemented by current and anticipated market conditions, including estimated growth and discount rates, management's plans and the anticipated impact of the COVID-19 pandemic on the reporting unit's business and financial performance. Based upon our analysis, we determined that the goodwill was not impaired. However, the fair value of the reporting unit exceeded its underlying carrying value by 20% and a 100 basis-point increase in the discount rate used in the financial forecast would result in an impairment of approximately$175 million . For the period endedJune 30, 2020 , we reviewed the assumptions used in ourMarch 31, 2020 assessment and determined that they remain appropriate. The estimated fair value of the reporting unit would be negatively impacted if future economic conditions are worse than our financial forecast and assumptions or there are substantial reductions in our end markets and volume assumptions relative to our financial forecasts. RESULTS OF OPERATIONS Net Sales For the Three Months Ended For the Six Months Ended June 30, June 30, (dollars in millions) 2020 2019 2020 2019 Net sales$ 3,972 $ 4,962 $ 7,860 $ 9,285 Percentage change (20) % (15) %
The factors contributing to the total percentage change year-over-year in total net sales are as follows:
For the Three Months For the Six Months
Ended June 30, 2020 Ended June 30, 2020
Organic / Operational (19) % (14) %
Foreign currency translation (1) % (1) %
Total % change (20) % (15) %
Organic sales declined across all three segments for the three and six months
ended June 30, 2020 compared with the same periods of the prior year, reflecting
lower volumes driven by the economic slowdowns attributed to the COVID-19
pandemic shutdowns in the first half of the year. The decrease in HVAC reflects
lower volumes in commercial and residential HVAC resulting from the difficult
economic environment due to the COVID-19 pandemic. The decrease in Refrigeration
was driven by a decline in transport refrigeration due to the impact from the
COVID-19 pandemic with declines in North America and Europe truck trailer as
well as container. The decrease in North America truck trailer sales was also
attributed to the cyclical peak experienced in 2019. The decrease in commercial
refrigeration was primarily driven by lower volume in Europe combined with
various regional shutdowns attributed to the COVID-19 pandemic. Fire & Security
decreased organically, reflecting lower sales volumes in both product and field
services driven by the impact of the COVID-19 pandemic which primarily impacted
the installation and service businesses due to no or limited access to customer
sites during the three months ended June 30, 2020 . For additional discussion on
the segment results for the three and six months ended June 30, 2020 , see
"Segment Review."
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Cost of Products and Services Sold
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(dollars in millions) 2020 2019 2020 2019
Total cost of products and services sold $ 2,831 $ 3,488 $ 5,597 $ 6,585
Percentage change year-over-year (19) % (15) %
The factors contributing to the percentage change year-over-year in total cost of products and services sold are as follows:
For the Three Months For the Six Months
Ended June 30, 2020 Ended June 30, 2020
Organic / Operational (17) % (14) %
Foreign currency translation (1) % (1) %
Other (1) % - %
Total % change (19) % (15) %
The organic decrease in total cost of products and services sold for the three
and six months ended June 30, 2020 , as compared with the same period of the
prior year, is consistent with the organic sales decline of 19% and 14%,
respectively, for the same periods. The organic declines in cost of products and
services sold is attributable to the sales volume declines driven by the
economic slowdowns related to the COVID-19 pandemic experienced in the first
half of the year.
Gross Margin
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(dollars in millions) 2020 2019 2020 2019
Gross margin $ 1,141 $ 1,474 $ 2,263 $ 2,700
Percentage of net sales 28.7 % 29.7 % 28.8 % 29.1 %
The 100 basis point decrease in gross margin as a percentage of sales for the
three months ended June 30, 2020 reflects the effects of lower sales volumes and
factory inefficiencies as a result of economic conditions resulting from the
COVID-19 pandemic partly offset by cost containment initiatives.
The 30 basis point decrease in gross margin as a percentage of sales for the six
months ended June 30, 2020 was primarily driven by the effects of lower volume
largely as a result of the COVID-19 pandemic, lower factory and field
productivity and unfavorable product mix, partially offset by favorable material
productivity and commodities.
Research and Development
For the Six Months Ended
For the Three Months Ended June 30, June 30,
(dollars in millions) 2020 2019 2020 2019
Research and development $ 94
2.4 % 2.1 % 2.4 % 2.2 %
Research and development spending is subject to the variable nature of program
development schedules and, therefore, year-over-year fluctuations in spending
levels are expected. Although cost containment initiatives resulted in lower
year-over-year research and development expenses, the lower sales volumes
experienced in the three and six months ended June 30, 2020 , as compared with
the same period of the prior year, resulted in a 30 basis point and 20 basis
point increase, respectively, in expenses as a percentage of net sales.
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Selling, General and Administrative
For the Six Months Ended
For the Three Months Ended June 30, June 30,
(dollars in millions) 2020 2019 2020 2019
Selling, general and administrative expenses $ 637
16.0 % 13.7 % 16.9 % 14.7 %
The decrease in Selling, general and administrative expenses for the three
months ended June 30, 2020 , as compared with the same period of the prior year,
was primarily driven by cost containment initiatives taken to mitigate the
COVID-19 related decline in sales volume. Such cost containment actions
included, but were not limited to, furloughs, lower employee compensation, and
reductions in discretionary spending across the businesses. Costs associated
with the Separation of $23 million were partially offset by lower restructuring
costs of $16 million . As a percentage of sales, the 230 basis point increase was
primarily driven by lower sales volumes experienced as a result of the COVID-19
pandemic as noted previously.
The decrease in Selling, general and administrative expenses in the six months
ended June 30, 2020 was primarily driven by cost containment initiatives taken
to mitigate the COVID-19 related decline in sales volume. Such cost containment
actions included, but were not limited to, furloughs, lower employee
compensation, and reductions in discretionary spending across the businesses.
Costs associated with the Separation of $68 million were partially offset by
lower restructuring costs of $40 million and lower costs associated with the
wind-down of a residential intrusion business of $13 million . As a percentage of
sales, the 220 basis point increase was primarily driven by lower sales volumes
experienced as a result of the COVID-19 pandemic as noted previously.
We are continuously evaluating our cost structure and have implemented
restructuring actions to keep our cost structure competitive. The amounts
reflected previously include the impact of restructuring actions on Selling,
general and administrative expenses. For additional discussion, see
"Restructuring Costs" and Note 15 - Restructuring Costs to the Unaudited
Condensed Consolidated Financial Statements.
Restructuring Costs
For the Six Months Ended June 30,
(dollars in millions) 2020 2019
Cost of sales $ 6 $ 13
Selling, general and administrative 10 50
Total restructuring costs $ 16 $ 63
Restructuring actions are a component of our operating margin improvement
efforts and relate to existing and recently acquired operations. Charges
generally arise from severance related to workforce reductions, facility exit
and lease termination costs associated with the consolidation of field and
manufacturing operations and costs to exit legacy programs. We continue to
closely monitor the economic environment and may undertake further restructuring
actions to keep our cost structure aligned with the demand for our products and
services and prevailing market conditions.
2020 Actions. During the six months ended June 30, 2020 , we recorded net pre-tax
restructuring charges of $13 million relating to ongoing cost reduction actions
initiated in 2020. For actions initiated in 2020, we are targeting to complete
the majority of the remaining workforce and facility-related cost reductions in
2021. During the six months ended June 30, 2020 , we had $4 million of cash
outflows related to the 2020 actions. As of June 30, 2020 , we expect to incur
additional restructuring and other charges of $7 million to complete these
actions.
2019 Actions. During the six months ended June 30, 2020 and 2019, we recorded
net pre-tax restructuring charges of $3 million and $49 million , respectively,
for actions initiated in 2019. For actions initiated in 2019, we are targeting
to complete the majority of the remaining workforce and facility-related cost
reductions in 2020. During the six months ended June 30, 2020 , we had cash
outflows of approximately $20 million related to the 2019 actions.
In addition, during the six months ended June 30, 2020 and 2019, we recorded net
pre-tax restructuring costs totaling $0 million and $14 million , respectively,
for restructuring actions initiated in 2018 and prior.
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Equity Method Investment Net Earnings
For the Six Months Ended
For the Three Months Ended June 30, June 30,
(dollars in millions) 2020 2019 2020 2019
Equity method investment net earnings $ 57 Investments over which we do not exercise control, but have significant influence, are accounted for using the equity method of accounting. Equity in earnings of unconsolidated equity method investments decreased in the three and six months endedJune 30, 2020 by$23 million and$34 million , respectively, primarily due to lower earnings from our investments in HVAC joint ventures inAsia and theMiddle East , primarily due to the impact of the COVID-19 pandemic. Other (Expense) Income, Net For the Six Months For the Three Months Ended June 30, Ended June 30, (dollars in millions) 2020 2019 2020 2019 Other (expense) income, net$ (25) $ 34 $ (71) $ 49 Other (expense) income, net primarily includes the impact of gains and losses related to our equity method investments or infrequently occurring items. The year-over-year change of$59 million for the three months endedJune 30, 2020 , is primarily driven by the absence of a gain on the sale of an interest in a joint venture of$21 million in 2019, the unfavorable impact of a change in the estimate of certain long-term liabilities of$12 million , and higher deferred compensation charges of$8 million . The year-over-year change of$120 million for the six months endedJune 30, 2020 , is primarily driven by an other-than-temporary impairment charge of$71 million on a minority-owned joint venture investment in 2020, the absence of gains on the sale of investments of$34 million in 2019 and the unfavorable impact of a change in the estimate of certain long-term liabilities of$12 million , partially offset by a gain on the sale of an investment of$9 million . Interest (Expense) Income, Net For the Six Months Ended For the Three Months Ended June 30, June 30, (dollars in millions) 2020 2019 2020 2019 Interest expense$ (85) $ (9) $ (123) $ (35) Interest income 4 25 5 55 Interest (expense) income, net$ (81) $
16
Prior to the Separation, Interest income and Interest expense related primarily to interest on related party activity between Carrier and UTC. See "Liquidity and Financial Condition" in this Item 2 and Note 5 - Related Parties and Note 10 - Borrowings and Lines of Credit to the Unaudited Condensed Consolidated Financial Statements. Interest (expense) income, net reflects higher year-over-year interest expense for the three and six months endedJune 30, 2020 compared with the three and six months endedJune 30, 2019 due to the issuance of$9.25 billion of fixed rate notes inFebruary 2020 , a$1.75 billion draw on our term loan inMarch 2020 , the issuance of$750 million of fixed rate notes inJune 2020 and a decrease in interest income earned on related party receivables due from UTC. Income Taxes For the Six Months For the Three Months Ended June 30, Ended June 30, 2020 2019 2020 2019 Effective tax rate 28.2 % 7.6 % 44.6 % 14.6 % The increase in the effective tax rate for the three months endedJune 30, 2020 compared with the prior year is primarily due to the absence of a prior year combined tax benefit of$149 million resulting from the filing by a Carrier subsidiary to participate in an amnesty program offered by theItalian Tax Authority and conclusion of an audit by theIRS for UTC tax years 2014, 2015 and 2016. 36 -------------------------------------------------------------------------------- Table of Contents The increase in the effective tax rate for the six months endedJune 30, 2020 as compared with the prior year is primarily due to the items described above as well as the following items which were recorded in the six months endedJune 30, 2020 : a$51 million adjustment related to a valuation allowance recorded against aUnited Kingdom tax loss and credit carry forward resulting from Separation-related activities, an adjustment of$46 million resulting from Carrier's decision to no longer permanently reinvest certain pre-2018 unremitted non-U.S. earnings, and the impact of a non-deductible impairment charge of$71 million on a minority-owned joint venture investment. We continue to monitor potential tax impacts from final regulations issued under the TCJA, as well as the economic impacts from COVID-19 and related legislative actions.
For additional discussion of income taxes and the effective income tax rate, see Note 14 - Income Taxes to the Unaudited Condensed Consolidated Financial Statements.
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