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CARRIER GLOBAL Corp - Quarter Report: 2023 June (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 ____________________________________ 
FORM 10-Q
____________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-39220
____________________________________ 
CARRIER GLOBAL CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________ 
Delaware 83-4051582
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
13995 Pasteur Boulevard, Palm Beach Gardens, Florida 33418
(Address of principal executive offices, including zip code)
(561) 365-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock ($0.01 par value)CARRNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 17, 2023, there were 837,627,926 shares of Common Stock outstanding.
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CARRIER GLOBAL CORPORATION
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Three and Six Months Ended June 30, 2023
Page

Carrier Global Corporation and its subsidiaries' names, abbreviations thereof, logos and product and service designators are all either the registered or unregistered trademarks or trade names of Carrier Global Corporation and its subsidiaries. Names, abbreviations of names, logos and products and service designators of other companies are either the registered or unregistered trademarks or trade names of their respective owners. As used herein, the terms "we," "us," "our," "the Company" or "Carrier," unless the context otherwise requires, mean Carrier Global Corporation and its subsidiaries. References to internet websites in this Form 10-Q are provided for convenience only. Information available through these websites is not incorporated by reference into this Form 10-Q.









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PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements

CARRIER GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

 Three Months Ended June 30,Six Months Ended June 30,
(In millions, except per share amounts)2023202220232022
Net sales
Product sales$5,355 $4,662 $10,041 $8,832 
Service sales637 549 1,224 1,033 
Total Net sales5,992 5,211 11,265 9,865 
Costs and expenses
Cost of products sold(3,769)(3,363)(7,227)(6,361)
Cost of services sold(468)(401)(905)(764)
Research and development(151)(122)(290)(247)
Selling, general and administrative(784)(614)(1,505)(1,215)
Total Costs and expenses(5,172)(4,500)(9,927)(8,587)
Equity method investment net earnings52 101 96 159 
Other income (expense), net(383)(390)1,119 
Operating profit489 819 1,044 2,556 
Non-service pension (expense) benefit — (1)— (2)
Interest (expense) income, net(67)(61)(113)(109)
Income from operations before income taxes422 757 931 2,445 
Income tax (expense) benefit(189)(170)(311)(471)
Net income from operations233 587 620 1,974 
Less: Non-controlling interest in subsidiaries' earnings from operations34 14 48 22 
Net income attributable to common shareowners$199 $573 $572 $1,952 
Earnings per share
Basic$0.24 $0.68 $0.68 $2.30 
Diluted $0.23 $0.67 $0.67 $2.25 
Weighted-average number of shares outstanding
Basic836.0 845.7 835.5 849.5 
Diluted850.9 862.7 851.5 868.4 
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

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CARRIER GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Net income from operations$233 $587 $620 $1,974 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments arising during period(63)(489)(9)(550)
Pension and post-retirement benefit plan adjustments— — — 
Chubb divestiture— — — (245)
Other comprehensive income (loss), net of tax(63)(487)(9)(795)
Comprehensive income (loss)170 100 611 1,179 
Less: Comprehensive income (loss) attributable to non-controlling interest26 42 13 
Comprehensive income (loss) attributable to common shareowners$144 $95 $569 $1,166 
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

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CARRIER GLOBAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
As of
(In millions)June 30,
2023
December 31,
2022
Assets
Cash and cash equivalents$3,209 $3,520 
Accounts receivable, net3,212 2,833 
Contract assets, current578 537 
Inventories, net2,699 2,640 
Other assets, current443 349 
Total current assets10,141 9,879 
Future income tax benefits690 612 
Fixed assets, net2,262 2,241 
Operating lease right-of-use assets600 642 
Intangible assets, net1,181 1,342 
Goodwill9,927 9,977 
Pension and post-retirement assets32 26 
Equity method investments1,139 1,148 
Other assets312 219 
Total Assets$26,284 $26,086 
Liabilities and Equity
Accounts payable$2,956 $2,833 
Accrued liabilities2,661 2,610 
Contract liabilities, current483 449 
Current portion of long-term debt134 140 
Total current liabilities6,234 6,032 
Long-term debt8,655 8,702 
Future pension and post-retirement obligations350 349 
Future income tax obligations560 568 
Operating lease liabilities485 529 
Other long-term liabilities1,712 1,830 
Total Liabilities17,996 18,010 
Commitments and contingent liabilities (Note 19)
Equity
Common stock
Treasury stock(1,972)(1,910)
Additional paid-in capital5,494 5,481 
Retained earnings6,129 5,866 
Accumulated other comprehensive loss(1,691)(1,688)
Non-controlling interest319 318 
Total Equity8,288 8,076 
Total Liabilities and Equity$26,284 $26,086 
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
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CARRIER GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)

(In millions)Accumulated Other Comprehensive Income (Loss)Common StockTreasury StockAdditional Paid-In CapitalRetained EarningsNon-Controlling InterestTotal Equity
Balance as of December 31, 2022$(1,688)$$(1,910)$5,481 $5,866 $318 $8,076 
Net income— — — — 373 14 387 
Other comprehensive income (loss), net of tax52 — — — — 54 
Shares issued under incentive plans, net— — — (9)— — (9)
Stock-based compensation— — — 22 — — 22 
Treasury stock repurchase— — (62)— — — (62)
Balance as of March 31, 2023$(1,636)$9 $(1,972)$5,494 $6,239 $334 $8,468 
Net income19934233
Other comprehensive income (loss), net of tax(55)(8)(63)
Dividends declared on common stock (1)
(309)(309)
Shares issued under incentive plans, net(18)(18)
Stock-based compensation18 18
Dividends attributable to non-controlling interest(41)(41)
Balance as of June 30, 2023$(1,691)$9 $(1,972)$5,494 $6,129 $319 $8,288 
(In millions)Accumulated Other Comprehensive Income (Loss)Common StockTreasury StockAdditional Paid-In CapitalRetained EarningsNon-Controlling InterestTotal Equity
Balance as of December 31, 2021$(989)$$(529)$5,411 $2,865 $327 $7,094 
Net income— — — — 1,379 1,387 
Other comprehensive income (loss), net of tax(308)— — — — — (308)
Shares issued under incentive plans, net— — — (17)— — (17)
Stock-based compensation— — — 21 — — 21 
Dividends attributable to non-controlling interest— — — — — (1)(1)
Sale of non-controlling interest— — — — — (5)(5)
Treasury stock repurchase— — (741)— — — (741)
Balance as of March 31, 2022$(1,297)$9 $(1,270)$5,415 $4,244 $329 $7,430 
Net income— — — — 573 14 587 
Other comprehensive income (loss), net of tax(478)— — — — (9)(487)
Dividends declared on common stock (2)
— — — — (253)— (253)
Conversion of cash settled awards— — — — — 
Stock-based compensation— — — 20 — — 20 
Dividends attributable to non-controlling interest— — — — — (38)(38)
Treasury stock repurchase— — (273)— — — (273)
Balance as of June 30, 2022$(1,775)$9 $(1,543)$5,441 $4,564 $296 $6,992 
(1) Cash dividends declared were $0.38 per share for the three months ended June 30, 2023
(2) Cash dividends declared were $0.30 per share for the three months ended June 30, 2022

The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
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CARRIER GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 Six Months Ended June 30,
(In millions)20232022
Operating Activities
Net income from operations$620 $1,974 
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization273 155 
Deferred income tax provision(110)(17)
Stock-based compensation costs40 41 
Equity method investment net earnings(96)(159)
(Gain) loss on extinguishment of debt— (36)
(Gain) loss on sale of investments / deconsolidation276 (1,119)
Changes in operating assets and liabilities
Accounts receivable, net(406)(483)
Contract assets, current(40)(224)
Inventories, net(59)(435)
Other assets, current(105)(37)
Accounts payable and accrued liabilities120 79 
Contract liabilities, current37 42 
Defined benefit plan contributions(11)(6)
Distributions from equity method investments10 15 
Other operating activities, net(45)40 
Net cash flows provided by (used in) operating activities504 (170)
Investing Activities
Capital expenditures(144)(122)
Investment in businesses, net of cash acquired (56)(38)
Dispositions of businesses 36 2,944 
Settlement of derivative contracts, net(14)(123)
Kidde-Fenwal, Inc. deconsolidation(134)— 
Other investing activities, net16 (16)
Net cash flows provided by (used in) investing activities(296)2,645 
Financing Activities
Increase (decrease) in short-term borrowings, net(19)(22)
Issuance of long-term debt21 
Repayment of long-term debt(12)(1,127)
Repurchases of common stock(62)(1,014)
Dividends paid on common stock(309)(257)
Dividends paid to non-controlling interest(41)(22)
Other financing activities, net(69)(13)
Net cash flows provided by (used in) financing activities(506)(2,434)
Effect of foreign exchange rate changes on cash and cash equivalents(13)(41)
Net increase (decrease) in cash and cash equivalents and restricted cash(311)— 
Cash, cash equivalents and restricted cash, beginning of period3,527 3,025 
Cash, cash equivalents and restricted cash, end of period3,216 3,025 
Less: restricted cash
Cash and cash equivalents, end of period$3,209 $3,017 
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.
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CARRIER GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1: DESCRIPTION OF THE BUSINESS

Carrier Global Corporation (the "Company") is a global leader in intelligent climate and energy solutions with a focus on providing differentiated, digitally-enabled lifecycle solutions to its customers. The Company's portfolio includes industry-leading brands such as Carrier, Toshiba, Automated Logic, Carrier Transicold, Kidde, Edwards and LenelS2 that offer innovative heating, ventilating, air conditioning ("HVAC"), refrigeration, fire, security and building automation technologies to help make the world safer and more comfortable. The Company also provides a broad array of related building services, including audit, design, installation, system integration, repair, maintenance and monitoring. The Company's operations are classified into three segments: HVAC, Refrigeration and Fire & Security.

In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements contain all adjustments (which include normal recurring adjustments) necessary to state fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for 2022 filed with the SEC on February 7, 2023 (the "2022 Form 10-K").

NOTE 2: BASIS OF PRESENTATION

The Unaudited Condensed Consolidated Financial Statements include all accounts of the Company and its wholly-owned and majority-owned subsidiaries in which it has control. Inter-company accounts and transactions have been eliminated. Related party transactions between the Company and its equity method investees have not been eliminated. Non-controlling interest represents a non-controlling investor's interests in the results of subsidiaries that the Company controls and consolidates.

Planned Portfolio Transformation

On April 25, 2023, the Company announced that it entered into a Share Purchase Agreement (the “Agreement”) to acquire the climate solutions business (the "VCS Business") of Viessmann Group GmbH & Co. KG (“Viessmann”), a privately-held company, for approximately €12 billion. The VCS Business develops intelligent, integrated and sustainable technologies, including heat pumps, boilers, photovoltaic systems, home battery storage and digital solutions, primarily for residential customers in Europe. The transaction is expected to close around the end of 2023, subject to customary closing conditions and regulatory approvals. In addition, the Company also announced plans to exit its Fire & Security and Commercial Refrigeration businesses over the course of 2024. See Note 15 Acquisitions and Note 16 - Divestitures for additional information.

Deconsolidation of Kidde-Fenwal, Inc.

On May 14, 2023, Kidde-Fenwal, Inc. ("KFI") filed a petition for voluntary reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the District of Delaware. KFI, an industrial fire detection and suppression business and an indirect wholly-owned subsidiary of the Company, has indicated that it intends to use the bankruptcy process to explore strategic alternatives, including the sale of KFI as a going concern. KFI has further stated that, during the Chapter 11 process, KFI expects that there will be no significant interruptions to its business operations. As of the petition date, KFI was deconsolidated and its respective assets and liabilities were derecognized from the Company's Unaudited Condensed Consolidated Financial Statements. See Note 19 - Commitments and Contingent Liabilities for additional information.

Acquisition of Toshiba Carrier Corporation

On February 6, 2022, the Company entered into a binding agreement to acquire a majority ownership interest in Toshiba Carrier Corporation (“TCC”), a variable refrigerant flow ("VRF") and light commercial HVAC joint venture between Carrier and Toshiba Corporation. The acquisition was completed on August 1, 2022. As a result, the assets, liabilities and results of operations of TCC are consolidated in the accompanying Unaudited Condensed Consolidated Financial Statements as of the
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date of acquisition and reported within the Company’s HVAC segment. Upon closing, Toshiba Corporation retained a 5% ownership interest in TCC. See Note 15 Acquisitions for additional information.

Sale of Chubb Fire & Security Business

On July 26, 2021, the Company entered into a stock purchase agreement to sell its Chubb Fire and Security business ("Chubb") to APi Group Corporation ("APi"). Chubb, which was reported within the Company’s Fire & Security segment, delivered essential fire safety and security solutions from design and installation to monitoring, service and maintenance across more than 17 countries around the globe. The sale of Chubb was completed on January 3, 2022 (the "Chubb Sale"). See Note 16 - Divestitures for additional information.

Separation from United Technologies

On April 3, 2020 (the Distribution Date"), United Technologies Corporation ("UTC"), since renamed RTX Corporation ("Raytheon Technologies Corporation" or "RTX"), completed the spin-off of Carrier into an independent, publicly traded company (the "Separation") through a pro-rata distribution (the "Distribution") on a one-for-one basis of all of the outstanding shares of common stock of Carrier to UTC shareowners who held shares of UTC common stock as of the close of business on March 19, 2020, the record date of the Distribution. In connection with the Separation, the Company issued an aggregate principal balance of $11.0 billion of debt and transferred approximately $10.9 billion of cash to UTC on February 27, 2020 and March 27, 2020. On April 1, 2020 and April 2, 2020, the Company received cash contributions totaling $590 million from UTC related to the Separation.

Recently Issued and Adopted Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") is the sole source of authoritative U.S. GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues Accounting Standards Updates ("ASU") to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. ASUs pending adoption were assessed and determined to be either not applicable or are not expected to have a material impact on the accompanying Unaudited Condensed Consolidated Financial Statements.

NOTE 3: INVENTORIES, NET

Inventories are stated at the lower of cost or estimated net realizable value. Cost is primarily determined based on the first-in, first-out inventory method ("FIFO") or average cost methods, which approximates current replacement cost. However, certain subsidiaries use the last-in, first-out inventory method ("LIFO").

Inventories, net consisted of the following:
(In millions)June 30,
2023
December 31,
2022
Raw materials$841 $884 
Work-in-process291 230 
Finished goods1,567 1,526 
Inventories, net$2,699 $2,640 

The Company performs periodic assessments utilizing customer demand, production requirements and historical usage rates to determine the existence of excess and obsolete inventory and records necessary provisions to reduce such inventories to the lower of cost or estimated net realizable value. Raw materials, work-in-process and finished goods are net of valuation reserves of $241 million and $190 million as of June 30, 2023 and December 31, 2022, respectively.

NOTE 4: GOODWILL AND INTANGIBLE ASSETS

The Company records goodwill as the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is tested and reviewed annually for impairment on July 1 or whenever there is a material change in events or circumstances that indicates that the fair value of the reporting unit may be less than its carrying value.

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The changes in the carrying amount of goodwill were as follows:

(In millions)HVACRefrigerationFire & SecurityTotal
Balance as of December 31, 2022$6,392 $1,197 $2,388 $9,977 
Acquisitions / divestitures(11)(4)— (15)
Foreign currency translation(22)(4)(9)(35)
Balance as of June 30, 2023$6,359 $1,189 $2,379 $9,927 

Indefinite-lived intangible assets are tested and reviewed annually for impairment on July 1 or whenever there is a material change in events or circumstances that indicates that the fair value of the asset may be less than the carrying amount of the asset. All other intangible assets with finite useful lives are amortized over their estimated useful lives.

Identifiable intangible assets consisted of the following:

June 30, 2023December 31, 2022
(In millions)Gross AmountAccumulated AmortizationNet AmountGross AmountAccumulated AmortizationNet Amount
Amortized:
Customer relationships$1,408 $(754)$654 $1,431 $(720)$711 
Patents and trademarks388 (202)186 401 (191)210 
Service portfolios and other932 (655)277 953 (595)358 
2,728 (1,611)1,117 2,785 (1,506)1,279 
Unamortized:
Trademarks and other64 — 64 63 — 63 
Intangible assets, net$2,792 $(1,611)$1,181 $2,848 $(1,506)$1,342 

Amortization of intangible assets was as follows:

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Amortization expense of Intangible assets$61 $20 $125 $41 
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NOTE 5: BORROWINGS AND LINES OF CREDIT

Long-term debt consisted of the following:

(In millions)June 30,
2023
December 31,
2022
2.242% Notes due February 15, 2025
$1,200 $1,200 
2.493% Notes due February 15, 2027
900 900 
2.722% Notes due February 15, 2030
2,000 2,000 
2.700% Notes due February 15, 2031
750 750 
3.377% Notes due April 5, 2040
1,500 1,500 
3.577% Notes due April 5, 2050
2,000 2,000 
Total long-term notes8,350 8,350 
Japanese Term Loan Facility374 404 
Other debt (including project financing obligations and finance leases)146 149 
Discounts and debt issuance costs(81)(61)
Total debt8,789 8,842 
Less: current portion of long-term debt134 140 
Long-term debt, net of current portion$8,655 $8,702 
Japanese Term Loan Facility

On July 15, 2022, the Company entered into a five-year, JPY 54 billion (approximately $400 million) senior unsecured term loan facility with MUFG Bank Ltd., as administrative agent and lender, and certain other lenders (the "Japanese Term Loan Facility"). Borrowings under the Japanese Term Loan Facility bear interest at a rate equal to the Tokyo Term Risk Free Rate plus 0.75%. In addition, the Japanese Term Loan Facility is subject to customary covenants including a covenant to maintain a maximum consolidated leverage ratio. The Company capitalized $2 million of deferred financing costs which are being amortized over its term. On July 25, 2022, the Company borrowed JPY 54 billion under the Japanese Term Loan Facility and used the proceeds to fund a portion of the TCC acquisition and to pay related fees and expenses.

Revolving Credit Facility

On May 19, 2023, the Company entered into a revolving credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and certain other lenders, permitting aggregate borrowings of up to $2.0 billion pursuant to an unsecured, unsubordinated revolving credit facility that matures in May 2028 (the "Revolving Credit Facility"). The Revolving Credit Facility supports the Company's commercial paper program and can be used for other general corporate purposes. Borrowings are available in U.S. Dollars and Euros. U.S. Dollar borrowings can bear interest at either a Term SOFR Rate plus 0.10% and a rating-based margin or, alternatively, at an alternate base rate plus a ratings-based margin. Euro borrowings bear interest at an adjusted EURIBOR rate plus a ratings-based margin. A ratings-based commitment fee is charged on unused commitments. Upon entering into the agreement, the Company terminated its existing revolving credit facility that was set to mature in April 2025. In addition, the Company capitalized $2 million of deferred financing costs which are being amortized over its term. As of June 30, 2023, there were no borrowings outstanding under the Revolving Credit Facility.

Commercial Paper Program

The Company has a $2.0 billion unsecured, unsubordinated commercial paper program, which can be used for general corporate purposes, including the funding of working capital and potential acquisitions. As of June 30, 2023, there were no borrowings outstanding under the commercial paper program.

Project Financing Arrangements

The Company is involved in long-term construction contracts in which it arranges project financing with certain customers. As a result, the Company issued $6 million and $21 million of debt during the six months ended June 30, 2023 and 2022, respectively. Long-term debt repayments associated with these financing arrangements during the six months ended June 30, 2023 and 2022 were $12 million and $12 million, respectively.
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Debt Covenants

The Revolving Credit Facility, the indenture for the long-term notes and the Japanese Term Loan Facility contain affirmative and negative covenants customary for financings of these types, which, among other things, limit the Company's ability to incur additional liens, to make certain fundamental changes and to enter into sale and leaseback transactions. As of June 30, 2023, the Company was in compliance with the covenants under the agreements governing its outstanding indebtedness.

Tender Offers

On March 15, 2022, the Company commenced tender offers to purchase up to $1.15 billion ("Aggregate Tender Cap") aggregate principal of the Company's 2.242% Notes due 2025 and 2.493% Notes due 2027 (together, the "Senior Notes"). The tender offers included payment of applicable accrued and unpaid interest up to the settlement date, along with a fixed spread for early repayment. Based on participation, the Company elected to settle the tender offers on March 30, 2022. The aggregate principal amount of Senior Notes validly tendered and accepted was approximately $1.15 billion, which included $800 million of Notes due 2025 and $350 million of Notes due 2027. As a result, the Company recognized a net gain of $33 million and wrote off $5 million of unamortized deferred financing costs within Interest (expense) income, net on the accompanying Unaudited Condensed Consolidated Statement of Operations during the three months ended March 31, 2022.

NOTE 6: FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurement ("ASC 820"), defines fair value as the price that would be received if an asset is sold or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors, including foreign currency and commodity price risk. These exposures are managed through operational strategies and the use of undesignated hedging contracts. The Company's derivative assets and liabilities are measured at fair value on a recurring basis using internal models based on observable market inputs, such as forward, interest, contract and discount rates with changes in fair value reported in Other income (expense), net in the accompanying Unaudited Condensed Consolidated Statement of Operations.

In connection with the TCC acquisition, the Company funded a portion of the Yen-denominated purchase price with cash on hand by entering into cross currency swaps with SMBC Capital Markets, Inc., as syndication swap arranger, and certain other financial institutions. The cross currency swaps are measured at fair value on a recurring basis using observable market inputs, such as forward, discount and interest rates as well as credit default swap spreads. The Company designated the cross currency swaps as a partial hedge of its investment in certain subsidiaries whose functional currency is the Japanese Yen in order to manage foreign currency translation risk. As a result, changes in the fair value of the swaps are recorded in Equity in the accompanying Unaudited Condensed Consolidated Balance Sheet.

The remaining portion of the Yen-denominated purchase price was funded by the Japanese Term Loan Facility. The carrying value of the facility is translated on a recurring basis using the exchange rate at the end of the applicable period and approximates its fair value. The Company designated the Japanese Term Loan Facility as a partial hedge of its investment in certain subsidiaries whose functional currency is the Japanese Yen in order to manage foreign currency translation risk. As a result, changes in the carrying value of the Japanese Term Loan Facility associated with foreign exchange rate movements are recorded in Equity in the Unaudited Condensed Consolidated Balance Sheet.

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In connection with the proposed acquisition of the VCS Business, the Company entered into window forward contracts with Bank of America N.A. and JPMorgan Chase Bank N.A. to mitigate the foreign currency risk of the expected cash outflows associated with the Euro-denominated purchase price. The instruments have an aggregate notional amount of €7 billion and a settlement window between November 28, 2023 and February 27, 2024. The window forward contracts are measured at fair value on a recurring basis using observable market inputs, such as forward, discount and interest rates with changes in fair value reported in Other income (expense), net in the accompanying Unaudited Condensed Consolidated Statement of Operations. During the three months ended June 30, 2023, the Company recognized a $111 million loss on the mark-to-market valuation of its window forward contracts.

The following tables provide the valuation hierarchy classification of assets and liabilities that are recorded at fair value and measured on a recurring basis in the accompanying Unaudited Condensed Consolidated Balance Sheet:

(In millions)TotalLevel 1Level 2Level 3
June 30, 2023
Derivative assets (1)(3)
$18 $— $18 $— 
Derivative liabilities (2)(3)
$(176)$— $(176)$— 
December 31, 2022
Derivative assets (1) (3)
$28 $— $28 $— 
Derivative liabilities (2) (3)
$(48)$— $(48)$— 
(1) Included in Other assets, current on the accompanying Unaudited Condensed Consolidated Balance Sheet.
(2) Included in Accrued liabilities on the accompanying Unaudited Condensed Consolidated Balance Sheet.
(3) Includes cross currency swaps and window forward contracts.

The following table provides the carrying amounts and fair values of the Company's long-term notes that are not recorded at fair value in the accompanying Unaudited Condensed Consolidated Balance Sheet:

June 30, 2023December 31, 2022
(In millions)Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Total long-term Notes (1)
$8,350 $6,943 $8,350 $6,832 
(1) Excludes debt discount and issuance costs.

The fair value of the Company's long-term debt is measured based on observable market inputs which are considered Level 1 within the fair value hierarchy. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximate fair value due to the short-term nature of these accounts and would be classified as Level 1 in the fair value hierarchy. The Company's financing leases and project financing obligations, included in Long-term debt and Current portion of long-term debt on the accompanying Unaudited Condensed Consolidated Balance Sheet, approximate fair value and are classified as Level 3 in the fair value hierarchy.

NOTE 7: EMPLOYEE BENEFIT PLANS

The Company sponsors both funded and unfunded domestic and international defined benefit pension and defined contribution plans. In addition, the Company contributes to various domestic and international multi-employer pension plans.

Contributions to the plans were as follows:

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Defined benefit plans$$$11 $
Defined contribution plans$29 $28 $66 $66 
Multi-employer pension plans$$$$

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The components of net periodic pension expense (benefit) for the defined benefit pension plans are as follows:

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Service cost$$$$
Interest cost16 
Expected return on plan assets(8)(6)(16)(13)
Amortization of prior service credit— 
Recognized actuarial net (gain) loss(1)(1)
Net periodic pension expense (benefit)$4 $5 $8 $10 

NOTE 8: STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation plans in accordance with ASC 718, Compensation - Stock Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured at the date of grant and is generally not adjusted for subsequent changes. The Company's stock-based compensation plans include programs for stock appreciation rights, restricted stock units and performance share units.

Stock-based compensation expense, net of estimated forfeitures, is included in Cost of products sold, Selling, general and administrative and Research and development in the accompanying Unaudited Condensed Consolidated Statements of Operations.

Stock-based compensation cost by award type was as follows:
 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Equity compensation costs - equity settled$18 $20 $40 $41 
Equity compensation costs - cash settled (1)
(11)(17)
Total stock-based compensation expense$19 $9 $42 $24 
(1) The cash settled awards are classified as liability awards and are measured at fair value at each balance sheet date.

NOTE 9: PRODUCT WARRANTIES

In the ordinary course of business, the Company provides standard warranty coverage on its products. Provisions for these amounts are established at the time of sale and estimated primarily based on product warranty terms and historical claims experience. In addition, the Company incurs discretionary costs to service its products in connection with specific product performance issues. Provisions for these amounts are established when they are known and estimable. The Company assesses the adequacy of its initial provisions and will make adjustments as necessary based on known or anticipated claims or as new information becomes available that suggests it is probable that future costs will be different than estimated amounts. Amounts associated with these provisions are classified on the accompanying Unaudited Condensed Consolidated Balance Sheet as Accrued liabilities or Other long-term liabilities based on their anticipated settlement date.

The changes in the carrying amount of warranty related provisions are as follows:
Six Months Ended June 30,
(In millions)20232022
Balance as of January 1,$552 $524 
Warranties, performance guarantees issued and changes in estimated liability117 84 
Settlements made(92)(78)
Other(2)(5)
Balance as of June 30,$575 $525 

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NOTE 10: EQUITY

The authorized number of shares of common stock of Carrier is 4,000,000,000 shares of $0.01 par value. As of June 30, 2023 and December 31, 2022, 880,570,371 and 876,487,480 shares of common stock were issued, respectively, which includes 43,490,981 and 42,103,995 shares of treasury stock, respectively.

Share Repurchase Program

The Company may repurchase its outstanding common stock from time to time subject to market conditions and at the Company's discretion. Repurchases occur in the open market or through one or more other public or private transactions pursuant to plans complying with Rules 10b5-1 and 10b-18 under the Exchange Act. Shares acquired are recognized at cost and presented separately on the balance sheet as a reduction to Equity. Since the initial authorization in February 2021, the Company's Board of Directors authorized the repurchase of up to $4.1 billion of the Company's outstanding common stock. As of December 31, 2022, the Company repurchased 42.1 million shares of common stock for an aggregate purchase price of $1.9 billion, including shares repurchased under an accelerated share repurchase agreement. As a result, the Company had approximately $2.2 billion remaining under the current authorization at December 31, 2022.

During the six months ended June 30, 2023, the Company repurchased 1.4 million shares of common stock for an aggregate purchase price of $62 million. As a result, the Company has approximately $2.1 billion remaining under the current authorization at June 30, 2023.

Accumulated Other Comprehensive Income (Loss)

A summary of changes in the components of Accumulated other comprehensive income (loss) for the three and six months ended June 30, 2023 is as follows:
(In millions)Foreign Currency TranslationDefined Benefit Pension and Post-retirement PlansAccumulated Other Comprehensive Income (Loss)
Balance as of December 31, 2022$(1,604)$(84)$(1,688)
Other comprehensive income (loss) before reclassifications, net52 — 52 
Amounts reclassified, pre-tax— — — 
Tax expense (benefit) reclassified— — — 
Balance as of March 31, 2023$(1,552)$(84)$(1,636)
Other comprehensive income (loss) before reclassifications, net(55)— (55)
Amounts reclassified, pre-tax— — — 
Tax expense (benefit) reclassified— — — 
Balance as of June 30, 2023$(1,607)$(84)$(1,691)

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A summary of changes in the components of Accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 is as follows:
(In millions)Foreign Currency TranslationDefined Benefit Pension and Post-retirement PlansAccumulated Other Comprehensive Income (Loss)
Balance as of December 31, 2021$(505)$(484)$(989)
Other comprehensive income (loss) before reclassifications, net(61)(4)(65)
Amounts reclassified, pre-tax— 
Tax expense (benefit) reclassified— (1)(1)
Chubb divestiture(574)329 (245)
Balance as of March 31, 2022$(1,140)$(157)$(1,297)
Other comprehensive income (loss) before reclassifications, net(480)— (480)
Amounts reclassified, pre-tax— 
Tax expense (benefit) reclassified— (1)(1)
Balance as of June 30, 2022$(1,620)$(155)$(1,775)
NOTE 11: REVENUE RECOGNITION

The Company accounts for revenue in accordance with ASC 606: Revenue from Contracts with Customers. Revenue is recognized when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. A significant portion of the Company's performance obligations are recognized at a point-in-time when control of the product transfers to the customer, which is generally at the time of shipment. The remaining portion of the Company’s performance obligations are recognized over time as the customer simultaneously obtains control as the Company performs work under a contract, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment.

Sales disaggregated by product and service are as follows:

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Sales Type
Product$3,754 $3,005 $6,955 $5,644 
Service462 383 883 714 
HVAC sales4,216 3,388 7,838 6,358 
Product858 925 1,645 1,792 
Service114 116 225 225 
Refrigeration sales972 1,041 1,870 2,017 
Product869 838 1,682 1,609 
Service63 49 119 96 
Fire & Security sales932 887 1,801 1,705 
Total segment sales6,120 5,316 11,509 10,080 
Eliminations and other(128)(105)(244)(215)
Net sales$5,992 $5,211 $11,265 $9,865 

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Contract Balances

Total contract assets and contract liabilities consisted of the following:

(In millions)June 30,
2023
December 31,
2022
Contract assets, current$578 $537 
Contract assets, non-current (included within Other assets)
Total contract assets586 543 
Contract liabilities, current(483)(449)
Contract liabilities, non-current (included within Other long-term liabilities)
(170)(174)
Total contract liabilities (653)(623)
Net contract assets (liabilities)$(67)$(80)

The timing of revenue recognition, billings and cash collections results in contract assets and contract liabilities. Contract assets relate to the conditional right to consideration for any completed performance under a contract when costs are incurred in excess of billings under the percentage-of-completion methodology. Contract liabilities relate to payments received in advance of performance under a contract or when the Company has a right to consideration that is conditioned upon transfer of a good or service to a customer. Contract liabilities are recognized as revenue as (or when) the Company performs under the contract.

The Company recognized revenue of $264 million during the six months ended June 30, 2023 that related to contract liabilities as of January 1, 2023. The Company expects a majority of its current contract liabilities at the end of the period to be recognized as revenue in the next 12 months.

NOTE 12: RESTRUCTURING COSTS

The Company incurs costs associated with restructuring initiatives intended to improve operating performance, profitability and working capital levels. Actions associated with these initiatives may include improving productivity, workforce reductions and the consolidation of facilities. Due to the size, nature and frequency of these discrete plans, they are fundamentally different from the Company's ongoing productivity actions.

The Company recorded net pre-tax restructuring costs for new and ongoing restructuring initiatives as follows:

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
HVAC$$$$
Refrigeration10 
Fire & Security(1)12 
Total Segment11 24 21 
General corporate expenses— 
Total restructuring costs$9 $13 $26 $23 
Cost of sales$$$$
Selling, general and administrative17 16 
Total restructuring costs$9 $13 $26 $23 



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The following table summarizes the reserve and charges relating to the restructuring reserve, included in Accrued liabilities on the accompanying Unaudited Condensed Consolidated Balance Sheet:

Six Months Ended June 30,
(In millions)20232022
Balance as of January 1,$24 $54 
Net pre-tax restructuring costs26 23 
Utilization, foreign exchange and other(19)(34)
Balance as of June 30,$31 $43 

During the six months ended June 30, 2023 and 2022, charges associated with restructuring initiatives related to cost reduction efforts. Amounts recognized primarily related to severance due to workforce reductions and exit costs due to the consolidation of field operations. As of June 30, 2023, the Company had $31 million accrued for costs associated with its announced restructuring initiatives, all of which is expected to be paid within one year.

NOTE 13: INCOME TAXES

The Company accounts for income tax expense in accordance with ASC 740, Income Taxes ("ASC 740"), which requires an estimate of the annual effective income tax rate for the full year to be applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year. The effective tax rate was 44.8% for the three months ended June 30, 2023 compared with 22.5% for the three months ended June 30, 2022. The year-over-year increase was primarily driven by the non-deductible losses of $293 million on the deconsolidation of KFI due to its Chapter 11 filing and the $111 million loss on the mark-to-market valuation of the Company's window forward contracts associated with the expected cash outflows of the Euro-denominated purchase price of the VCS Business.

The effective tax rate was 33.4% for the six months ended June 30, 2023 compared with 19.3% for the six months ended June 30, 2022. The year-over-year increase was primarily driven by the non-deductible losses of $293 million on the deconsolidation of KFI due to its Chapter 11 filing and the $111 million loss on the mark-to-market valuation of the Company's window forward contracts associated with the expected cash outflows of the Euro-denominated purchase price of the VCS Business. In addition, the six months ended June 30, 2022 included a lower effective tax rate on the $1.1 billion Chubb gain compared with the Company's U.S. statutory rate and a favorable tax adjustment of $32 million associated with foreign tax credits generated and utilized in the prior year.

The Company assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income that may be available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies and forecasts of taxable income. The Company considers all negative and positive evidence, including the weight of the evidence, to determine whether valuation allowances against deferred tax assets are required. The Company maintains valuation allowances against certain deferred tax assets.

The Company conducts business globally and files income tax returns in U.S. federal, state and foreign jurisdictions. In certain jurisdictions, the Company's operations were included in UTC's combined tax returns for the periods through the Distribution. The U.S. Internal Revenue Service ("IRS") is currently auditing UTC's 2017 and 2018 tax years and this audit could conclude within the next twelve months. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including Australia, Belgium, Canada, China, Czech Republic, France, Germany, Hong Kong, India, Italy, Mexico, the Netherlands, Singapore, the United Kingdom and the United States. The Company is no longer subject to U.S. federal income tax examination for years prior to 2017 and, with few exceptions, is no longer subject to state, local and foreign income tax examinations for tax years prior to 2013.

In the ordinary course of business, there is inherent uncertainty in quantifying the Company's income tax positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. The Company believes that it is reasonably possible that a net decrease in unrecognized tax benefits of $55 million to $70 million may occur within 12 months as a result of additional uncertain tax positions, the Separation, the revaluation of uncertain tax positions arising from examinations, appeals, court decisions and/or the expiration of tax statutes.
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NOTE 14: EARNINGS PER SHARE

Earnings per share is computed by dividing Net income attributable to common shareowners by the weighted-average number of shares of common stock outstanding during the period (excluding treasury stock). Diluted earnings per share is computed by giving effect to all potentially dilutive stock awards that are outstanding. The computation of diluted earnings per share excludes the effect of the potential exercise of stock-based awards, including stock appreciation rights and stock options, when the effect of the potential exercise would be anti-dilutive.

The following table summarizes the weighted-average number of shares of common stock outstanding for basic and diluted earnings per share calculations:

Three Months Ended June 30,Six Months Ended June 30,
(In millions, except per share amounts)2023202220232022
Net income attributable to common shareowners$199 $573 $572 $1,952 
Basic weighted-average number of shares outstanding836.0 845.7 835.5 849.5 
Stock awards and equity units (share equivalent)14.9 17.0 16.0 18.9 
Diluted weighted-average number of shares outstanding850.9 862.7 851.5 868.4 
Antidilutive shares excluded from computation of diluted earnings per share5.9 4.5 5.6 2.9 
Earnings Per Share
Basic$0.24 $0.68 $0.68 $2.30 
Diluted$0.23 $0.67 $0.67 $2.25 

NOTE 15: ACQUISITIONS

Acquisitions are recorded using the acquisition method of accounting in accordance with ASC 805, Business Combinations. As a result, the aggregate purchase price has been allocated to assets acquired and liabilities assumed based on the estimate of fair market value of such assets and liabilities at the date of acquisition.

Toshiba Carrier Corporation

On February 6, 2022, the Company entered into a binding agreement to acquire a majority ownership interest in TCC for $920 million. TCC, a VRF and light commercial HVAC joint venture between Carrier and Toshiba Corporation, designs and manufactures flexible, energy-efficient and high-performance VRF and light commercial HVAC systems as well as commercial products, compressors and heat pumps. The acquisition included all of TCC’s advanced research and development centers and global manufacturing operations, product pipeline and the long-term use of Toshiba’s iconic brand. The acquisition was completed on August 1, 2022 and funded through the Japanese Term Loan Facility and cash on hand. Upon closing, Toshiba Corporation retained a 5% ownership interest in TCC.
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The preliminary allocation of the purchase price is as follows:

(In millions)August 1, 2022
Cash and cash equivalents$462 
Accounts receivable426 
Inventories373 
Other assets, current54 
Fixed assets343 
Intangible assets965 
Goodwill876 
Other assets293 
Accounts payable(412)
Accrued liabilities(445)
Contract liabilities, current(21)
Other long-term liabilities(574)
Net assets acquired$2,340 
Less: Fair value of non-controlling interests(22)
Less: Fair value of previously held TCC equity investments(1,398)
Total cash consideration$920 

The excess purchase price over the estimated fair value of the net assets acquired was recognized as goodwill and totaled $876 million, which is not deductible for tax purposes. Accounts receivable and current liabilities were stated at their historical carrying value, which approximates fair value given the short-term nature of these assets and liabilities. The estimate of fair value for inventory and fixed assets was based on an assessment of the acquired assets' condition as well as an evaluation of the current market value of such assets. The sale agreement included several customary provisions to settle working capital and other transaction-related items as of the date of sale. During 2022, the parties finalized these amounts in accordance with the terms of the sale agreement and the Company paid an additional $41 million to Toshiba Corporation in 2023. In addition, the parties finalized amounts related to pension funding levels during the year which resulted in the Company receiving $12 million from Toshiba Corporation.

The Company recorded intangible assets based on its preliminary estimate of fair value which consisted of the following:

(In millions)Estimated Useful Life (in years)Intangible Assets Acquired
Customer relationships23$497 
Technology7220 
Trademark26180 
Backlog160 
Land use rights45
Total intangible assets acquired$965 

The valuation of intangible assets was determined using an income approach methodology including the multi-period excess earnings method and the relief from royalty method. Key assumptions used in estimating future cash flows included projected revenue growth rates, EBIT margins, discount rates, customer attrition rates and royalty rates among others. The projected future cash flows are discounted to present value using an appropriate discount rate. As of June 30, 2023, the Company finalized the process of allocating the purchase price and valuing the acquired assets and liabilities except for certain amounts associated with income taxes.

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The Company previously accounted for its minority ownership in TCC under the equity method of accounting. In connection with the transaction, the carrying value of the Company's previously held TCC equity investments were recognized at fair value at the date of acquisition using an income approach methodology. As a result, the Company recognized a $696 million non-cash gain within Other income (expense), net on the accompanying Unaudited Condensed Consolidated Statement of Operations. In addition, the assets, liabilities and results of operations of TCC are consolidated in the accompanying Unaudited Condensed Consolidated Financial Statements as of the date of acquisition and reported within the Company's HVAC segment. The Company incurred $29 million of acquisition-related costs during 2022, of which $13 million was recognized during the six months ended June 30, 2022 and included within Selling, general and administrative on the accompanying Unaudited Condensed Consolidated Statement of Operations. The Company has not included pro forma financial information required under ASC 805 as the pro forma impact was not significant.

Announced Acquisition

On April 25, 2023, the Company announced that it entered into an Agreement to acquire the VCS Business, a privately-held company, for approximately €12 billion. The VCS Business develops intelligent, integrated and sustainable technologies, including heat pumps, boilers, photovoltaic systems, home battery storage and digital solutions, primarily for residential customers in Europe. Under the terms of the Agreement, 20% of the purchase price will be paid in Carrier common stock, issued directly to Viessmann and subject to long-term lock-up provisions, and 80% will be paid in cash, subject to working capital and other adjustments. The Company intends to finance the acquisition with a combination of cash on hand and new debt financing and expects the transaction to close around the end of 2023, subject to customary closing conditions and regulatory approvals.

On April 25, 2023, the Company entered into commitment letters with JPMorgan Chase Bank, N.A., BofA Securities, Inc. and Bank of America, N.A. to provide a €8.2 billion aggregate principal, senior unsecured bridge term loan facility (the "Bridge Loan"). Proceeds from the Bridge Loan are expected to be used to fund a portion of the Euro-denominated purchase price of the VCS Business if other debt financing is not secured by the acquisition date. The Company capitalized $36 million of deferred financing costs associated with the Bridge Loan which are being amortized over the commitment period. On May 19, 2023, the aggregate principal amount of the Bridge Loan was reduced by €2.3 billion upon entering into a senior unsecured delayed draw term loan credit agreement. As a result, the Company accelerated the amortization on $10 million of deferred financing costs during the period in Interest expense.

On May 19, 2023, the Company entered into a senior unsecured delayed draw term loan credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and certain other lenders that permits aggregate borrowings of up to €2.3 billion (the "Delayed Draw Facility"). Proceeds from the Delayed Draw Facility are expected to be used to fund a portion of the Euro-denominated purchase price of the VCS Business. The Company capitalized $4 million of deferred financing costs associated with the Delayed Draw Facility which will be amortized over the term once the facility is drawn upon. In addition, the Company entered into a 364-day, $500 million, senior unsecured revolving credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and certain other lenders (the "Revolver") on May 19, 2023. Proceeds from the Revolver become available upon closing the purchase of the VCS Business.

NOTE 16: DIVESTITURES

Sale of Chubb Fire & Security Business

On January 3, 2022, the Company completed the Chubb Sale for net proceeds of $2.9 billion. Chubb, which was reported within the Company’s Fire & Security segment, delivered essential fire safety and security solutions from design and installation to monitoring, service and maintenance across more than 17 countries around the globe. The sale agreement included several customary provisions to settle working capital and other transaction-related items as of the date of sale. The parties finalized these amounts in accordance with the terms of the sale agreement during 2022. During the six months ended June 30, 2022, the Company recognized a net gain on the sale of $1.1 billion, which is included in Other income (expense), net on the accompanying Unaudited Condensed Consolidated Statement of Operations.

Planned Portfolio Transformation

On April 25, 2023, the Company announced plans to exit its Fire & Security and Commercial Refrigeration businesses over the course of 2024. Carrier expects to use the proceeds from these transactions to reduce leverage, advance the Company’s capital allocation priorities and for general corporate purposes. The planned exit is not expected to impact UTEC, Fire & Security’s controls business for residential HVAC customers or the Sensitech monitoring businesses.
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NOTE 17: SEGMENT FINANCIAL DATA

The Company conducts its operations through three reportable operating segments: HVAC, Refrigeration and Fire & Security. In accordance with ASC 280 - Segment Reporting, the Company's segments maintain separate financial information for which results of operations are evaluated on a regular basis by the Company's Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance.

The HVAC segment provides products, controls, services and solutions to meet the heating, cooling and ventilation needs of residential and commercial customers while enhancing building performance, health, energy efficiency and sustainability.

The Refrigeration segment includes transport refrigeration and monitoring products, services and digital solutions for trucks, trailers, shipping containers, intermodal and rail, as well as commercial refrigeration products.

The Fire & Security segment provides a wide range of residential, commercial and industrial technologies designed to help protect people and property.

The Company's customers are in both the public and private sectors and its businesses reflect extensive geographic diversification. Inter-company sales between segments are immaterial.

Net sales and Operating profit by segment are as follows:

Net SalesOperating Profit
 Three Months Ended June 30, Three Months Ended June 30,
(In millions)2023202220232022
HVAC$4,216 $3,388 $742 $585 
Refrigeration972 1,041 112 147 
Fire & Security932 887 (157)134 
Total segment6,120 5,316 697 866 
Eliminations and other(128)(105)(146)(16)
General corporate expenses— — (62)(31)
Total Consolidated$5,992 $5,211 $489 $819 


Net SalesOperating Profit
Six Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
HVAC$7,838 $6,358 $1,177 $1,055 
Refrigeration1,870 2,017 220 254 
Fire & Security1,801 1,705 (64)1,352 
Total segment11,509 10,080 1,333 2,661 
Eliminations and other(244)(215)(184)(40)
General corporate expenses— — (105)(65)
Total Consolidated$11,265 $9,865 $1,044 $2,556 
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Geographic external sales are attributed to the geographic regions based on their location of origin. With the exception of the U.S. presented in the table below, there were no individually significant countries with sales exceeding 10% of total sales during the six months ended June 30, 2023 and 2022.

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
United States $3,389 $3,171 $6,249 $5,955 
International:
Europe1,205 1,119 2,401 2,164 
Asia Pacific1,194 713 2,227 1,365 
Other204 208 388 381 
Net sales$5,992 $5,211 $11,265 $9,865 

NOTE 18: RELATED PARTIES

Equity Method Investments

The Company sells products to and purchases products from unconsolidated entities accounted for under the equity method and, therefore, these entities are considered to be related parties. Amounts attributable to equity method investees are as follows:

 Three Months Ended June 30,Six Months Ended June 30,
(In millions)2023202220232022
Sales to equity method investees included in Product sales
$887 $787 $1,641 $1,411 
Purchases from equity method investees included in Cost of products sold
$59 $91 $102 $201 

The Company had receivables from and payables to equity method investees as follows:

(In millions)June 30,
2023
December 31,
2022
Receivables from equity method investees included in Accounts receivable, net
$364 $154 
Payables to equity method investees included in Accounts payable
$39 $44 

23


NOTE 19: COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in various litigation, claims and administrative proceedings, including those related to environmental (including asbestos) and legal matters. In accordance with ASC 450, Contingencies, the Company records accruals for loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These accruals are generally based upon a range of possible outcomes. If no amount within the range is a better estimate than any other, the Company accrues the minimum amount. In addition, these estimates are reviewed periodically and adjusted to reflect additional information when it becomes available. The Company is unable to predict the final outcome of the following matters based on the information currently available, except as otherwise noted. However, the Company does not believe that the resolution of any of these matters will have a material adverse effect upon its results of operations, cash flows or financial condition.

Environmental Matters

The Company’s operations are subject to environmental regulation by various authorities. The Company has accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to individual sites, including the technology required to remediate, current laws and regulations and prior remediation experience.

The outstanding liabilities for environmental obligations are as follows:

(In millions)June 30,
2023
December 31,
2022
Environmental reserves included in Accrued liabilities
$15 $24 
Environmental reserves included in Other long-term liabilities
203 211 
Total Environmental reserves$218 $235 

For sites with multiple responsible parties, the Company considers its likely proportionate share of the anticipated remediation costs and the ability of other parties to fulfill their obligations in establishing a provision for these costs. Accrued environmental liabilities are not reduced by potential insurance reimbursements and are undiscounted.

Asbestos Matters

The Company has been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos allegedly integrated into certain Carrier products or business premises. While the Company has never manufactured asbestos and no longer incorporates it into any currently-manufactured products, certain products that the Company no longer manufactures contained components incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or have been covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos-related claims were not material individually or in the aggregate in any period.

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The Company's asbestos liabilities and related insurance recoveries are as follows:

(In millions)June 30,
2023
December 31,
2022
Asbestos liabilities included in Accrued liabilities
$16 $16 
Asbestos liabilities included in Other long-term liabilities
207 212 
Total Asbestos liabilities$223 $228 
Asbestos-related recoveries included in Other assets, current
$$
Asbestos-related recoveries included in Other assets
89 90 
Total Asbestos-related recoveries$94 $95 

The amounts recorded for asbestos-related liabilities are based on currently available information and assumptions that the Company believes are reasonable and are made with input from outside actuarial experts. These amounts are undiscounted and exclude the Company’s legal fees to defend the asbestos claims, which are expensed as incurred. In addition, the Company has recorded insurance recovery receivables for probable asbestos-related recoveries.

UTC Equity Awards Conversion Litigation

On August 12, 2020, several former employees of UTC or its subsidiaries filed a putative class action complaint (the "Complaint") in the United States District Court for the District of Connecticut against Raytheon Technologies Corporation, Carrier, Otis Worldwide Corporation ("Otis"), the former members of the UTC Board of Directors and the members of the Carrier and Otis Boards of Directors (Geraud Darnis, et al. v. Raytheon Technologies Corporation, et al.). The Complaint challenged the method by which UTC equity awards were converted to UTC, Carrier and Otis equity awards following the Separation and the Distribution. Defendants moved to dismiss the Complaint. Plaintiffs amended their Complaint on September 13, 2021 (the "Amended Complaint"). The Amended Complaint, with Raytheon Technologies Corporation, Carrier and Otis as the only defendants, asserted that the defendants are liable for breach of certain equity compensation plans and for breach of the implied covenant of good faith and fair dealing. The Amended Complaint also sought specific performance. The Company believes all plaintiffs' claims against it are without merit. Defendants moved to dismiss the Amended Complaint. On September 30, 2022, the court dismissed the case against all defendants, with prejudice. Plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. Oral arguments on the appeal were held before the Second Circuit on June 29, 2023 and a decision is pending.

Aqueous Film Forming Foam Litigation

As of June 30, 2023, the Company, KFI and others have been named as defendants in more than 4,500 lawsuits filed by individuals in or removed to the federal courts of the United States alleging that the historic use of Aqueous Film Forming Foam ("AFFF") caused personal injuries and/or property damage. The Company, KFI and others have also been named as defendants in more than 500 lawsuits filed by several U.S. states, municipalities and water utilities in or removed to U.S. federal courts alleging that the historic use of AFFF caused contamination of property and water supplies. In December 2018, the U.S. Judicial Panel on Multidistrict Litigation transferred and consolidated all AFFF cases pending in the U.S. federal courts against the Company, KFI and others to the U.S. District Court for the District of South Carolina (the "MDL Proceedings"). The individual plaintiffs in the MDL Proceedings generally seek damages for alleged personal injuries, medical monitoring, diminution in property value and injunctive relief to remediate alleged contamination of water supplies. The U.S. state, municipal and water utility plaintiffs in the MDL Proceedings generally seek damages and costs related to the remediation of public property and water supplies.

AFFF is a firefighting foam, developed beginning in the late 1960s pursuant to U.S. military specification, used to extinguish certain types of hydrocarbon-fueled fires. The lawsuits identified above relate to Kidde Fire Fighting, Inc. which owned the National Foam business. Kidde Fire Fighting, Inc. was acquired by a UTC subsidiary in 2005 and merged into KFI in 2007. The National Foam business manufactured AFFF for sale to government (including the U.S. federal government) and non-government customers in the U.S. at a single facility located in West Chester, Pennsylvania (the "Pennsylvania Site"). In 2013, KFI divested the AFFF businesses to an unrelated third party. The Company acquired KFI as part of the Separation in April 2020.

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The key components that contribute to AFFF's fire-extinguishing capabilities are known as fluorosurfactants. Neither the Company, nor KFI, nor any of the Company's subsidiaries involved in the AFFF litigation manufactured fluorosurfactants. Instead, the National Foam business purchased these substances from unrelated third parties for use in manufacturing AFFF. Plaintiffs in the MDL Proceedings allege that the fluorosurfactants used by various manufacturers in producing AFFF contained, or over time degraded into, compounds known as per- and polyfluoroalkyl substances (referred to collectively as "PFAS"), including perflourooctanesulfonic acid ("PFOS") and perflourooctanoic acid ("PFOA"). Plaintiffs further allege that, as a result of the use of AFFF, PFOS and PFOA were released into the environment and, in some instances, ultimately reached drinking water supplies.

Plaintiffs in the MDL Proceedings allege that PFOS and PFOA contamination has resulted from the use of AFFF manufactured using a process known as ECF, and that this process was used exclusively by 3M. They also allege that PFOA contamination has resulted from the use of AFFF manufactured using a different process, known as telomerization, and that this process was used exclusively by the other AFFF manufacturers (including the National Foam business). Compounds containing PFOS and PFOA (as well as many other PFAS) have also been used for decades by many third parties in a number of different industries to manufacture firefighters’ protective outerwear, carpets, clothing, fabrics, cookware, food packaging, personal care products, cleaning products, paints, varnishes and other consumer and industrial products.

Plaintiffs in the MDL Proceedings have named multiple defendants, including suppliers of chemicals and raw materials used to manufacture fluorosurfactants, fluorosurfactant manufacturers and AFFF manufacturers. The defendants in the MDL Proceedings moved for summary judgment on the government contractor defense, which potentially applies to AFFF sold to or used by the U.S. government. After full briefing and oral argument, on September 16, 2022, the MDL court declined to enter summary judgment for the defendants. The defense, however, remains available at any trial to which it applies.

On September 23, 2022, after completion of discovery, the MDL court selected one water provider case, the City of Stuart, FL v. 3M, et al., for a bellwether trial. That trial was scheduled to begin in early June 2023 but was postponed indefinitely. The MDL court ordered that the bellwether process for personal injury cases will begin in 2023. The court has not yet outlined details on that process or its timing.

Outside of the MDL Proceedings, the Company and other defendants also are party to six lawsuits in U.S. state courts brought by oil refining companies alleging product liability claims related to legacy sales of AFFF and seeking damages for the costs to replace the product and for property damage. In addition, the Company and other defendants are party to two actions related to the Pennsylvania Site in which the plaintiff water utility company seeks remediation costs related to the alleged contamination of the local water supply.

The Company, KFI and other defendants are also party to one action in Arizona state court brought by a firefighter claiming that occupational exposure to AFFF has caused certain personal injuries. The Company and KFI believe that they have meritorious defenses to the claims in the MDL Proceedings and the other AFFF lawsuits. Given the numerous factual, scientific and legal issues to be resolved relating to these claims, the Company is unable to assess the probability of liability or to reasonably estimate a range of possible loss at this time. There can be no assurance that any such future exposure will not be material in any period.

On May 14, 2023, KFI filed a voluntary petition with the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the Bankruptcy Code after the Company determined that it would not provide financial support to KFI going forward, other than ensuring KFI has access to services necessary for the effective operation of its business. As a result, all litigation against KFI is automatically stayed. KFI filed an adversary complaint and motion in the Chapter 11 case seeking an order staying or enjoining all AFFF-related litigation against the Company, its other subsidiaries and RTX. KFI has also indicated to the bankruptcy court that it intends to pursue insurance coverage for AFFF-related liabilities and contractual indemnification for AFFF-related liabilities from the third party to which KFI sold National Foam.

Deconsolidation Due to Bankruptcy

As of May 14, 2023, the Company no longer controls KFI as their activities are subject to review and oversight by the bankruptcy court. Therefore, KFI was deconsolidated and their respective assets and liabilities were derecognized from the Company’s Unaudited Condensed Consolidated Financial Statements. Upon deconsolidation, the Company determined the fair value of its retained interest in KFI to be zero and will account for it prospectively using the cost method. As a result of these actions, the Company recognized a loss of $293 million in its Unaudited Condensed Consolidated Statements of Operations
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within Other income/(expense), net. In addition, the deconsolidation resulted in an investing cash outflow of $134 million in the Company's Unaudited Condensed Consolidated Statements of Cash Flows.

In connection with the bankruptcy filing, KFI entered into several agreements with subsidiaries of the Company to ensure they have access to services necessary for the effective operation of their business. All post-deconsolidation activity between the Company and KFI are reported as third-party transactions recorded within the Company's Unaudited Condensed Consolidated Statements of Operations. Since the petition date, there were no material transactions between the Company and KFI.

Income Taxes

Under the Tax Matters Agreement relating to the Separation, the Company is responsible to UTC for its share of the Tax Cuts and Jobs Act transition tax associated with foreign undistributed earnings as of December 31, 2017. As a result, liabilities of $75 million and $293 million are included within the accompanying Unaudited Condensed Consolidated Balance Sheet within Accrued Liabilities and Other Long-Term Liabilities as of June 30, 2023, respectively. This obligation is expected to be settled in annual installments ending in April 2026 with the next installment of $75 million due in 2024. The Company believes that the likelihood of incurring losses materially in excess of this amount is remote.

Other

The Company has other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising in the ordinary course of business. The Company accrues for contingencies generally based upon a range of possible outcomes. If no amount within the range is a better estimate than any other, the Company accrues the minimum amount.

In the ordinary course of business, the Company is also routinely a defendant in, party to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the Company and could result in fines, penalties, compensatory or treble damages or non-monetary relief. The Company does not believe that these matters will have a material adverse effect upon its results of operations, cash flows or financial condition.


















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With respect to the accompanying Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2023 and 2022, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated July 27, 2023, appearing below, states that the firm did not audit and does not express an opinion on the accompanying Unaudited Condensed Consolidated Financial Statements. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the "Securities Act"), for its report on the accompanying Unaudited Condensed Consolidated Financial Statements because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Securities Act.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of Carrier Global Corporation

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Carrier Global Corporation and its subsidiaries (the “Company”) as of June 30, 2023, and the related condensed consolidated statements of operations, of comprehensive income (loss), and of changes in equity for the three-month and six-month periods ended June 30, 2023 and 2022 and the condensed consolidated statement of cash flows for the six-month periods ended June 30, 2023 and 2022, including the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2022, and the related consolidated statements of operations, of comprehensive income (loss), of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 7, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ PricewaterhouseCoopers LLP

Hallandale Beach, Florida
July 27, 2023
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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

Business Summary

Carrier Global Corporation ("we" or "our") is a global leader in intelligent climate and energy solutions with a focus on providing differentiated, digitally-enabled lifecycle solutions to our customers. Our portfolio includes industry-leading brands such as Carrier, Toshiba, Automated Logic, Carrier Transicold, Kidde, Edwards and LenelS2 that offer innovative heating, ventilating and air conditioning ("HVAC"), refrigeration, fire, security and building automation technologies to help make the world safer and more comfortable. We also provide a broad array of related building services, including audit, design, installation, system integration, repair, maintenance and monitoring. Our operations are classified into three segments: HVAC, Refrigeration and Fire & Security.
Our worldwide operations are affected by global and regional industrial, economic and political factors and trends. These include the mega-trends of urbanization, climate change and increasing requirements for food safety driven by the food needs of the growing global population and the rising standards of living in emerging markets. We believe that our business segments are well positioned to benefit from favorable secular trends, including these mega-trends and from the strength of our industry-leading brands and track record of innovation. In addition, we regularly review our end markets to proactively identify trends and adapt our strategies accordingly.
Our business is also affected by changes in the general level of economic activity, such as changes in business and consumer spending, construction and shipping activity as well as short-term economic factors such as currency fluctuations, commodity price volatility and supply disruptions. We continue to invest in our business, take pricing actions to mitigate supply chain and inflationary pressures, develop new products and services in order to remain competitive in our markets and use risk management strategies to mitigate various exposures. We believe that we have industry-leading global brands, which form the foundation of our business strategy. Coupled with our focus on growth, innovation and operational efficiency, we expect to drive long-term future growth and increased value for our shareowners.

Recent Developments

Supply Chain Challenges

The ongoing global economic recovery from the COVID-19 pandemic has caused significant challenges for global supply chains resulting in inflationary cost pressures, component shortages and transportation delays. As a result, we have incurred incremental costs for commodities and components used in our products as well as component shortages that have negatively impacted our sales and results of operations. Inflationary cost pressures and supply chain challenges have begun to moderate, but continue to affect our results. We expect that these challenges will continue to impact our businesses for the foreseeable future.

We continue to take proactive steps to limit the impact of these challenges and are working closely with our suppliers to ensure availability of products and implement other cost savings initiatives. In addition, we continue to invest in our supply chain to improve its resilience with a focus on automation, dual sourcing of critical components and localized manufacturing when feasible. To date, there has been limited disruption to the availability of our products, though it is possible that more significant disruptions could occur if these supply chain challenges continue.

Planned Portfolio Transformation

On April 25, 2023, we announced that we entered into a Share Purchase Agreement (the “Agreement”) to acquire the climate solutions business (the "VCS Business") of Viessmann Group GmbH & Co. KG (“Viessmann”), a privately-held company, for approximately €12 billion. The VCS Business develops intelligent, integrated and sustainable technologies, including heat pumps, boilers, photovoltaic systems, home battery storage and digital solutions, primarily for residential customers in Europe. The transaction is expected to close around the end of 2023, subject to customary closing conditions and regulatory approvals. In addition, we also announced plans to exit our Fire & Security and Commercial Refrigeration businesses over the course of 2024.


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Deconsolidation of Kidde-Fenwal, Inc.

On May 14, 2023, Kidde-Fenwal, Inc. ("KFI") filed a petition for voluntary reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the District of Delaware. KFI, an industrial fire detection and suppression business and an indirect wholly-owned subsidiary of the Company, has indicated that it intends to use the bankruptcy process to explore strategic alternatives, including the sale of KFI as a going concern. KFI has further stated that, during the Chapter 11 process, KFI expects that there will be no significant interruptions to its business operations. As of the petition date, KFI was deconsolidated and its respective assets and liabilities were derecognized from the Company's Unaudited Condensed Consolidated Financial Statements.

Acquisition of Toshiba Carrier Corporation

On February 6, 2022, we entered into a binding agreement to acquire a majority ownership interest in Toshiba Carrier Corporation ("TCC"), a variable refrigerant flow ("VRF") and light commercial HVAC joint venture between Carrier and Toshiba Corporation. TCC designs and manufactures flexible, energy-efficient and high-performance VRF and light commercial HVAC systems as well as commercial products, compressors and heat pumps. The acquisition included all of TCC's advanced research and development centers and global manufacturing operations, product pipeline and the long-term use of Toshiba's iconic brand. The acquisition was completed on August 1, 2022. As a result, the assets, liabilities and results of operations of TCC are consolidated in the accompanying Unaudited Condensed Consolidated Financial Statements as of the date of acquisition and reported within our HVAC segment. Upon closing, Toshiba Corporation retained a 5% ownership interest in TCC.

Sale of Chubb Fire & Security Business

On July 26, 2021, we entered into a stock purchase agreement to sell our Chubb Fire and Security business ("Chubb") to APi Group Corporation ("APi"). Chubb, which was reported within our Fire & Security segment, delivered essential fire safety and security solutions from design and installation to monitoring, service and maintenance across more than 17 countries around the globe. On January 3, 2022, we completed the sale of Chubb (the "Chubb Sale") for net proceeds of $2.9 billion and recognized a gain on the sale of $1.1 billion during the year ended December 31, 2022.


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 accompanying 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 our 2022 Form 10-K, we describe the significant accounting estimates and policies used in the preparation of the accompanying Unaudited Condensed Consolidated Financial Statements. There have been no significant changes in our critical accounting estimates.

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RESULTS OF OPERATIONS

The results of operations of TCC are included in our consolidated results since the acquisition date of August 1, 2022. Prior to the acquisition, we previously accounted for our minority ownership in TCC under the equity method of accounting and recognized our portion of earnings within Equity method investment in net earnings as part of operating expenses. As a result, prior period results may not be comparable to the current period. See Note 15 - Acquisitions in the Notes to the accompanying Unaudited Condensed Consolidated Financial Statements for additional information.

Three Months Ended June 30, 2023 Compared with the Three Months Ended June 30, 2022

The following represents our consolidated net sales and operating results:

 Three Months Ended June 30,
(In millions)20232022Period Change% Change
Net sales$5,992 $5,211 $781 15 %
Cost of products and services sold(4,237)(3,764)(473)13 %
Gross margin1,755 1,447 308 21 %
Operating expenses(1,266)(628)(638)102 %
Operating profit489 819 (330)(40)%
Non-operating income (expense), net(67)(62)(5)%
Income from operations before income taxes422 757 (335)(44)%
Income tax expense(189)(170)(19)11 %
Net income from operations233 587 (354)(60)%
Less: Non-controlling interest in subsidiaries' earnings from operations34 14 20 143 %
Net income attributable to common shareowners$199 $573 $(374)(65)%

Net Sales

For the three months ended June 30, 2023, Net sales were $6.0 billion, a 15% increase compared with the same period of 2022. The components of the year-over-year change were as follows:
Three Months Ended June 30, 2023
Organic%
Foreign currency translation— %
Acquisitions and divestitures, net%
Total % change15 %

Organic sales for the three months ended June 30, 2023 increased by 6% compared with the same period of 2022. The organic increase was driven by our HVAC segment due to improved global end-markets in our Commercial HVAC business and pricing improvements in our North America residential and light commercial business. In addition, our Fire & Security segment benefited from price improvements and volume growth in each region. Refrigeration results decreased as each of the segment's businesses experienced challenges in certain end-markets during the quarter. Refer to "Segment Review" below for a discussion of Net sales by segment.

On August 1, 2022, the Commercial HVAC business acquired a majority ownership interest in TCC, a VRF and light commercial HVAC joint venture between Carrier and Toshiba Corporation. The results of TCC have been included in our Unaudited Condensed Consolidated Financial Statements since the date of acquisition. The transaction added 10% to Net sales during the three months ended June 30, 2023 and is included in Acquisitions and divestitures, net.

As of May 14, 2023, we no longer control KFI as their activities are subject to review and oversight by the bankruptcy court. Therefore, KFI was deconsolidated and their respective assets and liabilities were derecognized from our Unaudited Condensed Consolidated Financial Statements. The deconsolidation had a 1% impact on Net sales during the three months ended June 30, 2023 and is included in Acquisitions and divestitures, net.
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Gross Margin

For the three months ended June 30, 2023, gross margin was $1.8 billion, a 21% increase compared with the same period of 2022. The components were as follows:

 Three Months Ended June 30,
(In millions)20232022
Net sales$5,992 $5,211 
Cost of products and services sold(4,237)(3,764)
Gross margin$1,755 $1,447 
Percentage of net sales29.3 %27.8 %

Gross margin increased by $308 million compared with the three months ended June 30, 2022. The main driver of the increase related to ongoing customer demand, pricing improvements and our continued focus on productivity initiatives. In addition, operating results associated with TCC since the date of acquisition further benefited gross margin during the period. These amounts were partially offset by the higher cost of commodities and components used in our products, certain supply chain constraints and freight costs. Although inflationary cost pressures have begun to moderate, they remain elevated and continue to impact the cost of products and services sold in each of our segments. Gross margin as a percentage of Net sales increased by 150 basis points compared with the same period of 2022.

Operating Expenses
For the three months ended June 30, 2023, operating expenses, including Equity method investment net earnings, were $1.3 billion, a 102% increase compared with the same period of 2022. The components were as follows:

 Three Months Ended June 30,
(In millions)20232022
Selling, general and administrative$(784)$(614)
Research and development(151)(122)
Equity method investment net earnings52 101 
Other income (expense), net(383)
Total operating expenses$(1,266)$(628)
Percentage of net sales21.1 %12.1 %

For the three months ended June 30, 2023, Selling, general and administrative expenses were $784 million, a 28% increase compared with the same period of 2022. The increase is primarily due to higher compensation and other employee-related costs in the current period. In addition, incremental selling, general and administrative expenses associated with TCC since the date of acquisition and portfolio transformation-related costs further contributed to the increase. The current period also included $14 million of acquisition-related costs compared with $7 million during the three months ended June 30, 2022.

Research and development costs relate to new product development and new technology innovation. Due to the variable nature of program development schedules, year-over-year spending levels can fluctuate. In addition, we continue to invest to prepare for future energy efficiency and refrigerant regulation changes and in digital controls technologies.

Investments over which we do not exercise control, but have significant influence, are accounted for using the equity method of accounting. For the three months ended June 30, 2023, Equity method investment net earnings were $52 million, a 49% decrease compared with the same period of 2022. The decrease was primarily driven by the increase in our ownership interest in TCC on August 1, 2022. As a result, TCC is no longer accounted for under the equity method of accounting since the date of acquisition. During the three months ended June 30, 2022, pre-acquisition equity earnings of TCC totaled $47 million which included a $27 million gain on the sale of two minority owned subsidiaries.

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Other income (expense), net primarily includes the impact of gains and losses related to the sale of businesses or interests in our equity method investments, foreign currency gains and losses on transactions that are denominated in a currency other than an entity's functional currency and hedging-related activities. In connection with the proposed acquisition of the VCS Business, we recognized a $111 million loss during the three months ended June 30, 2023 on the mark-to-market valuation of our window forward contracts associated with the expected cash outflows of the Euro-denominated purchase price for the Business. In addition, we recognized a loss of $293 million on the deconsolidation of KFI due to its Chapter 11 filing. During the three months ended June 30, 2022, we recognized a $22 million charge resulting from a litigation matter and a $7 million gain on the sale of our interest in a cost method investment reported within our Refrigeration segment.

Non-Operating Income (Expense), net

For the three months ended June 30, 2023, Non-operating income (expense), net was $67 million, an 8% increase compared with the same period of 2022. The components were as follows:

 Three Months Ended June 30,
(In millions)20232022
Non-service pension (expense) benefit $— $(1)
Interest expense$(94)$(68)
Interest income27 
Interest (expense) income, net$(67)$(61)
Non-operating income (expense), net$(67)$(62)

Non-operating income (expense), net includes the results from activities other than normal business operations such as interest expense, interest income and the non-service components of pension and post-retirement obligations. Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. For the three months ended June 30, 2023, Interest expense was $94 million, a 38% increase compared with the same period of 2022. In connection with the proposed acquisition of the VCS Business, we entered into several financing arrangements and capitalized $42 million of deferred financing costs in the current period. During the three months ended June 30, 2023, we amortized $21 million of deferred financing costs in Interest expense, of which $19 million related to our senior unsecured bridge term loan facility ("the Bridge Loan").

Income Taxes

  Three Months Ended June 30,
 20232022
Effective tax rate44.8 %22.5 %

We account for income tax expense in accordance with ASC 740, which requires an estimate of the annual effective income tax rate for the full year to be applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year. The effective tax rate was 44.8% for the three months ended June 30, 2023 compared with 22.5% for the three months ended June 30, 2022. The year-over-year increase was primarily driven by the non-deductible losses of $293 million on the deconsolidation of KFI due to its Chapter 11 filing and the $111 million loss on the mark-to-market valuation of our window forward contracts associated with the expected cash outflows of the Euro-denominated purchase price of the VCS Business.
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Six Months Ended June 30, 2023 Compared with the Six Months Ended June 30, 2022

The following represents our consolidated net sales and operating results:

Six Months Ended June 30,
(In millions)20232022Period Change% Change
Net sales$11,265 $9,865 $1,400 14 %
Cost of products and services sold(8,132)(7,125)(1,007)14 %
Gross margin3,133 2,740 393 14 %
Operating expenses(2,089)(184)(1,905)1,035 %
Operating profit1,044 2,556 (1,512)(59)%
Non-operating income (expense), net(113)(111)(2)%
Income from operations before income taxes931 2,445 (1,514)(62)%
Income tax expense(311)(471)160 (34)%
Net income from operations620 1,974 (1,354)(69)%
Less: Non-controlling interest in subsidiaries' earnings from operations48 22 26 118 %
Net income attributable to common shareowners$572 $1,952 $(1,380)(71)%

Net Sales

For the six months ended June 30, 2023, Net sales were $11.3 billion, a 14% increase compared with the same period of 2022. The components of the year-over-year change were as follows:

Six Months Ended June 30, 2023
Organic%
Foreign currency translation(1)%
Acquisitions and divestitures, net10 %
Total % change14 %

Organic sales for the six months ended June 30, 2023 increased by 5% compared with the same period of 2022. The organic increase was primarily driven by our Fire & Security segment due to price improvements and volume growth in each region. In addition, improved global end-markets in our Commercial HVAC business and pricing improvements in our North America residential and light commercial business further benefited our results. Refrigeration results decreased as each of the segment's businesses experienced challenges in certain end-markets during the quarter. Refer to "Segment Review" below for a discussion of Net sales by segment.

On August 1, 2022, the Commercial HVAC business acquired a majority ownership interest in TCC, a VRF and light commercial HVAC joint venture between Carrier and Toshiba Corporation. The results of TCC have been included in our Unaudited Condensed Consolidated Financial Statements since the date of acquisition. The transaction added 11% to Net sales during the six months ended June 30, 2023 and is included in Acquisitions and divestitures, net.

As of May 14, 2023, we no longer control KFI as their activities are subject to review and oversight by the bankruptcy court. Therefore, KFI was deconsolidated and their respective assets and liabilities were derecognized from our Unaudited Condensed Consolidated Financial Statements. The deconsolidation had a 1% impact on Net sales during the six months ended June 30, 2023 and is included in Acquisitions and divestitures, net.

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Gross Margin

For the six months ended June 30, 2023, gross margin was $3.1 billion, a 14% increase compared with the same period of 2022. The components were as follows:

Six Months Ended June 30,
(In millions)20232022
Net sales$11,265 $9,865 
Cost of products and services sold(8,132)(7,125)
Gross margin$3,133 $2,740 
Percentage of net sales27.8 %27.8 %

Gross margin increased by $393 million compared with the six months ended June 30, 2022. The main driver of the increase related to ongoing customer demand, pricing improvements and our continued focus on productivity initiatives. In addition, operating results associated with TCC since the date of acquisition further benefited gross margin during the period. These amounts were partially offset by the higher cost of commodities and components used in our products, certain supply chain constraints and freight costs. Although inflationary cost pressures have begun to moderate, they remain elevated and continue to impact the cost of products and services sold in each of our segments. While pricing improvements more than offset inflationary impacts and supply chain challenges, gross margin as a percentage of Net sales remained flat compared with the same period of 2022.

Operating Expenses

For the six months ended June 30, 2023, operating expenses, including Equity method investment net earnings, were $2.1 billion, a 1,035% increase compared with the same period of 2022. The components were as follows:

Six Months Ended June 30,
(In millions)20232022
Selling, general and administrative$(1,505)$(1,215)
Research and development(290)(247)
Equity method investment net earnings96 159 
Other income (expense), net(390)1,119 
Total operating expenses$(2,089)$(184)
Percentage of net sales18.5 %1.9 %

For the six months ended June 30, 2023, Selling, general and administrative expenses were $1.5 billion, a 24% increase compared with the same period of 2022. The increase is primarily due to higher compensation and other employee-related costs during the current period. In addition, incremental selling, general and administrative expenses associated with TCC since the date of acquisition and portfolio transformation-related costs further contributed to the increase. The current period also included $26 million of acquisition-related costs compared with $13 million during the six months ended June 30, 2022.

Research and development costs relate to new product development and new technology innovation. Due to the variable nature of program development schedules, year-over-year spending levels can fluctuate. In addition, we continue to invest to prepare for future energy efficiency and refrigerant regulation changes and in digital controls technologies.

Investments over which we do not exercise control, but have significant influence, are accounted for using the equity method of accounting. For the six months ended June 30, 2023, Equity method investment net earnings were $96 million, a 40% decrease compared with the same period of 2022. The decrease was primarily driven by the increase in our ownership interest in TCC on August 1, 2022. As a result, TCC is no longer accounted for under the equity method of accounting since the date of acquisition. During the six months ended June 30, 2022, pre-acquisition equity earnings of TCC totaled $67 million which included a $27 million gain on the sale of two minority owned subsidiaries.

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Other income (expense), net primarily includes the impact of gains and losses related to the sale of businesses or interests in our equity method investments, foreign currency gains and losses on transactions that are denominated in a currency other than an entity's functional currency and hedging-related activities. In connection with the proposed acquisition of the VCS Business, we recognized a $111 million loss during the six months ended June 30, 2023 on the mark-to-market valuation of our window forward contracts associated with the expected cash outflows of the Euro-denominated purchase price. In addition, we recognized a loss of $293 million on the deconsolidation of KFI due to its Chapter 11 filing. During the six months ended June 30, 2022, we completed the Chubb Sale and recognized a net gain on the sale of $1.1 billion. In addition, we recognized a $22 million charge resulting from a litigation matter and a $7 million gain on the sale of our interest in a cost method investment reported within our Refrigeration segment.

Non-Operating Income (Expense), net

For the six months ended June 30, 2023, Non-operating income (expense), net was $113 million, a 2% increase compared with the same period of 2022. The components were as follows:

Six Months Ended June 30,
(In millions)20232022
Non-service pension (expense) benefit $— $(2)
Interest expense$(165)$(155)
Interest income52 46 
Interest (expense) income, net$(113)$(109)
Non-operating income (expense), net$(113)$(111)

Non-operating income (expense), net includes the results from activities other than normal business operations such as interest expense, interest income and the non-service components of pension and post-retirement obligations. Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. For the six months ended June 30, 2023, Interest expense was $165 million, a 6% increase compared with the same period of 2022. In connection with the proposed acquisition of the VCS Business, we entered into several financing arrangements and capitalized $42 million of deferred financing costs in the current period. During the six months ended June 30, 2023, we amortized $22 million of deferred financing costs in Interest expense, of which $19 million related to our Bridge Loan. During the six months ended June 30, 2022, we completed tender offers to repurchase approximately $1.15 billion aggregate principal of our 2.242% Notes due 2025 and 2.493% Notes due 2027. Upon settlement, we wrote off $5 million of unamortized deferred financing costs in Interest expense and recognized a net gain of $33 million in Interest income.

Income Taxes

 Six Months Ended June 30,
 20232022
Effective tax rate33.4 %19.3 %

We account for income tax expense in accordance with ASC 740, which requires an estimate of the annual effective income tax rate for the full year to be applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year. The effective tax rate was 33.4% for the six months ended June 30, 2023 compared with 19.3% for the six months ended June 30, 2022. The year-over-year increase was primarily driven by the non-deductible losses of $293 million on the deconsolidation of KFI due to its Chapter 11 filing and the $111 million loss on the mark-to-market valuation of our window forward contracts associated with the expected cash outflows of the Euro-denominated purchase price of the VCS Business. In addition, the six months ended June 30, 2022 included a lower effective tax rate on the $1.1 billion Chubb gain compared with our U.S. statutory rate and a favorable tax adjustment of $32 million associated with foreign tax credits generated and utilized in the prior year.

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SEGMENT REVIEW

We have three operating segments:
The HVAC segment provides products, controls, services and solutions to meet the heating, cooling and ventilation needs of residential and commercial customers while enhancing building performance, health, energy efficiency and sustainability.
The Refrigeration segment includes transport refrigeration and monitoring products, services and digital solutions for trucks, trailers, shipping containers, intermodal and rail, as well as commercial refrigeration products.
The Fire & Security segment provides a wide range of residential, commercial and industrial technologies designed to help protect people and property.

We determine our segments based on how our Chief Executive Officer, who is the Chief Operating Decision Maker (the "CODM"), allocates resources, assesses performance and makes operational decisions. The CODM allocates resources and evaluates the financial performance of each of our segments based on Net sales and Operating profit. Adjustments to reconcile segment reporting to the consolidated results are included in Note 17 - Segment Financial Data.

Three Months Ended June 30, 2023 Compared with Three Months Ended June 30, 2022

Summary performance for each of our segments is as follows:

 Net SalesOperating ProfitOperating Profit Margin
 Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30,
(In millions)202320222023202220232022
HVAC$4,216 $3,388 $742 $585 17.6 %17.3 %
Refrigeration972 1,041 112 147 11.5 %14.1 %
Fire & Security932 887 (157)134 (16.8)%15.1 %
Total segment$6,120 $5,316 $697 $866 11.4 %16.3 %

HVAC Segment

For the three months ended June 30, 2023, Net sales in our HVAC segment were $4.2 billion, a 24% increase compared with the same period of 2022. The components of the year-over-year change were as follows:

Net Sales
Organic %
Foreign currency translation(1)%
Acquisitions and divestitures, net16 %
Total % change in Net sales24 %

The organic increase in Net sales of 9% was driven by continued strong results in the segment. Increased sales in our Commercial HVAC business (up 19%) benefited from pricing improvements and ongoing customer demand in our end-markets. The business saw strong growth in North America and continued improvements in Asia after COVID-19 related lockdowns. Growth in Europe moderated as economic conditions and inflationary cost pressures impacted end-market demand. Higher sales in our North America residential and light commercial business (up 5%) were primarily driven by pricing improvements and improved mix associated with regulatory changes effective as of the beginning of 2023. These amounts were partially offset by volume reductions in North America residential end-markets. Results in our Global Comfort Solutions business (down 10%) were primarily driven by lower demand in certain European end-markets.

On August 1, 2022, the Commercial HVAC business acquired a majority ownership interest in TCC, a VRF and light commercial HVAC joint venture between Carrier and Toshiba Corporation. The results of TCC have been included in our Unaudited Condensed Consolidated Financial Statements since the date of acquisition. The transaction added 16% to Net sales during the three months ended June 30, 2023 and is included in Acquisitions and divestitures, net.
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For the three months ended June 30, 2023, Operating profit in our HVAC segment was $0.7 billion, a 27% increase compared with the same period of 2022. The components of the year-over-year change were as follows:

Operating Profit
Operational13 %
Acquisitions and divestitures, net16 %
Amortization of acquired intangibles(5)%
Other%
Total % change in Operating profit27 %

The operational profit increase of 13% was primarily attributable to pricing improvements and ongoing customer demand in certain end-markets compared with the prior year. These benefits more than offset the higher costs for commodities and components used in our products and freight and logistics costs. Lower earnings from equity method investments impacted operational profit due to the increase in our ownership interest in TCC on August 1, 2022. As a result, TCC is no longer accounted for under the equity method of accounting since the date of acquisition. Inflationary cost pressures have begun to moderate, but continue to impact our operating profit.

Refrigeration Segment

For the three months ended June 30, 2023, Net sales in our Refrigeration segment were $972 million, a 7% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:
Net Sales
Organic(6)%
Foreign currency translation— %
Acquisitions and divestitures, net(1)%
Total % change in Net sales(7)%

Organic Net sales decrease 6% compared to the prior year as each of the segment's businesses experienced challenges in certain end-markets during the period. Results for Commercial refrigeration decreased (down 19%) compared with the prior year, primarily driven by lower volumes in Europe as economic conditions and inflationary cost pressures impacted end-market demand. In addition, lower volumes in Asia were partially offset by pricing improvements. Transport refrigeration sales were flat compared to the prior year as pricing improvements and strong end-market demand in the U.S. and Europe were offset by continued weakness in container end-markets.

For the three months ended June 30, 2023, Operating profit in our Refrigeration segment was $112 million, a 24% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:

Operating Profit
Operational(22)%
Foreign currency translation— %
Acquisitions and divestitures, net(1)%
Restructuring(1)%
Total % change in Operating profit(24)%

The decrease in operational profit of 22% was primarily driven by volume reductions in certain end-markets compared with the prior year. In addition, the higher costs of commodities and components used in our products further impacted segment results. These amounts were partially offset by pricing improvements and favorable productivity initiatives during the period. Inflationary cost pressures have begun to moderate, but continue to impact our operating profit.

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Fire & Security Segment

For the three months ended June 30, 2023, Net sales in our Fire & Security segment were $932 million, a 5% increase compared with the same period of 2022. The components of the year-over-year change were as follows:

 Net Sales
Organic%
Foreign currency translation(1)%
KFI deconsolidation(3)%
Total % change in Net sales5 %

The organic increase in Net sales of 9% was primarily driven by pricing improvements and volume growth compared with the prior year. Sales grew in all three regions including strong commercial and residential results in the Americas. Growth in Europe moderated as economic conditions and inflationary cost pressures impacted end-market demand. Results in Asia normalized after a strong COVID-19 related recovery. Global industrial sales benefited segment results due to pricing improvements and strong demand. The segment continues to be impacted by ongoing supply chain constraints for certain components used in our products.

For the three months ended June 30, 2023, Operating profit in our Fire & Security segment was a loss of $157 million, a 217% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:

 Operating Profit
Operational10 %
Foreign currency translation(2)%
Restructuring%
KFI deconsolidation(228)%
Total % change in Operating profit(217)%

The increase in operational profit of 10% was primarily driven by pricing improvements, volume growth and lower freight and logistics costs compared to the prior year. These amounts were partially offset by the higher costs of commodities and components used in our products. In addition, higher inventory-related reserves resulting from supply chain constraints further impacted segment results. Inflationary cost pressures have moderated, but continue to impact our operating profit.

As of May 14, 2023, we no longer control KFI as their activities are subject to review and oversight by the bankruptcy court. Therefore, KFI was deconsolidated and their respective assets and liabilities were derecognized from our Unaudited Condensed Consolidated Financial Statements. As a result, we recognized a loss on deconsolidation of $293 million during the three months ended June 30, 2023.


Six Months Ended June 30, 2023 Compared with Six Months Ended June 30, 2022

Summary performance for each of our segments is as follows:
Net SalesOperating ProfitOperating Profit Margin
Six Months Ended June 30,Six Months Ended June 30,Six Months Ended June 30,
(In millions)202320222023202220232022
HVAC$7,838 $6,358 $1,177 $1,055 15.0 %16.6 %
Refrigeration1,870 2,017 220 254 11.8 %12.6 %
Fire & Security1,801 1,705 (64)1,352 (3.6)%79.3 %
Total segment$11,509 $10,080 $1,333 $2,661 11.6 %