Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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.

Deconsolidation of Kidde-Fenwal, Inc.

On May 14, 2023, Kidde-Fenwal, Inc. ("KFI"), an indirect wholly-owned subsidiary of ours, 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 historically reported in our Fire & Security segment, 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 our 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.

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

The following represents our consolidated net sales and operating results:


	Three Months Ended September 30,
(In millions)	2023		2022		Period Change		% Change
Net sales	$	5,731	$	5,451	$	280	5	%
Cost of products and services sold	(3,915)		(3,974)		59		(1)	%
Gross margin	1,816		1,477		339		23	%
Operating expenses	(1,171)		49		(1,220)		(2,490)	%
Operating profit	645		1,526		(881)		(58)	%
Non-operating income (expense), net	(51)		(56)		5		(9)	%
Income from operations before income taxes	594		1,470		(876)		(60)	%
Income tax expense	(213)		(138)		(75)		54	%
Net income from operations	381		1,332		(951)		(71)	%
Less: Non-controlling interest in subsidiaries' earnings from operations	24		20		4		20	%
Net income attributable to common shareowners	$	357	$	1,312	$	(955)	(73)	%

Net Sales

For the three months ended September 30, 2023, Net sales were $5.7 billion, a 5% increase compared with the same period of 2022. The components of the year-over-year change were as follows:


	Three Months Ended September 30, 2023
Organic	3	%
Foreign currency translation	1	%
Acquisitions and divestitures, net	1	%

Total % change	5	%

Organic sales for the three months ended September 30, 2023 increased by 3% 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 the Americas as well as strong demand in global industrial markets. Refrigeration results decreased due to volume reductions in commercial refrigeration and container end-markets. Refer to "Segment Review" below for a discussion of Net sales by segment.

On August 1, 2022, we 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 2% to Net sales during the three months ended September 30, 2023 and is included in Acquisitions and divestitures, net.

As of May 14, 2023, we no longer controlled 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 September 30, 2023 and is included in Acquisitions and divestitures, net.

Gross Margin

For the three months ended September 30, 2023, gross margin was $1.8 billion, a 23% increase compared with the same period of 2022. The components were as follows:


	Three Months Ended September 30,
(In millions)	2023			2022
Net sales	$	5,731		$	5,451
Cost of products and services sold	(3,915)			(3,974)
Gross margin	$	1,816		$	1,477
Percentage of net sales	31.7		%	27.1		%

Gross margin increased by $339 million compared with the three months ended September 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. 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 460 basis points compared with the same period of 2022.

Operating Expenses

For the three months ended September 30, 2023, operating expenses, including Equity method investment net earnings, were $1.2 billion, a 2,490% decrease compared with the same period of 2022. The components were as follows:


	Three Months Ended September 30,
(In millions)	2023			2022
Selling, general and administrative	$	(831)		$	(624)
Research and development	(157)			(143)
Equity method investment net earnings	75			63
Other income (expense), net	(258)			753
Total operating expenses	$	(1,171)		$	49
Percentage of net sales	20.4		%	(0.9)		%

For the three months ended September 30, 2023, Selling, general and administrative expenses were $831 million, a 33% increase compared with the same period of 2022. The increase is primarily due to higher compensation, commissions 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 further contributed to the increase. The current period also included $62 million of acquisition and divestiture-related costs compared with $15 million during the three months ended September 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 September 30, 2023, Equity method investment net earnings were $75 million, a 19% increase compared with the same period of 2022. The increase was primarily driven by a $16 million benefit recognized in connection with a favorable tax ruling at a minority owned joint venture. The amount was partially offset by an 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 September 30, 2022, pre-acquisition equity earnings of TCC totaled $20 million.

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 $257 million loss during the three months ended September 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 VCS Business.

In connection with the TCC acquisition, the carrying value of our previously held TCC equity investments were recognized at fair value at the date of acquisition. As a result, we recognized a $732 million non-cash gain associated with the increase in our ownership interest during the three months ended September 30, 2022. In addition, we recognized a $7 million charge resulting from the settlement of working capital and other transaction-related items associated with the Chubb Sale.

Non-Operating Income (Expense), net

For the three months ended September 30, 2023, Non-operating income (expense), net was $51 million, a 9% decrease compared with the same period of 2022. The components were as follows:


	Three Months Ended September 30,
(In millions)	2023		2022
Non-service pension (expense) benefit	$	—	$	—

Interest expense	$	(86)	$	(71)
Interest income	35		15
Interest (expense) income, net	$	(51)	$	(56)

Non-operating income (expense), net	$	(51)	$	(56)

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 September 30, 2023, Interest expense was $86 million, a 21% 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 $54 million of deferred financing costs. During the three months ended September 30, 2023, we amortized $12 million of deferred financing costs in Interest expense, of which $11 million related to our senior unsecured bridge term loan facility ("the Bridge Loan").

Income Taxes


	Three Months Ended September 30,
	2023		2022
Effective tax rate	35.9	%	9.4	%

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 35.9% for the three months ended September 30, 2023 compared with 9.4% for the three months ended September 30, 2022. The year-over-year increase was primarily driven by the non-deductible loss of $257 million 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 and a tax charge of $33 million related to our intention to no longer permanently reinvest historical earnings from certain jurisdictions. In addition, the three months ended September 30, 2022 included a lower effective tax rate on a $732 million non-cash gain resulting from the recognition of our previously held TCC equity investments at fair value upon acquisition of TCC compared to our U.S. statutory tax rate.

Nine Months Ended September 30, 2023 Compared with the Nine Months Ended September 30, 2022

The following represents our consolidated net sales and operating results:


	Nine Months Ended September 30,
(In millions)	2023		2022		Period Change		% Change
Net sales	$	16,996	$	15,316	$	1,680	11	%
Cost of products and services sold	(12,047)		(11,099)		(948)		9	%
Gross margin	4,949		4,217		732		17	%
Operating expenses	(3,260)		(135)		(3,125)		2,315	%
Operating profit	1,689		4,082		(2,393)		(59)	%
Non-operating income (expense), net	(164)		(167)		3		(2)	%
Income from operations before income taxes	1,525		3,915		(2,390)		(61)	%
Income tax expense	(524)		(609)		85		(14)	%
Net income from operations	1,001		3,306		(2,305)		(70)	%
Less: Non-controlling interest in subsidiaries' earnings from operations	72		42		30		71	%
Net income attributable to common shareowners	$	929	$	3,264	$	(2,335)	(72)	%

Net Sales

For the nine months ended September 30, 2023, Net sales were $17.0 billion, a 11% increase compared with the same period of 2022. The components of the year-over-year change were as follows:


	Nine Months Ended September 30, 2023
Organic	4	%
Foreign currency translation	(1)	%
Acquisitions and divestitures, net	8	%

Total % change	11	%

Organic sales for the nine months ended September 30, 2023 increased by 4% compared with the same period of 2022. The organic increase was primarily 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 due to volume reductions in commercial refrigeration and container end-markets. Refer to "Segment Review" below for a discussion of Net sales by segment.

On August 1, 2022, we 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 9% to Net sales during the nine months ended September 30, 2023 and is included in Acquisitions and divestitures, net.

As of May 14, 2023, we no longer controlled 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 nine months ended September 30, 2023 and is included in Acquisitions and divestitures, net.

Gross Margin

For the nine months ended September 30, 2023, gross margin was $4.9 billion, a 17% increase compared with the same period of 2022. The components were as follows:


	Nine Months Ended September 30,
(In millions)	2023			2022
Net sales	$	16,996		$	15,316
Cost of products and services sold	(12,047)			(11,099)
Gross margin	$	4,949		$	4,217
Percentage of net sales	29.1		%	27.5		%

Gross margin increased by $732 million compared with the nine months ended September 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 and certain supply chain constraints. 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 160 basis points compared with the same period of 2022.

Operating Expenses

For the nine months ended September 30, 2023, operating expenses, including Equity method investment net earnings, were $3.3 billion, a 2,315% increase compared with the same period of 2022. The components were as follows:


	Nine Months Ended September 30,
(In millions)	2023			2022
Selling, general and administrative	$	(2,336)		$	(1,839)
Research and development	(447)			(390)
Equity method investment net earnings	171			222
Other income (expense), net	(648)			1,872
Total operating expenses	$	(3,260)		$	(135)
Percentage of net sales	19.2		%	0.9		%

For the nine months ended September 30, 2023, Selling, general and administrative expenses were $2.3 billion, a 27% increase compared with the same period of 2022. The increase is primarily due to higher compensation, commissions 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 further contributed to the increase. The current period also included $88 million of acquisition and divestiture-related costs compared with $28 million during the nine months ended September 30, 2022.

Investments over which we do not exercise control, but have significant influence, are accounted for using the equity method of accounting. For the nine months ended September 30, 2023, Equity method investment net earnings were $171 million, a 23% 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. The decrease was partially offset by a $16 million benefit recognized in connection with a favorable tax ruling at a minority owned joint venture. During the nine months ended September 30, 2022, pre-acquisition equity earnings of TCC totaled $87 million which included a $27 million gain on the sale of two minority owned subsidiaries.

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 $368 million loss during the nine months ended September 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 $297 million on the deconsolidation of KFI due to its Chapter 11 filing.

In connection with the TCC acquisition, the carrying value of our previously held TCC equity investments were recognized at fair value at the date of acquisition. As a result, we recognized a $732 million non-cash gain associated with the increase in our ownership interest during the nine months ended September 30, 2022. In addition, we completed the Chubb Sale and recognized a net gain on the sale of $1.1 billion. Prior period results also included 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 nine months ended September 30, 2023, Non-operating income (expense), net was $164 million, a 2% decrease compared with the same period of 2022. The components were as follows:


	Nine Months Ended September 30,
(In millions)	2023		2022
Non-service pension (expense) benefit	$	—	$	(2)

Interest expense	$	(251)	$	(226)
Interest income	87		61
Interest (expense) income, net	$	(164)	$	(165)

Non-operating income (expense), net	$	(164)	$	(167)

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 nine months ended September 30, 2023, Interest expense was $251 million, a 11% 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 $54 million of deferred financing costs. During the nine months ended September 30, 2023, we amortized $34 million of deferred financing costs in Interest expense, of which $30 million related to our Bridge Loan. During the nine months ended September 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


	Nine Months Ended September 30,
	2023		2022
Effective tax rate	34.4	%	15.6	%

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 nine months ended September 30, 2022 included a lower effective tax rate on a $732 million non-cash gain resulting from the recognition of our previously held TCC equity investments at fair value upon acquisition of TCC and 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.

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

Summary performance for each of our segments is as follows:


	Net Sales				Operating Profit				Operating Profit Margin
	Three Months Ended September 30,				Three Months Ended September 30,				Three Months Ended September 30,
(In millions)	2023		2022		2023		2022		2023		2022
HVAC	$	4,008	$	3,734	$	763	$	1,314	19.0	%	35.2	%
Refrigeration	924		923		107		116		11.6	%	12.6	%
Fire & Security	923		905		164		142		17.8	%	15.7	%
Total segment	$	5,855	$	5,562	$	1,034	$	1,572	17.7	%	28.3	%

HVAC Segment

For the three months ended September 30, 2023, Net sales in our HVAC segment were $4.0 billion, a 7% increase compared with the same period of 2022. The components of the year-over-year change were as follows:


	Net Sales
Organic	4	%
Foreign currency translation	—	%
Acquisitions and divestitures, net	3	%


Total % change in Net sales	7	%

The organic increase in Net sales of 4% was driven by continued strong results in the segment. Increased sales in our Commercial HVAC business (up 9%) benefited from pricing improvements and ongoing customer demand in our end-markets. The business saw strong growth in North America and volume improvements in Europe. Asia results were impacted by reduced end-market demand in China. 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 7%) were primarily driven by lower demand in certain European end-markets.

On August 1, 2022, we 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 3% to Net sales during the three months ended September 30, 2023 and is included in Acquisitions and divestitures, net.

For the three months ended September 30, 2023, Operating profit in our HVAC segment was $763 million, a 42% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:


	Operating Profit
Operational	12	%

Acquisitions and divestitures, net	1	%
Restructuring	(2)	%

Other	(53)	%
Total % change in Operating profit	(42)	%

The operational profit increase of 12% 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. Higher earnings from equity method investments further benefited operational profit and included a $16 million benefit recognized in connection with a favorable tax ruling at a minority owned joint venture. These amounts were partially offset 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. Inflationary cost pressures have begun to moderate, but continue to impact our operating profit.

Acquisitions and divestitures, net primarily related to the results of operations associated with the acquisition of TCC. The transaction added 1% to Operating profit during the three months ended September 30, 2022. In connection with the TCC acquisition, the carrying value of our previously held TCC equity investments were recognized at fair value at the date of acquisition. As a result, we recognized a $732 million non-cash gain associated with the increase in our ownership interest in Other.

Refrigeration Segment

For the three months ended September 30, 2023, Net sales in our Refrigeration segment were $924 million, flat compared with the same period of 2022. The components of the year-over-year change were as follows:


	Net Sales
Organic	(3)	%
Foreign currency translation	3	%
Acquisitions and divestitures, net	—	%


Total % change in Net sales	—	%

Organic Net sales decreased 3% compared to the prior year as the segment experienced challenges in certain end-markets during the period. Results for Commercial refrigeration decreased (down 12%) 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, Asia results were impacted by reduced end-market demand in China. Transport refrigeration results increased (up 1%) compared to the prior year as pricing improvements and strong end-market demand in Europe and Asia were offset by continued weakness in container end-markets.

For the three months ended September 30, 2023, Operating profit in our Refrigeration segment was $107 million, a 8% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:


	Operating Profit
Operational	(9)	%
Foreign currency translation	3	%
Acquisitions and divestitures, net	(1)	%
Restructuring	(1)	%

Total % change in Operating profit	(8)	%

The decrease in operational profit of 9% 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.

Fire & Security Segment

For the three months ended September 30, 2023, Net sales in our Fire & Security segment were $923 million, a 2% increase 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	1	%


KFI deconsolidation	(5)	%

Total % change in Net sales	2	%

The organic increase in Net sales of 6% was primarily driven by pricing improvements and volume growth compared with the prior year. Growth in the Americas was primarily driven by strong commercial markets while residential markets were down compared with the prior year. End-market demand in Europe continued to be be impacted by economic conditions and inflationary cost pressures. Results in Asia normalized after a strong COVID-19 related recovery but were further impacted by reduced end-market demand in China. Global industrial sales benefited segment results due to pricing improvements and strong end-market demand. The segment continues to be impacted by ongoing supply chain constraints for certain components used in our products.

For the three months ended September 30, 2023, Operating profit in our Fire & Security segment was $164 million, a 15% increase compared with the same period of 2022. The components of the year-over-year change were as follows:


	Operating Profit
Operational	17	%
Foreign currency translation	1	%

Restructuring	1	%
KFI deconsolidation	(9)	%
Chubb gain	5	%
Total % change in Operating profit	15	%

The increase in operational profit of 17% 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 challenges 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.

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022



Summary performance for each of our segments is as follows:
	Net Sales				Operating Profit				Operating Profit Margin
	Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2023		2022		2023		2022		2023		2022
HVAC	$	11,846	$	10,092	$	1,940	$	2,369	16.4	%	23.5	%
Refrigeration	2,794		2,940		327		370		11.7	%	12.6	%
Fire & Security	2,724		2,610		100		1,494		3.7	%	57.2	%
Total segment	$	17,364	$	15,642	$	2,367	$	4,233	13.6	%	27.1	%

HVAC Segment

For the nine months ended September 30, 2023, Net sales in our HVAC segment were $11.8 billion, a 17% increase 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	(1)	%
Acquisitions and divestitures, net	12	%


Total % change in Net sales	17	%

The organic increase in Net sales of 6% was driven by continued strong results in the segment. Increased sales in our Commercial HVAC business (up 14%) benefited from pricing improvements and ongoing customer demand in our end-markets. The business saw strong growth in all regions including Europe and Asia as current economic conditions and inflationary cost pressures improved compared with the prior year. Higher sales in our North America residential and light commercial business (up 3%) 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 4%) were primarily driven by lower demand in certain European end-markets.

On August 1, 2022, we 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 12% to Net sales during the nine months ended September 30, 2023 and is included in Acquisitions and divestitures, net.

For the nine months ended September 30, 2023, Operating profit in our HVAC segment was $1.9 billion, a 18% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:


	Operating Profit
Operational	8	%

Acquisitions and divestitures, net	6	%
Restructuring	(1)	%
Amortization of acquired intangibles	(3)	%
Other	(28)	%
Total % change in Operating profit	(18)	%

The operational profit increase of 8% 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. 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.

Acquisitions and divestitures, net primarily related to the results of operations associated with the acquisition of TCC. The transaction added 1% to Operating profit during the nine months ended September 30, 2022. In connection with the TCC acquisition, the carrying value of our previously held TCC equity investments were recognized at fair value at the date of acquisition. As a result, we recognized a $732 million non-cash gain associated with the increase in our ownership interest in Other.

Refrigeration Segment

For the nine months ended September 30, 2023, Net sales in our Refrigeration segment were $2.8 billion, a 5% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:


	Net Sales
Organic	(4)	%
Foreign currency translation	—	%
Acquisitions and divestitures, net	(1)	%


Total % change in Net sales	(5)	%

Organic Net sales decreased 4% compared to the prior year as the segment experienced challenges in certain end-markets during the period. Results for Commercial refrigeration decreased (down 16%) 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, Asia results were impacted by reduced end-market demand in China. Transport refrigeration sales were flat compared to the prior year as pricing improvements and strong end-market demand in the U.S. and Europe offset continued weakness in container end-markets.

For the nine months ended September 30, 2023, Operating profit in our Refrigeration segment was $327 million, a 12% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:


	Operating Profit
Operational	(16)	%

Acquisitions and divestitures, net	(1)	%
Restructuring	(1)	%

Other	6	%
Total % change in Operating profit	(12)	%

The decrease in operational profit of 16% 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. Inflationary cost pressures have begun to moderate, but continue to impact our operating profit. Amounts reported in Other represent a $24 million gain on the sale of a business within Transport refrigeration.

Fire & Security Segment

For the nine months ended September 30, 2023, Net sales in our Fire & Security segment were $2.7 billion, a 4% increase compared with the same period of 2022. The components of the year-over-year change were as follows:


	Net Sales
Organic	8	%
Foreign currency translation	(1)	%


KFI deconsolidation	(3)	%

Total % change in Net sales	4	%

The organic increase in Net sales of 8% 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 nine months ended September 30, 2023, Operating profit in our Fire & Security segment was $100 million, a 93% decrease compared with the same period of 2022. The components of the year-over-year change were as follows:


	Operating Profit
Operational	2	%




KFI deconsolidation	(21)	%
Chubb gain	(74)	%
Total % change in Operating profit	(93)	%

The increase in operational profit of 2% 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 challenges further impacted segment results. Inflationary cost pressures have moderated, but continue to impact our operating profit.

LIQUIDITY AND FINANCIAL CONDITION

We assess liquidity in terms of our ability to generate adequate amounts of cash necessary to fund our current and future cash requirements to support our business and strategic initiatives. In doing so, we review and analyze our cash on hand, working capital, debt service requirements and capital expenditures. We rely on operating cash flows as our primary source of liquidity. In addition, we have access to other sources of capital to finance our strategic initiatives and fund growth.

As of September 30, 2023, we had cash and cash equivalents of $3.9 billion, of which approximately 39% was held by our foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds and the cost effectiveness with which we can access funds held by foreign subsidiaries. On occasion, we are required to maintain cash deposits in connection with contractual obligations related to acquisitions, divestitures or other legal obligations. As of September 30, 2023 and December 31, 2022, the amount of such restricted cash was approximately $6 million and $7 million, respectively.

We maintain 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. In addition, we maintain a $2.0 billion revolving credit agreement with various banks (the "Revolving Credit Facility") that matures in May 2028 which supports our commercial paper borrowing program and can be used for other general corporate purposes. A ratings-based commitment fee is charged on

unused commitments. As of September 30, 2023, we had no borrowings outstanding under our commercial paper program and our Revolving Credit Facility.

We continue to actively manage and strengthen our business portfolio to meet the current and future needs of our customers. This is accomplished through research and development activities with a focus on new product development and new technology innovation as well as sustaining activities with a focus on improving existing products and reducing production costs. We also pursue potential acquisitions to complement existing products and services to enhance our product portfolio. In addition, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments to manage our business portfolio.

We believe that our available cash and operating cash flows will be sufficient to meet our future operating cash needs. Our committed credit facilities and access to the debt and equity markets provide additional sources of short-term and long-term capital to fund current operations, debt maturities and future investment opportunities. Although we believe that the arrangements currently in place permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including: (1) our credit ratings or absence of credit ratings, (2) the liquidity of the overall capital markets and (3) the state of the economy. There can be no assurance that we will be able to obtain additional financing on terms favorable to us, if at all.

The following table contains several key measures of our financial condition and liquidity:


(In millions)	September 30, 2023			December 31, 2022
Cash and cash equivalents	$	3,902		$	3,520
Total debt	$	8,785		$	8,842
Total equity	$	8,502		$	8,076

Net debt (total debt less cash and cash equivalents)	$	4,883		$	5,322
Total capitalization (total debt plus total equity)	$	17,287		$	16,918
Net capitalization (total debt plus total equity less cash and cash equivalents)	$	13,385		$	13,398
Total debt to total capitalization	51		%	52		%
Net debt to net capitalization	36		%	40		%

Borrowings and Lines of Credit

Our short-term obligations primarily consist of current maturities of long-term debt. Our long-term obligations primarily consist of long-term notes with maturity dates ranging between 2025 and 2050. Interest payments related to long-term Notes are expected to approximate $249 million per year, reflecting an approximate weighted-average interest rate of 2.86%. Any borrowings from the Revolving Credit Facility are subject to variable interest rates. See Note 5 – Borrowings and Lines of Credit in the Notes to the accompanying Unaudited Condensed Consolidated Financial Statements for additional information regarding the terms of our long-term debt obligations.

On March 15, 2022, we commenced tender offers to repurchase up to $1.15 billion aggregate principal of our 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, we 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 and included $800 million of Notes due 2025 and $350 million of Notes due 2027. Upon settlement, we recognized a net gain of $33 million and wrote off $5 million of unamortized deferred financing costs during the three months ended March 31, 2022.

On July 15, 2022, we 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 bear interest at a rate equal to the Tokyo Term Risk Free Rate plus 0.75%. In addition, it is subject to customary covenants including a covenant to maintain a maximum consolidated leverage ratio. On July 25, 2022, we 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.

The Revolving Credit Facility, the Japanese Term Loan Facility and the indentures for the long-term notes contain affirmative and negative covenants customary for financings of these types, which among other things, limit our ability to incur additional liens, to make certain fundamental changes and to enter into sale and leaseback transactions. As of September 30, 2023, we were compliant with the covenants under the agreements governing our outstanding indebtedness.

The following table presents our credit ratings and outlook as of September 30, 2023:


Rating Agency	Long-term Rating (1)	Short-term Rating	Outlook (2) (3)
Standards & Poor's ("S&P")	BBB	A2	Stable
Moody's Investors Service Inc. ("Moody's")	Baa3	P3	Positive
Fitch Ratings ("Fitch")	BBB-	F3	Stable

(1) The long-term rating for S&P was affirmed on May 14, 2021, and for Moody's on March 30, 2022. Fitch's long-term rating was affirmed on June 3, 2021.

(2) S&P revised its outlook to stable from positive on April 25, 2023.

(3) Moody's Investors Service revised its outlook to positive from stable on February 28, 2023.

Planned Portfolio Transformation

On April 25, 2023, we announced that we entered into an Agreement to acquire the VCS Business for approximately €12 billion. 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. We intend to finance the acquisition with a combination of cash on hand and new debt financing and expect the transaction to close around the end of 2023. In addition, we also announced plans to exit our Fire & Security and Commercial Refrigeration businesses over the course of 2024.

In connection with the planned acquisition, we entered into commitment letters with JPMorgan Chase Bank, N.A., BofA Securities, Inc. and Bank of America, N.A. to provide an €8.2 billion Bridge Loan. Proceeds from the Bridge Loan are expected to be used to fund a portion of the Euro-denominated purchase price of the Business if other debt financing is not secured by the acquisition date. 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.

On May 19, 2023, we 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 Business. In addition, we 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 Business.

Share Repurchase Program

We may repurchase our outstanding common stock from time to time subject to market conditions and at our 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. Since the initial authorization in February 2021, our Board of Directors authorized the repurchase of up to $4.1 billion of our outstanding common stock. As of December 31, 2022, we 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, we had approximately $2.2 billion remaining under the current authorization at December 31, 2022.

During the three months ended September 30, 2023, we did not repurchase any shares of common stock. During the nine months ended September 30, 2023, we repurchased 1.4 million shares of common stock for an aggregate purchase price of $62 million. As a result, we have approximately $2.1 billion remaining under the current authorization at September 30, 2023.

Dividends

We paid dividends on common stock during the nine months ended September 30, 2023, totaling $465 million. In October 2023, the Board of Directors declared a dividend of $0.185 per share of common stock payable on November 20, 2023 to shareowners of record at the close of business on October 27, 2023.

Discussion of Cash Flows


	Nine Months Ended September 30,
(In millions)	2023		2022
Net cash flows provided by (used in):
Operating activities	$	1,545	$	620
Investing activities	(431)		2,045
Financing activities	(688)		(2,584)
Effect of foreign exchange rate changes on cash and cash equivalents	(45)		(115)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	381	$	(34)

Cash flows from operating activities primarily represent inflows and outflows associated with our operations. Primary activities include net income from operations adjusted for non-cash transactions, working capital changes and changes in other assets and liabilities. The year-over-year increase in net cash provided by operating activities was primarily driven by a decrease in working capital balances compared with the prior period. Improved inventory management and higher accounts payable balances more than offset higher accounts receivable balances. In addition, Accounts payable and accrued liabilities included a $368 million mark-to-market valuation adjustment on our window forward contracts associated with the Euro-denominated purchase price of the VCS Business. Prior year working capital balances increased due to higher safety stock and supply chain constraints.

Cash flows from investing activities primarily represent inflows and outflows associated with long-term assets. Primary activities include capital expenditures, acquisitions, divestitures and proceeds from the sale of fixed assets. During the nine months ended September 30, 2023, net cash used in investing activities was $431 million. The primary drivers of the outflow related to $236 million of capital expenditures and $134 million related to the deconsolidation of KFI. In addition, we settled working capital and other transaction-related items associated with the acquisition of TCC and invested in several businesses. These amounts totaled $69 million, net of cash acquired and were partially offset by the proceeds from the sale of a business during the period. During the nine months ended September 30, 2022, net cash provided by investing activities was $2.0 billion. The primary driver of the inflow related to the net proceeds from the Chubb Sale. This amount was partially offset by the acquisition of TCC and several other businesses and minority-owned businesses, which totaled $472 million, net of cash acquired and $213 million of capital expenditures.

Cash flows from financing activities primarily represent inflows and outflows associated with equity or borrowings. During the nine months ended September 30, 2023, net cash used in financing activities was $688 million. The primary driver of the outflow related to the payment of $465 million in dividends to our common shareowners. In addition, we paid $62 million to repurchase shares of our common stock. During the nine months ended September 30, 2022, net cash used in financing activities was $2.6 billion. The primary driver of the outflow related to the payment of $1.3 billion to repurchase shares of our common stock. In addition, we settled our tender offers for $1.15 billion and paid $384 million in dividends to our common shareowners.

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