Carrier Global Corp. (NYSE:CARR)

Total inventory levels exhibited a consistent and accelerating upward trend between December 31, 2020, and December 31, 2022. Net inventories increased from $1,629 million to $2,640 million, representing an overall growth of approximately 62% over the two-year period.

Raw Materials Expansion

The most significant proportional increase is observed in raw materials, which rose from $363 million in 2020 to $884 million by 2022. This represents a substantial expansion of the input base, suggesting a strategic shift toward higher stockpiling or a response to supply chain volatility and inflationary pressures.

Finished Goods Analysis

Finished goods remain the largest component of the inventory mix, increasing from $1,123 million in 2020 to $1,526 million in 2022. The steady rise in this category indicates a growth in the volume of products available for shipment, potentially to support increased sales forecasts or to buffer against production delays.

Work-in-Process Trends

Work-in-process inventory showed a steady increase from $143 million in 2020 to $230 million in 2022. While the absolute growth is smaller than that of other categories, the increase reflects an expansion in active production volume.

Inventory Compositional Shift

A notable shift in the inventory structure is evident. Raw materials as a percentage of total net inventories increased from approximately 22.3% in 2020 to 33.5% in 2022. This suggests a heavier allocation of capital toward early-stage inventory relative to the growth in finished goods.

A consistent upward trend in inventory levels is observed from 2020 to 2022. Both reported and adjusted inventories grew significantly, with reported inventories increasing by approximately 62% and adjusted inventories increasing by 62% over the three-year period. The conversion from LIFO to FIFO results in a consistent upward adjustment to the valuation of inventories, indicating a positive LIFO reserve that has expanded over time.

Inventory Valuation and LIFO Reserve

The discrepancy between reported and adjusted inventories, representing the LIFO reserve, widened from 118 million USD in 2020 to 199 million USD in 2022. This growth suggests a trend of rising replacement costs for inventory items, as the FIFO method reflects more recent, higher costs on the balance sheet compared to the LIFO method.

Impact on Asset Position

The adjustment to FIFO increases the valuation of current assets and total assets proportionally to the increase in inventory. Adjusted current assets remained higher than reported current assets across all periods, with the variance increasing from 118 million USD in 2020 to 199 million USD by the end of 2022. Consequently, total assets also show a corresponding increase, mirroring the growth of the LIFO reserve.

Equity and Shareholder Value

Adjusted equity attributable to common shareowners is consistently higher than reported equity. The difference grew from 118 million USD in 2020 to 199 million USD in 2022. This indicates that the use of LIFO has understated the book value of equity relative to a FIFO valuation, with the understatement becoming more pronounced as inventory levels and costs rose.

Net Income Variance

The conversion to FIFO reveals a shifting impact on profitability. In 2020, the adjusted net income was marginally lower than the reported figure. However, in 2021 and 2022, adjusted net income exceeded reported net income, with a difference of 23 million USD in 2021 and 58 million USD in 2022. This pattern is characteristic of an inflationary environment where LIFO results in higher cost of goods sold and lower reported net income compared to FIFO.

The adjustment from LIFO to FIFO valuation reveals a consistent, albeit modest, impact across key financial metrics from 2020 to 2022. The general trend indicates that the FIFO adjustment slightly enhances liquidity and profitability markers while marginally increasing the asset base, which in turn impacts turnover and leverage ratios.

Liquidity and Asset Efficiency

The adjusted current ratio remains consistently higher than the reported ratio throughout the period, moving from 1.69 in 2020 to 1.67 in 2022. This suggests that the LIFO reserve adds value to current assets, providing a more favorable view of short-term solvency. Conversely, total asset turnover is slightly lower under the adjusted figures, as the increase in the asset base marginally reduces the efficiency ratio, which stabilized at 0.78 by 2022.

Profitability and Returns

Net profit margins experienced significant volatility, dipping in 2021 before rising sharply to 17.31% (reported) and 17.59% (adjusted) in 2022. The adjusted margins are generally higher in the latter two years, indicating that FIFO valuation recognizes higher profit levels. This trend is mirrored in the Return on Assets (ROA), which peaked in 2022 at 13.67% (adjusted), and the Return on Equity (ROE), which reached 45.14% (adjusted) in the same year.

Financial Leverage and Capital Structure

A clear downward trend in financial leverage is observed, with the reported ratio decreasing from 4.01 in 2020 to 3.36 in 2022. The adjusted leverage is consistently lower than the reported figures, falling to 3.30 by the end of 2022. This indicates that the LIFO-to-FIFO adjustment increases the equity component of the balance sheet, thereby reducing the perceived financial risk and leverage of the organization.

The liquidity position between 2020 and 2022 is characterized by a peak in both assets and ratios during the 2021 fiscal year, followed by a moderate contraction in 2022. Both reported and adjusted metrics follow a synchronized trajectory, maintaining a current ratio well above 1.60 throughout the period, which indicates a consistent ability to cover short-term liabilities.

Current Asset Analysis

Adjusted current assets increased from 8,642 million US$ in 2020 to a peak of 11,548 million US$ in 2021, before declining to 10,078 million US$ by the end of 2022. A consistent variance is observed between reported and adjusted figures, with adjusted current assets remaining higher than reported assets across all three years.

Adjusted Current Ratio Trends

The adjusted current ratio rose from 1.69 in 2020 to 1.74 in 2021, subsequently decreasing to 1.67 in 2022. This ratio consistently exceeds the reported current ratio, suggesting that the adjustments applied to the current assets provide a more optimistic view of the company's short-term solvency.

Comparative Liquidity Stability

Despite the volatility in total asset values, the fluctuation in the adjusted current ratio remained narrow, moving within a range of 0.05 points between its peak and trough. This suggests that current liabilities likely trended in alignment with current assets, preserving a stable liquidity margin.

A period of volatility in profitability is observed between 2020 and 2022, characterized by a contraction in 2021 followed by a substantial expansion in 2022. The convergence between reported and adjusted figures suggests that non-recurring items had a minimal impact on overall performance during this timeframe.

Adjusted Net Profit Margin

The adjusted net profit margin experienced a decline from 11.34% in 2020 to 8.18% in 2021, representing a compression of 3.16 percentage points. However, this trend reversed sharply in 2022, with the margin expanding to 17.59%. This represents a significant increase of 9.41 percentage points over the 2021 level, indicating a marked improvement in operational efficiency or a shift in the revenue mix toward higher-margin products or services.

Net Income Performance

Adjusted net income followed a trajectory consistent with the profit margins. A decrease was noted from US$ 1,980 million in 2020 to US$ 1,687 million in 2021. By December 31, 2022, adjusted net income rose to US$ 3,592 million, more than doubling the results from the previous year and exceeding 2020 levels by approximately 81%.

Reported versus Adjusted Metrics

The variance between reported and adjusted net profit margins remained marginal across all three years. In 2022, for example, the reported margin of 17.31% differed from the adjusted margin of 17.59% by only 0.28 percentage points, suggesting that the drivers of the 2022 growth were primarily operational rather than the result of one-time accounting adjustments.

An examination of the asset utilization metrics from 2020 to 2022 reveals a period of initial expansion followed by relative stabilization. The asset base grew moderately in 2021 before remaining nearly constant through 2022. Concurrently, asset turnover ratios experienced a distinct improvement between 2020 and 2021, indicating an increase in the efficiency with which assets were utilized to generate revenue.

Adjusted Total Assets

Adjusted total assets increased from US$ 25,211 million in 2020 to US$ 26,313 million in 2021. This growth was followed by a marginal decline to US$ 26,285 million by December 31, 2022, suggesting a stabilization of the company's overall investment in assets.

Adjusted Total Asset Turnover

The adjusted total asset turnover ratio demonstrated a significant increase from 0.69 in 2020 to 0.78 in 2021. This upward trend indicates improved operational productivity. The ratio remained stable at 0.78 in 2022, showing that the gains in efficiency achieved in 2021 were maintained.

Comparison of Reported and Adjusted Metrics

A narrow variance is observed between reported and adjusted figures for both total assets and turnover ratios across the three-year period. The adjusted total asset turnover consistently aligns with the reported turnover, indicating that the adjustments applied to the asset base did not materially alter the perceived efficiency of the asset utilization.

A consistent reduction in financial leverage is evident across the analyzed three-year period. Both reported and adjusted leverage ratios exhibit a clear downward trajectory, indicating a strengthening of the capital structure and a decreased reliance on debt relative to equity.

Adjusted Financial Leverage Trends

The adjusted financial leverage ratio declined steadily from 3.96 in 2020 to 3.81 in 2021, and further to 3.30 by December 31, 2022. This downward trend suggests a systemic improvement in the company's solvency profile over the period.

Equity Growth Analysis

A primary driver of the reduced leverage is the consistent increase in adjusted equity attributable to common shareowners. Equity grew from US$ 6,370 million in 2020 to US$ 6,908 million in 2021, reaching US$ 7,957 million in 2022. This growth represents a significant expansion of the equity base, which effectively lowers the leverage ratio.

Asset Stability

Adjusted total assets remained relatively stable, shifting from US$ 25,211 million in 2020 to US$ 26,285 million in 2022. Because assets did not increase proportionally with equity, the reduction in financial leverage is attributable to the growth in equity rather than a contraction of the asset base.

Comparison of Reported and Adjusted Metrics

There is a consistent, narrow variance between reported and adjusted figures. In all three years, the adjusted financial leverage ratio remained slightly lower than the reported ratio, while adjusted equity and assets remained slightly higher than their reported counterparts, indicating a stable application of adjustments over the observed timeframe.

An analysis of the adjusted return on equity (ROE) reveals a volatile trend between 2020 and 2022, characterized by a contraction in 2021 followed by a substantial expansion in 2022.

Adjusted Net Income

Adjusted net income attributable to common shareowners experienced a decline of approximately 14.8% in 2021, falling from US$ 1,980 million to US$ 1,687 million. However, a significant recovery occurred in 2022, with adjusted net income increasing by 113% to reach US$ 3,592 million.

Adjusted Equity

Adjusted equity attributable to common shareowners demonstrated consistent growth over the three-year period. The value rose from US$ 6,370 million in 2020 to US$ 6,908 million in 2021, and further increased to US$ 7,957 million by the end of 2022.

Adjusted Return on Equity (ROE)

The adjusted ROE followed a V-shaped trajectory. In 2021, the combination of decreasing adjusted net income and increasing adjusted equity led to a reduction in ROE from 31.08% to 24.42%. In 2022, the surge in adjusted net income significantly outpaced the growth in equity, resulting in a sharp increase in adjusted ROE to 45.14%.

Comparative Variance

The variance between reported and adjusted figures remains minimal across all metrics. Adjusted ROE consistently tracks closely with reported ROE, suggesting that non-recurring items had a negligible impact on the overall return profile during this period.

The financial performance from 2020 to 2022 is characterized by significant volatility in profitability relative to a stable asset base, resulting in a substantial increase in asset utilization efficiency by the conclusion of the period.

Adjusted Net Income Trends

Adjusted net income attributable to common shareowners experienced a decline from US$ 1,980 million in 2020 to US$ 1,687 million in 2021, representing a contraction in profitability. This was followed by a sharp recovery in 2022, where adjusted net income more than doubled to reach US$ 3,592 million.

Adjusted Total Asset Stability

The adjusted asset base remained relatively constant across the three-year duration. Assets rose slightly from US$ 25,211 million in 2020 to US$ 26,313 million in 2021, before stabilizing at US$ 26,285 million in 2022, indicating that growth in returns was not driven by asset expansion.

Adjusted Return on Assets (ROA) Analysis

The Adjusted ROA exhibited a fluctuating trend, decreasing from 7.85% in 2020 to 6.41% in 2021, which correlates with the decrease in net income and the slight increase in assets. A significant upward shift occurred in 2022, with the Adjusted ROA rising to 13.67%, demonstrating a marked improvement in the ability to generate earnings from the existing asset base.