Carrier Global Corp. (NYSE:CARR)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially decreased before experiencing substantial growth. Simultaneously, the cost of capital increased steadily, while invested capital remained relatively stable. These factors combined to produce a shift from negative economic profit to a positive result.

NOPAT Trend

Net operating profit after taxes decreased from US$2,367 million in 2020 to US$1,932 million in 2021, representing a decline of approximately 18.4%. However, a significant recovery occurred in 2022, with NOPAT increasing to US$3,800 million, a rise of roughly 96.7% from the prior year.

Cost of Capital Trend

The cost of capital exhibited a consistent upward trend throughout the period. It rose from 14.75% in 2020 to 15.70% in 2021, and further to 16.33% in 2022. This indicates increasing financing costs for the company.

Invested Capital Trend

Invested capital remained relatively stable. A slight decrease was observed from US$19,032 million in 2020 to US$18,835 million in 2021. This was followed by a modest increase to US$19,880 million in 2022. The changes were minimal compared to the fluctuations in NOPAT.

Economic Profit Trend

Economic profit was negative in both 2020 and 2021, at -US$439 million and -US$1,025 million respectively. This indicates that the company’s returns were not exceeding its cost of capital during these years. However, economic profit turned positive in 2022, reaching US$553 million. This positive result suggests that the company generated returns exceeding its cost of capital in that year, driven primarily by the substantial increase in NOPAT.

The shift to positive economic profit in 2022 is a notable development. While the cost of capital continued to rise, the significant growth in NOPAT outweighed this effect, resulting in value creation for the company.

The analysis of the financial data over the three reported years reveals notable fluctuations in key profitability metrics, specifically net income attributable to common shareowners and net operating profit after taxes (NOPAT).

Net income attributable to common shareowners

This measure shows a decrease from 1982 million US dollars in 2020 to 1664 million US dollars in 2021, indicating a reduction of approximately 16%. However, in 2022, there is a significant recovery and growth, with net income rising sharply to 3534 million US dollars. This represents more than a doubling from the prior year and an overall increase compared to 2020. The pattern suggests that while 2021 experienced a dip in profitability, 2022 saw a robust improvement and strong earnings performance.

Net operating profit after taxes (NOPAT)

Like net income, NOPAT declined from 2367 million US dollars in 2020 to 1932 million US dollars in 2021, reflecting a decrease of approximately 18%. In 2022, NOPAT rebounded substantially to 3800 million US dollars, surpassing both previous years. This improvement in NOPAT illustrates enhanced operational efficiency and a stronger bottom-line operating profit after accounting for taxes during the most recent year.

Overall, the data presents a trend of initial earnings contraction in 2021, potentially due to external or internal challenges affecting profitability, followed by a marked recovery and growth in 2022. The increase in both net income and NOPAT in 2022 underscores a positive shift in financial performance and operational results. This recovery phase suggests successful strategic or operational adjustments leading to substantial value creation for shareholders.

The financial data for the periods ending December 31, 2020, 2021, and 2022 reveal the following trends in tax-related expenses.

Income Tax Expense

The income tax expense shows a decline from US$ 849 million in 2020 to US$ 699 million in 2021, representing a significant decrease. However, in 2022, income tax expense exhibited a slight increase to US$ 708 million. Overall, the expense decreased year-over-year from 2020 to 2022, but the change from 2021 to 2022 indicates a modest upward adjustment.

Cash Operating Taxes

The cash operating taxes consistently increased over the three years. Starting from US$ 820 million in 2020, it rose to US$ 844 million in 2021, and further increased to US$ 900 million in 2022. This steady upward trend may indicate higher cash tax obligations or changes in operating taxable income over the observed period.

In summary, while reported income tax expenses decreased initially and then slightly increased, cash taxes paid showed a consistent rise. This divergence may suggest timing differences between recognized tax expense and actual cash tax payments, or changes in tax planning, credits, or provisions affecting the income tax expense recognition.

Total reported debt & leases

There is a clear downward trend in total reported debt and leases over the three-year period. The value decreased from $11,030 million at the end of 2020 to $10,353 million in 2021, and further declined to $9,503 million by the end of 2022. This indicates a consistent reduction in the company's leverage or obligations related to debt and leases.

Equity attributable to common shareowners

Equity attributable to common shareowners shows a steady increase each year. Starting at $6,252 million in 2020, it rose to $6,767 million in 2021 and further increased to $7,758 million in 2022. This growth suggests improvements in the company's net worth and possibly retained earnings or capital infusion over the period.

Invested capital

Invested capital remained relatively stable in 2020 and 2021, with a slight decrease from $19,032 million to $18,835 million. However, there was a notable increase to $19,880 million in 2022. This indicates a modest growth in the total capital deployed in the company’s operations by the end of the third year.

The economic performance of the entity, as measured by economic value added (EVA) metrics, demonstrates a significant shift over the observed period. Initially, the entity experienced negative economic profit, which transitioned to positive economic profit by the final year. This change is reflected in the economic spread ratio, which moved from negative values to a positive value over the same timeframe.

Economic Profit

Economic profit began at negative US$439 million in 2020, indicating the entity’s returns were less than its cost of capital. This deficit widened considerably in 2021, reaching negative US$1,025 million. However, a substantial improvement occurred in 2022, with economic profit turning positive at US$553 million. This suggests a considerable enhancement in the entity’s ability to generate returns exceeding its cost of capital.

Invested Capital

Invested capital experienced a slight decrease from US$19,032 million in 2020 to US$18,835 million in 2021. A subsequent increase was observed in 2022, with invested capital rising to US$19,880 million. The fluctuations in invested capital appear relatively modest compared to the changes in economic profit, suggesting that the primary driver of the economic profit shift is operational performance rather than significant changes in capital deployment.

Economic Spread Ratio

The economic spread ratio, which represents the difference between the entity’s return on invested capital and its cost of capital, mirrored the trend in economic profit. It was negative in both 2020 (-2.31%) and 2021 (-5.44%), indicating that returns were below the cost of capital. The ratio became positive in 2022 (2.78%), signifying that the entity’s returns exceeded its cost of capital during that year. The magnitude of the shift from -5.44% to 2.78% represents a substantial improvement in the entity’s profitability relative to its capital costs.

In summary, the entity demonstrated a notable turnaround in economic performance between 2020 and 2022. The transition from negative to positive economic profit and the corresponding improvement in the economic spread ratio suggest successful strategies were implemented to enhance profitability and generate returns above the cost of capital.

The economic profit margin exhibited significant fluctuation over the observed period. Initially negative, it transitioned to positive territory, indicating a change in the company’s ability to generate returns exceeding its cost of capital.

Economic Profit

Economic profit demonstrated a marked shift in performance. A substantial loss of US$439 million was recorded in 2020, which widened considerably to a loss of US$1,025 million in 2021. However, 2022 witnessed a reversal, with the company reporting an economic profit of US$553 million. This suggests improved operational efficiency and/or capital allocation in the most recent year.

Net Sales

Net sales increased from US$17,456 million in 2020 to US$20,613 million in 2021, representing a growth trajectory. While sales remained high in 2022 at US$20,421 million, a slight decrease was observed compared to the prior year. This suggests that the positive shift in economic profit in 2022 was not solely driven by revenue growth.

Economic Profit Margin

The economic profit margin began at -2.52% in 2020, reflecting a negative return on sales after accounting for the cost of capital. This margin deteriorated to -4.97% in 2021, indicating a further decline in profitability relative to capital employed. A significant improvement was then realized in 2022, with the margin reaching 2.71%. This positive margin signifies that the company generated economic value during that year, exceeding the required rate of return on its investments.

The substantial swing in economic profit margin, from negative values to positive, warrants further investigation into the factors driving this change. While net sales experienced growth, the improvement in economic profit margin in 2022 suggests enhanced cost management, improved capital efficiency, or a combination of both contributed to the positive outcome.