Grade: F — Three Red Flags Including AR Growth Pattern
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed February 5, 2026, FY ended December 31, 2025) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP — Unqualified opinion, auditor since 2019 (1 critical audit matter: goodwill — Climate Solutions Europe reporting unit, $7.8B)
One-line verdict: Carrier is a portfolio still being reshaped after the 2024 Viessmann acquisition and the simultaneous divestitures of Fire & Security, Access, Industrial Fire, and CCR. Revenue fell 3% to $21.75B (organic -1%), gross margin compressed 70 basis points to 25.9%, operating profit fell 18% from $2,646M to $2,172M, and earnings from continuing operations were up 29% to $1,558M only because FY2024 had a $1.06B income tax charge vs $240M in FY2025. The continuing-operations story is weaker than headline suggests. The balance sheet carries the real issues: goodwill of $15.5B plus intangibles of $6.3B total $21.8B — 158% of equity — with $7.8B of that goodwill concentrated in the Climate Solutions Europe reporting unit that PwC flagged as the critical audit matter. Cash of $1.56B covers just 13% of $12.25B in debt (down from $3.97B cash a year ago after $2.89B of buybacks). And AR has outpaced revenue for two consecutive years — the A2 failing check. The Riello divestiture agreed in December 2025 is the next step in reshaping, expected to close in H1 2026 for approximately $430M. The mega-story is European goodwill carried at 55% of total goodwill while European organic demand is soft.
| Metric | Result |
|---|---|
| Red Flags | **3** (A2 AR growth, C4 cash-to-debt, D1 goodwill/equity) |
| Watch Items | **0** |
| Checks Completed | **17/18** |
| Beneish M-Score | **-2.57** (clean) |
| Altman Z-Score | **2.36** (grey zone) |
A Portfolio Still Being Rebuilt
The MD&A describes FY2024 as the year the portfolio was "transformed":
"During 2024, we completed several activities designed to simplify our business portfolio, transforming it into a pure-play climate and energy solutions provider. On January 2, 2024, we acquired the climate solutions business (the 'VCS Business') of Viessmann Group GmbH & Co. KG… a premier residential and light commercial heating, ventilating and air conditioning ('HVAC') provider in Europe. In addition, we divested our Commercial and Residential Fire, Access Solutions and Industrial Fire businesses… We also divested our Commercial Refrigeration business ('CCR') during 2024."
FY2025 continued the reshaping:
"On December 16, 2025, we entered into a purchase agreement to sell our Riello business ('Riello') to Ariston Group with expected gross proceeds of approximately $430 million. Riello, predominantly reported in our Climate Solutions Europe segment, is a leading international manufacturer that designs, produces and integrates a comprehensive portfolio of thermal solutions including burners, boilers, heat pumps, cooling systems and aftermarket services… This transaction is expected to close in the first half of 2026."
Segment structure was also revised — three regional HVAC operating segments (Americas, Europe, APAC/MEA) plus Climate Solutions Transportation. The CODM measure changed from "Operating profit" to "Segment operating profit." The "pure play climate and energy" label now applies.
Financial Performance: Headline EPS Up, Organic Down
From the consolidated statement of operations (in millions):
| Metric | FY2025 | FY2024 | FY2023 | Trend |
|---|---|---|---|---|
| Product Sales | $19,173 | $19,990 | $16,665 | -4.1% |
| Service Sales | $2,574 | $2,496 | $2,286 | +3.1% |
| Total Net Sales | $21,747 | $22,486 | $18,951 | -3.3% |
| Cost of Products Sold | $(14,232) | $(14,580) | $(12,002) | -2.4% |
| Cost of Services Sold | $(1,891) | $(1,925) | $(1,787) | -1.8% |
| Gross Margin | $5,624 | $5,981 | $5,162 | -6.0% |
| Gross Margin % | 25.9% | 26.6% | 27.2% | -70bp (-130bp two-yr) |
| R&D | $(625) | $(686) | $(493) | -8.9% |
| SG&A | $(3,092) | $(3,197) | $(2,607) | -3.3% |
| Operating Profit | $2,172 | $2,646 | $2,160 | -17.9% |
| Interest Expense, net | $(364) | $(371) | $(160) | -1.9% |
| Earnings before Tax | $1,798 | $2,274 | $1,999 | -20.9% |
| Income Tax | $(240) | $(1,062) | $(521) | -77% |
| Earnings from Continuing Ops | $1,558 | $1,212 | $1,478 | +28.5% |
| Discontinued Ops | $29 | $4,496 | $(38) | -99% |
| Net Earnings | $1,587 | $5,708 | $1,440 |
The 29% continuing-operations increase is misleading: it's driven by the income tax line dropping from $1,062M to $240M, not by operating improvement. Operating profit actually fell 18%.
Per the MD&A, the FY2025 revenue decline breaks down as:
"Organic/Operational (1)%, Foreign currency translation 1%, Acquisitions and divestitures, net (3)%, Total % change (3)%"
And the organic decline: "primarily due to our Climate Solutions Americas segment as reduced demand in certain end-markets resulted in lower volumes. In addition, lower end-market demand in both Climate Solutions Europe and Climate Solutions Asia Pacific, Middle East & Africa further impacted results."
Gross margin compressed 70 basis points. The MD&A notes: "The prior period included inventory step-up and backlog amortization resulting from the recognition of acquired assets of the VCS Business at fair value which are now fully amortized. These costs had a 130 basis point unfavorable impact on the prior period gross margin as a percentage of Net sales." In other words, the 70bp decline understates the true operational decline because the prior year had a 130bp drag from acquisition accounting that rolled off. Adjusted for that, gross margin really fell by ~200bp year-over-year on comparable basis.
On tariffs, management claims: "we fully mitigated the impact of tariffs during 2025 through a combination of supply-chain adjustments, productivity initiatives and approximately $200 million of incremental product pricing actions. To date, tariffs have not had a material impact on our business."
Cash Flow: Reshaping Shows Up in Cash Flow Volatility
From the consolidated statements of cash flows (in millions):
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Net Earnings | $1,587 | $5,708 | $1,440 |
| D&A | $1,274 | $1,232 | $491 |
| Continuing OCF | $2,089 | $1,571 | $2,252 |
| Discontinued OCF | $424 | $(1,008) | $355 |
| **Total OCF** | **$2,513** | **$563** | **$2,607** |
| CapEx | $(392) | $(519) | $(439) |
| Acquisitions | $(107) | $(10,890) | $(84) |
| Dispositions | $27 | $634 | $54 |
| Long-term Debt Issued | $48 | $3,412 | $5,609 |
| Long-term Debt Repaid | $(1,212) | $(5,345) | $(111) |
| Buybacks | $(2,892) | $(1,944) | $(62) |
| Dividends | $(772) | $(670) | $(620) |
The yfinance-derived CFFO/NI ratio of 1.69 reflects $2,513M total operating cash flow (including discontinued ops) / $1,484M net earnings attributable to common shareowners — but the FY2024 denominator included a $4,496M gain from discontinued operations (the sale proceeds from Fire & Security businesses), which made the FY2024 ratio nonsense (0.10). Stripping out the noise: continuing operating cash flow of $2,089M versus continuing net earnings attributable to common shareowners of $1,455M gives a cleaner 1.44x conversion — healthy.
Free cash flow (continuing OCF minus CapEx) was $1,697M in FY2025. The company spent $2,892M on buybacks plus $772M on dividends — $3,664M returned to shareholders, funded partly by drawing down cash from $3,969M to $1,555M.
Balance Sheet: The European Goodwill Concentration
From the consolidated balance sheet (in millions):
| Item | Dec 31, 2025 | Dec 31, 2024 |
|---|---|---|
| Cash & Equivalents | $1,555 | $3,969 |
| Accounts Receivable | $2,639 | $2,651 |
| Inventories | $2,483 | $2,299 |
| Assets Held for Sale | $592 | $0 |
| Other Current Assets | $1,264 | $972 |
| Total Current Assets | $8,533 | $9,891 |
| Fixed Assets | $3,165 | $2,999 |
| Intangible Assets (net) | $6,326 | $6,432 |
| Goodwill | $15,501 | $14,601 |
| Total Assets | $37,190 | $37,403 |
| Short-term Borrowings & Current LTD | $468 | $1,336 |
| Long-term Debt | $11,365 | $11,026 |
| Total Liabilities | $23,062 | $23,008 |
| Treasury Stock | $(6,795) | $(3,915) |
| Retained Earnings | $12,193 | $11,483 |
| Total Equity | $14,128 | $14,395 |
Goodwill + intangibles = $21.8B, or 158% of $14.1B equity. And per the CAM: "the Company's goodwill balance was $15.5 billion as of December 31, 2025, and the goodwill associated with the Climate Solutions Europe reporting unit was $7.8 billion." Half of total goodwill sits in one reporting unit — the same region the MD&A describes as experiencing "lower end-market demand."
Cash dropped from $3.97B to $1.56B — a $2.4B decline — as buybacks ($2.89B) and debt repayment ($1.21B) exceeded operating cash inflows. Treasury stock jumped from $3.92B to $6.80B. Total debt of $11.83B ($468M ST + $11,365M LT) is down from $12.36B, but cash coverage fell dramatically.
The Viessmann share repurchase line item is notable: "Share repurchase with Viessmann (300)" — in FY2025 Carrier bought back $300M of the shares issued to Viessmann as part of the original VCS acquisition consideration. This is on top of $2,580M of open-market buybacks.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 44 days, +1 day YoY |
| A2 | AR vs Revenue Growth | **FAIL** | AR outpaced revenue for 2 consecutive years |
| A3 | Revenue vs CFFO | PASS | Revenue -3.3%, CFFO +346% (FY2024 base was depressed) |
A2 is the standout flag. Accounts receivable have grown faster than revenue for two consecutive years — even as revenue declined 3.3%, AR barely moved ($2,651M → $2,639M), and on a 2-year basis AR outpaced revenue growth. This is a classic Schilit-style revenue-quality question. Combined with the mix shift from declining organic volumes, it raises the question of whether channel stuffing or extended payment terms are supporting headline revenue.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory +8.0% vs COGS -2.3% |
| B2 | CapEx vs Revenue | PASS | CapEx -24.5% vs revenue -3.3% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 55.0% |
| B4 | Gross Margin | PASS | 25.9%, -0.7pp (within tolerance) |
Inventory rising 8% while COGS declines 2% is a yellow flag — the build could reflect lower sell-through, not necessarily fraud.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.69 |
| C2 | Free Cash Flow | PASS | FCF $2.1B, FCF/NI = 1.43 |
| C3 | Accruals Ratio | PASS | -2.8%, low accruals |
| C4 | Cash vs Debt | **FAIL** | Cash $1.6B covers only 13% of debt $12.3B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | **FAIL** | $21.8B = 158% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 3.5x (borderline) |
| D3 | Soft Asset Growth | PASS | Other assets +19.7% vs revenue -3.3% |
| D4 | Asset Impairment | N/A | No write-off data |
Debt/EBITDA at 3.5x passes the 4.0x threshold but is at the high end. A 10% drop in EBITDA would push it above 4.0x.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill+Intangibles +4% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | PASS | -2.57 (threshold: < -2.22) |
Key Risks from the 10-K
1. Climate Solutions Europe Goodwill — PwC's Critical Audit Matter
PricewaterhouseCoopers identified the $7.8B goodwill allocated to the Climate Solutions Europe reporting unit as the critical audit matter. PwC writes: "The principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessment of the Climate Solutions Europe reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the Climate Solutions Europe reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management's significant assumptions related to the revenue growth rate, EBIT margin, discount rate, and terminal growth rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge." With European demand described as soft in the MD&A and $7.8B of goodwill concentrated in one reporting unit, a mid-single-digit impairment of 10% would be a $780M charge.
2. International Operations and Tariff Exposure
"Approximately 52% of our net sales for the year ended December 31, 2025, are derived from international operations, including U.S. export sales." The risk factors explicitly warn: "The implementation of more restrictive trade policies, including tariffs, by the U.S. or by other countries, such as China and Mexico, where we sell or produce our products and services or procure materials, or unpredictability or rapid shifts in trade policies, including as a result of trade conflict between the U.S. and other countries, have in the past negatively impacted, and could in the future negatively impact, our business."
3. Joint Venture Dependence
"Our business operations, particularly in our Climate Solutions Americas and Climate Solutions Asia Pacific, Middle East & Africa segments, depend on various strategic relationships, namely, joint ventures and non-wholly owned subsidiaries. We sell our products and services through certain key distributor, joint venture and similar relationships, including the Carrier Enterprise joint ventures with Watsco, Inc., AHI-Carrier FZC, a United Arab Emirates-based joint venture and various joint ventures with members of the Midea Group." Equity method investment earnings of $229M in FY2025 flow through operating profit.
4. Separation from UTC Indemnification Obligations
"In connection with the Separation into three independent public companies, each of UTC, Carrier and Otis has agreed to indemnify the other parties for certain liabilities. If we are required to pay UTC and/or Otis under these indemnities, our financial results could be negatively impacted… In certain circumstances, we could be required to indemnify UTC for material taxes and other related amounts." This is a legacy from the 2020 UTC separation.
5. HVAC Seasonality and Weather Dependence
"Demand for our HVAC products and services is influenced by weather conditions, seasonality, macroeconomic conditions and other factors." Mild summers in key geographies dampen residential AC demand.
6. Credit Rating Risk
"Failure to maintain a satisfactory credit rating could adversely affect our liquidity, capital position, borrowing costs and access to the capital markets." With $12.25B of debt and Debt/EBITDA at 3.5x, a one-notch downgrade would push borrowing costs materially higher.
Summary
Grade: F. Three red flags: AR growth outpacing revenue for two consecutive years, cash covering only 13% of $12.25B debt, and goodwill at 158% of equity with $7.8B concentrated in a single European reporting unit that is the auditor's critical audit matter.
Operating metrics are deteriorating: revenue -3.3%, organic -1%, gross margin -70bp (adjusted -200bp), operating profit -18%. The 29% growth in continuing-operations net earnings is an artifact of comparing against FY2024's heavy income tax charge — the underlying operating trajectory is negative.
Capital allocation shows aggressive buybacks ($2,892M + $300M Viessmann repurchase) funded by drawing down cash from $3.97B to $1.56B while maintaining $12.25B of debt. In a business with declining organic revenue and shrinking gross margin, deploying cash into buybacks rather than debt reduction is a bet on the cyclical recovery.
The critical audit matter — $7.8B of goodwill on one European reporting unit while the MD&A acknowledges European demand softness — is the single most important item in the 10-K. If PwC's sensitivity were to flip, a multi-billion-dollar goodwill impairment would flow through to reported earnings and equity.
The key question for FY2026: Does the Riello divestiture ($430M proceeds) and continued Viessmann integration get management closer to its portfolio targets, or does the European reporting unit become the source of a goodwill impairment event?
**Disclaimer**: This report is based on Carrier Global's FY2025 10-K filed with SEC EDGAR on February 5, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP (Unqualified opinion, auditor since 2019, 1 critical audit matter — goodwill impairment, Climate Solutions Europe reporting unit)
Fiscal year ended: December 31, 2025