Trane Technologies plc — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company provides HVAC, transport refrigeration, and related services and solutions through its Trane and Thermo King brands.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4,704.7 | $4,190.4 | $8,370.6 | $7,545.9 |
| Operating income | $885.4 | $710.6 | $1,342.2 | $1,098.8 |
| Operating margin | 18.8% | 17.0% | 16.0% | 14.6% |
| Net earnings attributable to Trane Technologies | $586.2 | $509.3 | $893.3 | $769.5 |
| Diluted EPS | $2.55 | $2.16 | $3.87 | $3.26 |
| Continuing operating cash flow | Not provided for quarter | Not provided for quarter | $548.1 | $417.7 |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $426.9 | $387.2 |
Q2 revenue rose 12.3%; reported gross margin improved to 33.7% from 31.6%. For the first half, revenue rose 10.9% and gross margin increased to 32.6% from 30.6%. Management attributed growth mainly to pricing and higher volumes, with acquisitions contributing and currency partly offsetting growth. Price realization and productivity supported margins; supply-chain inflation, higher costs to serve customers, and business reinvestment were offsets. First-half selling and administrative expense rose 14.2% and increased to 16.6% of revenue from 16.1%.
First-half segment results: Americas revenue was $6,553.5 and Segment Adjusted EBITDA margin was 19.0%; EMEA revenue was $1,128.2 and margin 18.8%; Asia Pacific revenue was $688.9 and margin 20.9%. All three regions grew revenue and adjusted EBITDA. Segment Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings.
Balance sheet, debt and liquidity
At June 30, 2023, cash and cash equivalents were $663.6, down from $1,220.5 at year-end 2022. Total debt was $5,026.8, versus $4,836.3; net debt was approximately $4,363.2. The debt-to-total-capital ratio was 44.5%, compared with 44.2%. Current assets were $6,675.0 and current liabilities $5,593.2. The company had $2.0 billion of unused revolving credit facilities and $200.0 of commercial paper outstanding.
First-half continuing operating cash flow improved by $130.4 year over year. The company reported $647.0 of continuing investing cash outflow, including $506.2 for acquisitions and $134.0 of capital expenditures. Financing cash outflow was $436.4, including $341.4 of dividends and $300.0 of share repurchases, partly offset by debt proceeds. The March issuance of $700.0 of 5.250% notes due 2033 funded redemption of $700.0 of 4.250% notes due 2023. Management stated liquidity should be sufficient for operating and capital needs for at least the next 12 months and thereafter for the foreseeable future.
Material changes and unusual items
- Acquired MTA S.p.A. and Helmer Scientific in May for a combined $484.8 net of cash acquired. Purchase accounting remains preliminary; reported first-half acquisition cash outflow was $506.2, including other acquisitions.
- Other income/expense included a $52.2 impairment of an equity investment in Q2. Q2 other expense was $57.4, versus $1.6 a year earlier.
- A favorable non-cash contingent-consideration adjustment reduced selling and administrative expenses by $52.0 in Q2 and $49.3 for the first half; the related fair-value liability was zero at June 30, down from $49.3 at year-end.
- Cash declined amid acquisitions, dividends, share repurchases, and other cash uses. First-half working-capital changes used $595.0 of cash.
Outlook, commentary and risks
The filing gives no specific near-term revenue or earnings guidance. Management described end-market demand as healthy but market conditions as mixed across geographies. It cited continuing supply-chain and resource constraints, material, wage and energy inflation, and potential effects from tighter financial conditions, higher interest rates and global banking uncertainty. Management emphasized growth opportunities from its installed base, service and replacement businesses, product innovation, and sustainability investments.
The Aldrich and Murray Chapter 11 asbestos cases remain a significant contingency. Motions to dismiss the cases were heard on July 14, 2023; the filing says the outcome, extent of asbestos liability, approval of a reorganization plan, and timing cannot be predicted. The company has funding-agreement obligations, and the proposed plan and trust remain subject to court approval. Other disclosed risks include litigation, environmental matters, taxes, supply chains, inflation, foreign exchange, cybersecurity, and acquisition execution. Environmental reserves were $43.9 at June 30.
Management also said transformation initiatives had generated approximately $240 million of cost reductions through 2022 and targeted an additional $60 million in 2023, for $300 million of annual savings. It anticipated costs of up to $150 million through 2023 and had incurred approximately $132 million cumulatively through June 30.
Investor verification priorities
- Track the asbestos bankruptcy proceedings, trust-plan approval, potential funding obligations, and any change in the company’s assessment of exposure.
- Assess the sustainability of reported earnings and margins, including the $52.2 investment impairment and favorable contingent-consideration adjustment.
- Review final purchase accounting and subsequent contribution from MTA, Helmer, and other acquisitions.
- Reconcile cash generation with working-capital use, acquisition spending, capital returns, and the company’s non-GAAP free cash flow definition.
- Monitor cash, debt maturities, commercial paper, interest expense, and the availability of revolving credit facilities.
- Compare subsequent market commentary and results with the filing’s mixed-demand, inflation, supply-chain, and interest-rate risks.