Trane Technologies plc — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. Trane Technologies sells and services HVAC, transport refrigeration and related solutions under the Trane and Thermo King brands.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenues | $3,665.8 million | $3,355.5 million |
| Gross profit / margin | $1,143.5 million / 31.2% | $989.0 million / 29.5% |
| Operating income / margin | $456.8 million / 12.5% | $388.2 million / 11.6% |
| Earnings from continuing operations | $316.6 million | $270.4 million |
| Net earnings attributable to Trane Technologies | $307.1 million | $260.2 million |
| Diluted EPS, total / continuing operations | $1.33 / $1.35 | $1.10 / $1.13 |
| Continuing operating cash flow | $16.8 million | $(3.9) million |
| Free cash flow, non-GAAP | $(51.6) million | $27.3 million |
Revenue increased 9.2%, driven by pricing (6.6 percentage points), volume (2.4 points) and acquisitions (1.8 points), partly offset by currency translation (1.6 points). Gross margin improved 170 basis points, primarily from pricing and productivity; higher selling and administrative costs and inflationary pressures partly offset the improvement. Selling and administrative expense rose 14.3% to $686.7 million.
Segment revenue and adjusted EBITDA margin were: Americas, $2,861.0 million and 15.9% (up from 15.4%); EMEA, $510.5 million and 18.5% (up from 13.4%); Asia Pacific, $294.3 million and 19.4% (up from 15.5%). Total segment adjusted EBITDA was $607.4 million, up 19.5%; this is a company-defined, non-GAAP measure.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $692.9 million at March 31, down from $1,220.5 million at year-end. Total debt was $4,830.1 million, broadly unchanged from $4,836.3 million; debt-to-total-capital was 44.4%, versus 44.2%.
- The company had $2.0 billion of unused revolving credit facilities and no commercial paper outstanding. It reported that available cash, operating cash generation, credit lines and expected capital-market access should fund operating and capital needs for at least the next 12 months.
- Q1 financing cash outflow was $459.2 million, including $300.0 million of share repurchases and $170.3 million of dividends paid. The company issued $700 million of 5.250% notes due 2033 and used the proceeds to redeem $700 million of 4.250% notes due 2023. Approximately $2.9 billion remained under the 2022 share-repurchase authorization.
- Capital expenditures were $77.1 million. Free cash flow declined year over year; the company cited higher working-capital balances as a cash-flow headwind. The 2022 comparison included a $91.8 million continuing-operations adjustment for QSF funding in the company’s free-cash-flow reconciliation.
Outlook, commentary and risks
- Management described end-market conditions as mixed by geography, while overall demand remained healthy. Supply-chain disruptions, resource constraints, material, wage and energy inflation continued to affect operations. Higher interest rates, tighter financial conditions and banking uncertainty could weaken economic conditions and demand. The filing provides no specific consolidated revenue or earnings guidance.
- The company expects approximately $300 million in total annual savings from transformation initiatives, including a further $60 million during 2023. It had incurred approximately $131 million of costs through March 31 and expected total costs of up to $150 million through 2023.
- On May 2, 2023, after quarter-end, the company completed its acquisition of MTA S.p.A., a process-cooling business expected to report primarily in EMEA.
- The Chapter 11 cases of subsidiaries Aldrich and Murray, related to asbestos claims, remained pending. The outcome, extent of potential liability and timing were uncertain; the proposed plan and trust arrangements remained subject to court approval. The company also disclosed environmental reserves of $43.1 million and ongoing product, tax and other legal matters.
- The company projected approximately $70 million of worldwide pension contributions in 2023. It identified currency movements, competition, supply constraints, labor and talent, cyber risks, climate and regulatory developments, and litigation among factors that could affect results.
Most important facts for investors to verify
- Whether revenue growth and margin improvement persist as pricing, inflation, supply constraints and customer demand evolve.
- Whether working-capital movements improve and operating cash flow converts into positive free cash flow.
- Debt servicing and liquidity following the 2033 note issuance, continued capital returns and the MTA acquisition.
- Developments and potential financial exposure in the Aldrich and Murray bankruptcy and asbestos proceedings.
- Progress against transformation savings targets and the associated remaining costs.