Trane Technologies plc — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Trane Technologies designs, manufactures, sells and services HVAC, transport refrigeration and related climate solutions under the Trane and Thermo King brands.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $4,882.9m | $4,371.9m | $13,253.5m | $11,917.9m |
| Operating income | $864.2m | $739.5m | $2,206.4m | $1,838.3m |
| Operating margin | 17.7% | 16.9% | 16.6% | 15.4% |
| Net earnings attributable to Trane Technologies | $626.3m | $547.9m | $1,519.6m | $1,317.4m |
| Diluted EPS | $2.72 | $2.34 | $6.58 | $5.59 |
Revenue grew 11.7% in Q3 and 11.2% year to date. For the nine-month period, growth reflected pricing of 5.0%, volume of 4.6% and acquisitions of 2.1%, partly offset by 0.5% unfavorable currency translation. Gross margin improved to 34.0% in Q3 from 32.8%, and to 33.1% year to date from 31.4%, chiefly from price realization and productivity, partly offset by inflation and reinvestment.
Q3 Segment Adjusted EBITDA was $1,027.1m, up 17.5%, with a 21.0% margin versus 20.0%. For nine months, it was $2,630.2m, up 18.5%, with a 19.8% margin versus 18.6%. These are non-GAAP measures defined by the company.
- Americas: Q3 revenue $3,888.0m (+11.7%); segment margin 20.8% versus 20.0%. Nine-month revenue $10,441.5m (+9.9%); margin 19.7% versus 19.0%.
- EMEA: Q3 revenue $618.6m (+20.6%), aided by acquisitions and currency; margin 21.1% versus 18.5%. Nine-month revenue $1,746.8m (+18.3%); margin 19.6% versus 16.7%.
- Asia Pacific: Q3 revenue $376.3m (-0.3%), with lower volume and unfavorable currency; margin 23.3% versus 21.7%. Nine-month revenue $1,065.2m (+13.2%); margin 21.7% versus 17.9%.
Cash flow, debt and liquidity
For the first nine months, cash from continuing operating activities was $1,482.6m, compared with $933.4m a year earlier. Company-defined free cash flow was $1,288.4m versus $891.0m; it is non-GAAP and adjusts operating cash flow for specified items, including capital expenditures. Capital expenditures were $217.2m. Investing cash outflow was $736.1m, including $510.2m for acquisitions; financing cash outflow was $952.1m, including $513.0m of ordinary-share dividends and $459.8m of share repurchases.
At September 30, cash was $960.0m, total debt $4,824.6m and the debt-to-total-capital ratio 41.9% (44.2% at December 31, 2022). The company had no commercial paper outstanding and $2.0bn of unused revolving credit facilities. Cash declined from $1,220.5m at year-end. Current assets were $6,726.9m and current liabilities $5,214.2m.
In March, the company issued $700m of 5.25% senior notes due 2033, using the proceeds to redeem $700m of 4.25% notes due 2023. Long-term debt increased to $4,476.3m from $3,788.3m, while total debt was broadly unchanged. Share repurchases totaled approximately $460m year to date; $2.7bn remained under the current authorization at September 30. The company said it expects cash, operations and available credit to meet operating and capital needs for at least the next 12 months.
Changes, outlook and risks
- Management described overall commercial HVAC markets as strong, supported by demand for differentiated solutions, energy efficiency and decarbonization. Transport refrigeration and residential markets were mixed and normalizing as lead times returned toward historical levels. The company expected market conditions to remain mixed across geographies.
- Management cited continuing material, wage and energy inflation, as well as potential risks from tighter credit, higher interest rates, geopolitical events and weaker economic conditions. No specific numeric earnings or revenue guidance is provided in the filing text.
- MTA and Helmer Scientific were acquired in May 2023 for a combined $490.8m, net of cash acquired. The company signed an agreement to acquire Nuvolo, subject to regulatory approval, with closing expected in Q4 2023.
- Other income/expense included a $52.2m equity-investment impairment in the first nine months, contributing to the increase in net expense to $76.8m from $21.0m. A $49.3m favorable noncash change in contingent consideration also affected the year-to-date comparison. Q3 2022 included a $25.0m insurance settlement that benefited the prior-year comparison.
- The effective tax rate was 20.5% for the first nine months, up from 18.3% in 2022. The filing cites, among other factors, a nondeductible equity-investment impairment in 2023 and tax valuation-allowance benefits in 2022.
- Asbestos-related Chapter 11 cases for subsidiaries Aldrich and Murray remained pending. Motions to dismiss were heard in July 2023; the outcome, duration and ultimate asbestos liability remain uncertain. A proposed reorganization plan and the company’s funding agreements may create exposure, but the filing says the potential outcome cannot be predicted. Environmental reserves were $46.8m at September 30.
- The company reported no material changes to its previously disclosed risk factors. Disclosure controls were assessed as effective, with no materially affecting change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track the Aldrich and Murray bankruptcy proceedings, proposed trust funding and possible implications of the funding agreements for the parent company.
- Assess whether pricing and productivity can continue to offset input-cost inflation, and monitor normalization in residential and transport refrigeration markets.
- Review acquisition integration and the pending Nuvolo transaction, including regulatory approval and expected timing.
- Reconcile the non-GAAP Segment Adjusted EBITDA and free-cash-flow measures to GAAP results, including the effects of the investment impairment, contingent consideration and prior-year insurance settlement.
- Monitor cash conversion, acquisition spending, leverage and capital returns; confirm the remaining share-repurchase authorization and subsequent repurchases.