Trane Technologies plc — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 2, 2022. Trane Technologies sells and services HVAC and transport refrigeration equipment and solutions under the Trane and Thermo King brands. Financial amounts below are in millions of U.S. dollars except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $4,371.9 | $3,719.8 | $11,917.9 | $10,567.1 |
| Operating income | $739.5 | $583.4 | $1,838.3 | $1,587.6 |
| Operating margin | 16.9% | 15.7% | 15.4% | 15.0% |
| Net earnings attributable to Trane Technologies | $547.9 | $405.7 | $1,317.4 | $1,105.6 |
| Diluted EPS | $2.34 | $1.68 | $5.59 | $4.55 |
| Continuing operating cash flow | Not provided for the quarter | Not provided for the quarter | $933.4 | $1,162.6 |
Q3 revenue rose 17.5% year over year, driven by pricing, volume and acquisitions, partly offset by currency translation. Gross margin increased 40 basis points to 32.8%; management cited pricing above direct-material and freight inflation and higher volume. For the first nine months, gross margin declined 100 basis points to 31.4%, with material and freight inflation and supply-chain-related productivity challenges outweighing pricing.
Q3 revenue increased in the Americas by 19.6%, EMEA by 3.7%, and Asia Pacific by 20.0%. EMEA adjusted EBITDA margin fell 160 basis points to 18.5%, while Americas rose 50 basis points to 20.0% and Asia Pacific rose 350 basis points to 21.7%. For the nine-month period, EMEA adjusted EBITDA margin declined 270 basis points to 16.7%; Americas and Asia Pacific margins were 19.0% and 17.9%, respectively. Segment Adjusted EBITDA is a non-GAAP measure.
Cash flow, balance sheet and capital allocation
- Continuing operating cash flow for the first nine months was $933.4, down from $1,162.6. Management attributed the decline primarily to higher working capital, $91.8 of continuing-operations funding for the asbestos-related qualified settlement fund (QSF), and planned pension and postemployment funding, partly offset by higher earnings.
- Capital expenditures were $202.8, compared with $121.6 a year earlier. The company reported non-GAAP free cash flow of $891.0, versus $1,081.6; its calculation includes specified adjustments, including QSF funding, restructuring, executive compensation and a property-claim insurance settlement.
- Cash and cash equivalents were $1,080.2 at September 30, 2022, down from $2,159.2 at year-end 2021. Total debt was $4,837.4, broadly unchanged from $4,842.1; the debt-to-total-capital ratio increased to 45.2% from 43.6%. Cash less total debt was approximately $3,757.2 of net debt.
- Current maturities and short-term borrowings increased to $1,049.9, including $699.5 of senior notes due in 2023 and $342.9 of debentures with annual holder put options. The company had no commercial paper outstanding and had $2.0 billion of unused revolving credit commitments, with facilities maturing in 2026 and 2027.
- The company repurchased $900.1 of shares and paid $467.0 in ordinary-share dividends in the first nine months. It had approximately $500 remaining under its 2021 repurchase authorization before the subsequent $3.0 billion authorization takes effect. The annualized dividend was $2.68 per share.
Material developments, outlook and risks
- Management described demand as improved across segments during the first nine months but said market conditions remain mixed. It cited continuing supply-chain and resource constraints, material, wage and energy inflation, and tighter financial conditions from higher interest rates as risks to demand and results. No specific financial guidance was provided in the filing text.
- Russia and Belarus: the company halted new orders and shipments after Russia’s invasion of Ukraine and said it planned to exit all business activity in both markets by year-end 2022. It reported no material operational impact as of September 30, 2022.
- On October 31, 2022, after the quarter, the company acquired AL-KO Air Technology. Purchase accounting details were not yet available in this filing. In April, it acquired a Commercial HVAC independent dealer for $110.0 net of cash acquired.
- Asbestos litigation remains a significant uncertainty. Aldrich and Murray, deconsolidated subsidiaries, are in Chapter 11 proceedings. A $270.0 QSF was funded on March 2, 2022; $91.8 was allocated to continuing operations and $178.2 to discontinued operations. A proposed plan contemplated a $545.0 trust, but it remained subject to court approval, claimant and insurer matters, and other conditions. Claimants have asserted claims relating to the 2020 restructuring, which the company is vigorously contesting. The ultimate liability, any further funding obligations, and timing of resolution are uncertain.
- Other notable items include a $15.0 Q3 pension settlement charge for a retired executive and a $25.0 insurance settlement on a property claim, which management excluded from Segment Adjusted EBITDA. The nine-month effective tax rate was 18.3%, including a benefit from a $33.1 reduction in certain state deferred-tax valuation allowances.
Most important facts for investors to verify
- Whether pricing continues to offset inflation and supply-chain costs, particularly in EMEA, where year-to-date adjusted margins weakened.
- Working-capital trends and conversion of earnings into operating cash flow and free cash flow.
- Refinancing or repayment plans for the $699.5 of 2023 notes and potential exercise of put options on $342.9 of debentures.
- Developments in the Aldrich and Murray Chapter 11 cases, including court rulings, claimant challenges, the proposed trust and potential additional funding exposure.
- Integration and financial contribution of AL-KO Air Technology, and execution of the stated Russia and Belarus exit.
- Whether reported earnings and margins are affected by nonrecurring items, including the property-claim insurance settlement, pension settlement charge and tax valuation-allowance benefit.