Trane Technologies Plc annual report, FY2022

Business context and reporting period

Trane Technologies plc (NYSE: TT) filed its annual report for the fiscal year ended December 31, 2022. The Irish-domiciled company sells HVAC, transport refrigeration and related services under the Trane and Thermo King brands. Results are annual, not standalone fourth-quarter figures. Its reportable segments are Americas, EMEA and Asia Pacific.

Financial performance and liquidity

• Revenue rose 13.1%, reflecting pricing of 9.6%, volume growth of 4.9% and acquisitions of 0.8%, partly offset by a 2.2% currency headwind. Products generated $10,930.8 million and services $5,060.9 million.
• Gross margin declined 60 basis points to 31.0%, as material, freight and other inflation and supply-chain-related productivity impacts outweighed price increases. Operating margin improved to 15.1% from 14.3%; selling and administrative expenses fell to 15.9% of revenue from 17.3%.
• Net cash used in continuing investing activities was $539.8 million, including $291.8 million of capital expenditures and $234.7 million for acquisitions, net of cash acquired. Financing used $1,852.2 million, including $1,200.2 million of share repurchases and $620.2 million of dividends.
• Cash declined by $938.7 million year over year. Total debt was broadly stable, but cash was lower; debt-to-total capital increased to 44.2% from 43.6%. The company reported $2.0 billion of unused revolving credit facilities and no commercial paper outstanding.

Material changes versus 2021

• Net earnings attributable to the company increased to $1,756.5 million from $1,423.4 million, and diluted EPS from continuing operations rose to $7.57 from $5.96. The effective tax rate declined to 17.3% from 18.6%, aided by valuation-allowance reductions and other tax benefits.
• Segment revenue increased in all regions. Americas revenue rose 15.4% and adjusted EBITDA margin edged up to 18.4%; EMEA revenue rose 4.6%, but margin fell to 16.6% from 18.5%; Asia Pacific revenue rose 6.6% and margin increased to 18.9%.
• Year-end backlog rose to $6,883.1 million from $5,436.7 million. The company said the 2022 backlog includes additional revenue streams because of increased lead times, so the comparison is not fully like-for-like.
• Cash operating activities improved despite higher working capital, the $91.8 million continuing-operations share of the asbestos qualified settlement fund payment, and a retired-executive compensation payment. Total QSF funding was $270 million in 2022, with the remaining $178.2 million allocated to discontinued operations.

Outlook, management commentary and key risks

• The filing provides no specific consolidated revenue or earnings guidance. Management described demand as healthy but market conditions as mixed and cautioned that inflation, higher interest rates, supply constraints and weaker economic conditions could affect results.
• Management expects 2023 capital expenditures of approximately 1.5%–2.0% of revenue. It targets $300 million of total annual savings from post-separation transformation initiatives by 2023; approximately $240 million had been achieved through year-end 2022, with up to $150 million of cumulative costs anticipated through 2023.
• The board increased the quarterly dividend from $0.67 to $0.75 per share in February 2023, a stated 12% increase. Management said it expects a competitive and growing dividend.
• The company completed its acquisition of AL-KO Air Technology in October 2022 and a commercial HVAC independent dealer acquisition in April 2022. Russia and Belarus business activity had been exited by year-end; the company said the conflict had not materially affected financial performance to date.
• The principal legal uncertainty is the Chapter 11 process for subsidiaries Aldrich and Murray, which concerns asbestos claims. The $270 million QSF was funded, but court approval, ultimate liability, trust funding and related claims against the company remain uncertain. The filing also identifies supply-chain and commodity inflation, foreign exchange, cybersecurity, climate regulation, tax changes and litigation as risks.
• Environmental reserves were $42.4 million at year-end. The company disclosed approximately $1 billion of outstanding energy-savings performance guarantees extending through 2048; it reported about $1 million of cumulative transaction-price adjustments related to these guarantees since 1995.
• PwC issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition was identified as a critical audit matter.

Important facts for investors to verify

1. Track whether pricing and productivity continue to offset inflation and supply-related costs, especially the margin pressure reported in EMEA.
2. Review backlog conversion, cancellations or deferrals, and the effect of the expanded backlog definition and supply constraints on revenue timing.
3. Monitor cash generation, working-capital trends, debt maturities—including $699.7 million of notes due in June 2023—and capital returns.
4. Follow developments in the Aldrich and Murray bankruptcy cases, including the proposed plan, funding obligations, and claims challenging the 2020 restructuring.
5. Assess the sustainability of earnings growth and the effective tax rate, including valuation-allowance benefits, foreign earnings mix and potential international tax changes.