Trane Technologies plc — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Trane Technologies is a global climate-solutions company serving buildings, homes and transportation through its Trane and Thermo King brands.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenues | $3,719.8M | $3,495.5M | $10,567.1M | $9,275.6M |
| Operating income | $583.4M | $566.9M | $1,587.6M | $1,144.8M |
| Net earnings attributable to Trane Technologies | $405.7M | $400.6M | $1,105.6M | $610.2M |
| Diluted EPS, including discontinued operations | $1.68 | $1.64 | $4.55 | $2.51 |
- Q3 revenue increased 6.4%; management attributed growth chiefly to pricing and acquisitions, with no consolidated volume growth. Year-to-date revenue rose 13.9%, reflecting volume recovery, pricing, acquisitions and currency effects.
- Q3 gross margin was 32.4%, down 10 basis points year over year; operating margin was 15.7%, versus 16.2%. Higher material inflation and selling and administrative costs weighed on quarterly margins.
- For the first nine months, gross margin improved to 32.4% from 30.8%, and operating margin to 15.0% from 12.3%. Management cited pricing, productivity, higher volumes and favorable mix, partly offset by inflation.
- Continuing-operations earnings were $422.0M in Q3 and $1,128.1M year to date. Discontinued operations reduced net earnings by $13.3M and $12.6M, respectively, in 2021; the comparable 2020 nine-month loss was $120.4M.
- Continuing operating cash flow was $1,162.6M for nine months, compared with $1,132.9M. Company-defined free cash flow, a non-GAAP measure, was $1,081.6M versus $1,128.5M; working-capital changes used $258.9M.
- At September 30, cash was $2,738.8M and total debt $4,841.1M, compared with $3,289.9M and $5,272.1M at year-end 2020. Debt-to-total capital was 42.7%, down from 45.1%. The $2.0B revolving facilities were unused, and commercial paper outstanding was zero.
Material changes and capital allocation
- Compared with Q3 2020, revenue and operating income increased, but quarterly operating margin declined. Year-to-date operating performance improved substantially against a 2020 comparison affected by the pandemic.
- Nine-month financing cash outflows included $600.2M of share repurchases, $432.5M of long-term debt repayments and $421.9M of ordinary-share dividends. The company had approximately $1.9B remaining under its $2.0B 2021 repurchase authorization.
- In February 2021, the quarterly dividend was increased 11%, from $0.53 to $0.59 per share. A new $1.0B revolving credit facility maturing in 2026 replaced a facility due in 2022; a separate $1.0B facility matures in 2023.
Outlook, risks and unusual items
- Management said end-market demand had strengthened but remained mixed, with supply-chain and resource constraints affecting HVAC and transport markets. It reported executing price increases to address rising material, component and logistics costs, and expected markets to continue improving as vaccine distribution expanded. The filing provides no clear numerical revenue or earnings guidance.
- COVID-19-related disruption, supply shortages, labor and logistics constraints, commodity inflation, and the ability to pass costs through to customers could affect production, margins and cash flows. The company also identifies currency, cybersecurity, climate regulation and other legal and market risks.
- Asbestos-related Chapter 11 proceedings for subsidiaries Aldrich and Murray remain unresolved. The company increased its Funding Agreement liability to $270M and recorded $21.2M of related charges in 2021. A proposed plan contemplates a $545M trust contribution; a proposed $270M qualified settlement fund was subject to court approval, and ultimate liability and timing remained uncertain.
- A post-quarter acquisition of Farrar Scientific closed October 15, 2021, for $250M initial cash consideration, with up to $115M of additional earnout consideration tied to future targets.
- The filing disclosed a correction to prior interim equity statements for cash dividends declared. It had no effect on reported cash flows or ending retained earnings for the periods disclosed.
- Management reported disclosure controls were effective and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether supply constraints, inflation and pricing affect subsequent revenue growth and segment margins.
- Developments in the Aldrich and Murray bankruptcy cases, court approval of the plan and trust, and the company’s ultimate funding obligations.
- Cash conversion and working-capital trends, including the decline in company-defined free cash flow year over year.
- Debt maturities, the debentures with a holder put feature, and continued use of cash for repurchases and dividends.
- Farrar Scientific’s final purchase accounting, earnout exposure and contribution to results.