Trane Technologies plc — Q1 2021 Form 10-Q
Business context and period: Global climate-solutions company serving buildings, homes and transportation through Trane and Thermo King. This unaudited report covers the three months ended March 31, 2021, compared with Q1 2020. The former Ingersoll Rand Industrial segment is reported as a discontinued operation following its February 2020 separation.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net revenue | $3,017.6 million | $2,641.3 million |
| Gross profit / margin | $953.2 million / 31.6% | $742.5 million / 28.1% |
| Operating income / margin | $353.2 million / 11.7% | $154.4 million / 5.8% |
| Earnings from continuing operations | $236.9 million | $52.8 million |
| Net earnings attributable to ordinary shareholders | $235.2 million | Loss of $29.2 million |
| Diluted EPS | $0.97 | Loss of $0.12 |
| Cash from continuing operating activities | $262.9 million | Cash used of $129.3 million |
| Free cash flow (non-GAAP) | $235.9 million | Cash used of $122.1 million |
- Revenue and margins: Revenue increased 14.2%, driven by volume (9.4 percentage points), acquisitions (1.6), pricing (1.8) and currency (1.4). Gross margin expanded 350 basis points, reflecting productivity, pricing and favorable product mix, partly offset by material inflation. Selling and administrative expense was $600.0 million, or 19.9% of revenue, versus 22.3% a year earlier.
- Segments: Americas revenue was $2,325.7 million and adjusted EBITDA margin 16.5%; EMEA revenue was $443.9 million and margin 17.3%; Asia Pacific revenue was $248.0 million and margin 17.5%. All segment margins improved year over year. Total Segment Adjusted EBITDA, a non-GAAP measure, rose to $504.0 million from $315.9 million.
- Cash and liquidity: Cash and equivalents were $2,838.0 million at March 31, down from $3,289.9 million at year-end. Q1 operating cash flow benefited from higher earnings and improved working capital; investing activities used $113.7 million and financing activities used $554.9 million. Cash outflows included $300.0 million of debt repayment, $140.2 million of dividends and $104.2 million of share repurchases.
- Debt: Total debt was $4,971.7 million, down from $5,272.1 million; debt-to-total-capital ratio was 44.1%, versus 45.1% at year-end. The company had no commercial paper outstanding and $2.0 billion of revolving credit commitments unused. A further $125.0 million of debentures was due in August 2021.
- Capital returns: The quarterly dividend increased 11% to $0.59 per share. The company repurchased $104.2 million of shares in Q1 and authorized a new $2.0 billion repurchase program to follow completion of the prior authorization.
Material changes, outlook and risks
- Management attributed Q1 growth to stronger end-market demand, strong execution, higher volumes and pricing. Asia Pacific’s comparison particularly benefited from recovery after COVID-related facility closures in Q1 2020.
- Management expected economic conditions to improve as vaccination expanded, while warning that input material costs were continuing to rise. It stated that price increases had so far recovered those costs. The filing provides no specific revenue or earnings guidance.
- The company targeted $300 million of total annual savings through transformation initiatives: $140 million by 2021 and a further $160 million by 2023.
- COVID-19 remained a risk to demand, supply chains, operations and capital markets. Other cited risks included inflation and commodity availability, foreign exchange, litigation, cybersecurity, tax matters and economic conditions.
- Asbestos proceedings: Subsidiaries Aldrich and Murray remained in Chapter 11, with asbestos claims stayed. The company recorded a $248.8 million liability for funding-agreement obligations and a $53.6 million retained equity investment at deconsolidation; the ultimate funding requirement and case outcome remain uncertain.
- Other unusual items: A $49.5 million accrual and retained-earnings reduction related to an agreement in principle to settle remaining separation-related items. Q1 2020 included $99.1 million of pre-tax separation costs in discontinued operations and a $37.0 million non-cash tax valuation-allowance charge, making the year-over-year comparison less representative of ongoing operations.
Important facts for investors to verify
- Whether revenue momentum, price realization and margin improvement persist as material and other input costs rise.
- How operating cash flow and working capital perform in subsequent quarters; Q1 included a $104.6 million cash use from changes in assets and liabilities.
- The timing and amount of future asbestos-related funding under the Aldrich and Murray agreements, and whether the bankruptcy cases produce a confirmed resolution.
- Debt maturities and refinancing needs, including the August 2021 debentures and revolving facilities maturing in 2022 and 2023.
- Progress against the $300 million transformation-savings target and the company’s use of cash for dividends, repurchases and investment.