Trane Technologies plc — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Trane Technologies provides climate solutions for buildings, homes and transportation through its Trane and Thermo King brands. The former Ingersoll Rand Industrial business is reported as discontinued operations following its February 2020 separation.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3,829.7 million | $3,138.8 million | $6,847.3 million | $5,780.1 million |
| Operating income | $651.0 million | $423.5 million | $1,004.2 million | $577.9 million |
| Operating margin | 17.0% | 13.5% | 14.7% | 10.0% |
| Net earnings | $469.0 million | $242.1 million | $706.8 million | $216.2 million |
| Diluted EPS | $1.91 | $0.99 | $2.88 | $0.87 |
Q2 revenue rose 22.0%; first-half revenue rose 18.5%. Growth reflected higher volume, pricing, acquisitions and currency translation. First-half continuing-operations operating cash flow was $751.8 million versus $179.2 million; company-defined free cash flow was $696.4 million versus $182.7 million. Capital expenditures were $77.5 million. Working-capital changes used $167.2 million in the first half.
Gross margin improved to 33.2% in Q2 from 31.2%, and to 32.5% for the first half from 29.8%. Management attributed the gains to pricing and favorable mix exceeding material inflation, productivity and lower restructuring spending. First-half Segment Adjusted EBITDA was $1,295.3 million, up 43.0%.
Segments and material changes
- Americas: Q2 revenue $2,971.6 million, up 21.0%; Segment Adjusted EBITDA margin 20.9%, versus 19.2%. First-half revenue increased 16.3% and margin rose to 19.0% from 16.1%.
- EMEA: Q2 revenue $523.2 million, up 40.2%; margin 20.5%, versus 15.9%. First-half revenue increased 31.1% and margin rose to 19.0% from 13.9%.
- Asia Pacific: Q2 revenue $334.9 million, up 8.3%; margin declined to 18.8% from 19.4%, reflecting inflation and mix. First-half revenue increased 19.3% and margin rose to 18.3% from 14.5%.
Comparisons benefited from COVID-19-related weakness in 2020. Three channel acquisitions also contributed to growth. First-half 2020 included substantial separation costs and tax charges associated with the Industrial separation, making net earnings comparisons less representative of underlying operating growth. In 2021, the company recorded a $49.5 million accrual and reduction to retained earnings to finalize transaction-related settlements with Gardner Denver.
Liquidity, debt and capital allocation
- At June 30, 2021, cash and cash equivalents were $2,912.4 million, down from $3,289.9 million at year-end 2020. Total debt was $4,965.2 million, down from $5,272.1 million; debt-to-total-capital was 43.4%, versus 45.1%.
- Current assets were $7,125.1 million and current liabilities $4,512.9 million. The company reported $2.0 billion of unused revolving credit commitments and no commercial paper outstanding.
- First-half financing cash outflow was $937.6 million, including $354.2 million of share repurchases, $307.5 million of long-term debt repayments and $281.6 million of dividends paid.
- The company raised its quarterly dividend 11% to $0.59 per share in February 2021. It expected to complete approximately $600 million of share repurchases during 2021; subsequent to quarter-end, it reported repurchasing the remaining $145.8 million under the 2018 authorization and about $100 million under the new authorization.
Outlook, risks and unusual items
Management reported higher end-market demand in the first half and said price increases had so far recovered higher material, component and logistics costs. It expected input costs to continue rising and planned to keep managing supply-chain and logistics risks. Management anticipated improving market conditions as vaccine distribution expanded, while describing conditions across end markets as mixed. The filing provides no quantified revenue or earnings guidance.
- COVID-19 and supply chain: Further pandemic disruption, demand changes, supply delays, commodity inflation or logistics constraints could affect operations and results.
- Asbestos proceedings: Subsidiaries Aldrich and Murray remain in Chapter 11. The company recorded a $248.8 million liability under funding agreements and a $53.6 million retained equity investment. The ultimate funding obligation, trust terms, liability and timing remain uncertain; a court-approved resolution has not been reached.
- Other contingencies: Environmental reserves were $38.5 million. Warranty liabilities were $293.6 million. Management said other pending legal matters were not expected to have a material adverse effect, subject to disclosed uncertainties.
- Other items: First-half restructuring charges were $11.8 million, versus $63.1 million a year earlier. The company targeted $300 million of total annual savings under transformation initiatives by 2023, including $140 million through 2021. It projected approximately $56 million of worldwide pension contributions for 2021.
Management stated that existing cash, operating cash generation and committed credit lines were expected to fund operating and capital needs for at least the next twelve months. The filing reported no material change to risk factors from the 2020 Form 10-K; forward-looking results remain exposed to economic, currency, commodity, tax, litigation, cybersecurity and other risks.
Important facts for investors to verify
- Whether pricing continues to offset material and logistics inflation, particularly in Asia Pacific where Q2 segment margin declined.
- Whether the strong year-over-year growth persists beyond comparisons against pandemic-affected 2020 periods.
- Developments in the Aldrich and Murray Chapter 11 cases, including any change to the $248.8 million funding-agreement liability or potential claims against other Trane entities.
- Cash conversion and working-capital trends, alongside ongoing dividends, repurchases, debt maturities and investment spending.
- Progress against the $300 million transformation savings target and the timing and costs of restructuring actions.