Business context and reporting period
Trane Technologies plc filed this Form 10-K for the fiscal year ended December 31, 2021. The company designs, manufactures, sells and services HVAC and transport refrigeration solutions under the Trane and Thermo King brands. Its reportable segments are Americas, EMEA and Asia Pacific. The 2020 separation of its former Industrial segment is reported as a discontinued operation, so comparisons reflect a changed business perimeter.
Financial performance and liquidity
Unless noted otherwise, amounts are in U.S. dollars. Fiscal 2021 results compared with 2020:
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net revenue | $14.14 billion | $12.45 billion | +13.5% |
| Gross profit margin | 31.6% | 30.5% | +110 basis points |
| Operating income | $2.02 billion | $1.53 billion | +32.0% |
| Operating margin | 14.3% | 12.3% | +200 basis points |
| Earnings from continuing operations | $1.46 billion | $991 million | +47.0% |
| Net earnings attributable to Trane Technologies | $1.42 billion | $855 million | +66.5% |
| Diluted earnings per share | $5.87 | $3.52 | +66.8% |
| Cash from continuing operating activities | $1.59 billion | $1.77 billion | Down $172 million |
| Free cash flow, non-GAAP | $1.43 billion | $1.71 billion | Down $283 million |
Revenue growth reflected higher volumes (7.5 percentage points), pricing (3.6 points), acquisitions (1.6 points) and currency translation (0.8 points). Price realization, productivity and volume gains lifted margins, partly offset by material, freight and other inflation. The effective tax rate was 18.6%, versus 23.0% in 2020.
Cash and cash equivalents were $2.16 billion at year-end, down from $3.29 billion. Total debt was $4.84 billion, down from $5.27 billion; the debt-to-total-capital ratio improved to 43.6% from 45.1%. The company reported no commercial paper outstanding and $2.0 billion of unused revolving credit commitments. Operating cash flow declined principally because of higher working-capital balances. Capital expenditures were $223 million.
Segment results
| Segment | Revenue 2021 | Revenue growth | Adjusted EBITDA margin 2021 | Margin change |
|---|---|---|---|---|
| Americas | $10.96 billion | 13.1% | 18.3% | +100 basis points |
| EMEA | $1.94 billion | 18.0% | 18.5% | +240 basis points |
| Asia Pacific | $1.23 billion | 10.1% | 18.5% | +170 basis points |
Segment Adjusted EBITDA is a non-GAAP measure. Year-end firm backlog was $5.44 billion, up from $2.89 billion; the company expected to ship most of the 2021 year-end backlog during 2022.
Material changes, capital allocation and unusual items
- Revenue increased across all three segments, supported by stronger demand, pricing and acquisitions. Management cited significant industry-wide supply-chain and resource constraints that hindered production and shipments.
- Free cash flow fell despite higher earnings, with working-capital investment and increased capital expenditures contributing to the decline.
- The company repurchased $1.10 billion of shares and paid $561 million in ordinary-share dividends during 2021. It announced a 14% dividend increase in February 2022 and a new $3.0 billion repurchase authorization, subject to completion of the prior authorization.
- The company acquired Farrar Scientific in October 2021 for $251.2 million upfront, with contingent consideration of up to $115 million tied to revenue targets. The year-end estimated fair value of the earnout liability was $96.2 million.
- Management reported $21.2 million of 2021 charges to increase the asbestos-related Funding Agreement liability to $270 million. The liability was classified as current at year-end in anticipation of funding.
- Discontinued operations produced a net loss of $20.6 million in 2021, compared with a $121.4 million loss in 2020. The 2020 comparison included $114.2 million of separation costs and a deconsolidation loss related to Aldrich.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or earnings guidance for 2022. Management said it expected market conditions to continue improving as vaccine distribution expanded, while emphasizing ongoing supply-chain constraints. It estimated 2022 capital expenditures at approximately 2% of revenue and expected to contribute about $82 million to pension plans. Its transformation program targets $300 million of annual cost savings by 2023; approximately $126 million of costs had been incurred through year-end 2021, with costs of up to $150 million anticipated through 2022.
Key risks include COVID-19 and potential resurgences, supplier and logistics constraints, commodity and labor-cost inflation, and the possibility that price increases may not fully offset costs. Other disclosed risks include competition and product-development execution, foreign-exchange movements, cybersecurity and data privacy, climate regulation and refrigerant transitions, tax-law changes, and litigation.
Aldrich Pump LLC and Murray Boiler LLC remain in Chapter 11 proceedings concerning asbestos claims. Their proposed reorganization plan contemplated a $545 million trust, while the company recorded a $270 million Funding Agreement liability and expected a $270 million qualified settlement fund contribution. The bankruptcy court approved the request to fund that settlement fund on January 27, 2022, after the reporting date; funding was expected after the related order became final. Plan approval, the ultimate asbestos liability, insurance arrangements and the timing of resolution remained uncertain as of February 7, 2022. The company stated that other pending legal matters were not expected to have a material adverse effect, but acknowledged uncertainty around the Chapter 11 cases.
Management and PwC concluded that internal control over financial reporting was effective at December 31, 2021. PwC issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Review the cash-flow and working-capital trend: operating cash flow and non-GAAP free cash flow declined while revenue and earnings rose.
- Track backlog conversion, shipment delays, supplier capacity and whether pricing continues to offset inflation.
- Monitor the Aldrich and Murray proceedings, final trust terms, insurance recoveries and the timing and source of the $270 million settlement-fund contribution.
- Assess the effects of share repurchases and dividend increases on cash, debt and future capital allocation.
- Evaluate Farrar Scientific’s revenue performance against earnout targets and the assumptions underlying its contingent consideration.
- Compare future results with management’s stated savings targets and expected capital spending; the filing does not provide quantified full-year 2022 revenue or earnings guidance.