Trane Technologies plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Trane Technologies is a global climate-solutions company serving buildings, homes and transportation markets through Trane and Thermo King. On February 29, it completed the separation of its former Industrial segment through a Reverse Morris Trust transaction with Gardner Denver. The continuing business reports through Americas, EMEA and Asia Pacific. Prior-year segment information was recast, but discontinued-operations results are not fully comparable because the 2020 period includes Industrial only through the transaction date.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $2,641.3 million | $2,803.7 million |
| Gross profit / margin | $742.5 million / 28.1% | $814.5 million / 29.1% |
| Operating income / margin | $154.4 million / 5.8% | $236.5 million / 8.4% |
| Continuing-operations earnings attributable to shareholders | $50.0 million; $0.21 diluted EPS | $144.2 million; $0.59 diluted EPS |
| Net earnings (loss) attributable to shareholders | $(29.2) million; $(0.12) diluted EPS | $199.9 million; $0.82 diluted EPS |
| Segment adjusted EBITDA | $315.9 million | $370.0 million |
- Revenue declined 5.8%, reflecting lower volumes (5.9 percentage points) and unfavorable currency (0.6 points), partly offset by pricing (0.7 points). Gross margin fell 100 basis points; operating margin fell 260 basis points.
- Continuing operating cash flow was $(129.3) million versus $12.4 million; free cash flow, a non-GAAP measure, was $(122.1) million versus $(11.3) million. Working-capital changes used $295.8 million of cash. Capital expenditures were $34.7 million.
- Cash and equivalents were $2.648 billion at quarter-end, up from $1.279 billion at year-end. Continuing financing cash flow included a $1.9 billion special cash payment received in connection with the separation.
- Total debt was $5.575 billion, broadly unchanged from year-end; the debt-to-total-capital ratio rose to 49.1% from 43.3%, principally as equity declined after the separation. The company had $2.0 billion of unused revolving credit commitments and no commercial paper outstanding. Approximately $2.629 billion of cash was held by non-U.S. subsidiaries.
- Q1 revenue and adjusted EBITDA by segment: Americas $2.098 billion and $262.1 million; EMEA $364.3 million and $43.2 million; Asia Pacific $179.2 million and $10.6 million. Asia Pacific revenue fell 35.0% and adjusted EBITDA fell 61.5%.
Material changes, outlook and management commentary
- COVID-19 disrupted Asia Pacific facilities in January and February and more broadly affected Americas and EMEA from March. Management cited lower volumes, temporary closures, supply-chain disruption and adverse currency movements. It reported no pandemic-related impairment charges identified through the filing date but cautioned that the impact could worsen and could not yet be estimated reliably.
- The company suspended its 2020 guidance in May 2020 because of economic uncertainty and limited visibility, and said it intended to reassess guidance at its Q2 earnings call. Management stated it remained confident in its sustainability strategy and financial position.
- Management expected to maintain the dividend at $0.53 per share quarterly ($2.12 annualized) in 2020. It also expected to reduce separation-related stranded costs by $100 million through 2021, while incurring $100 million to $150 million of expenses to achieve those savings.
- Reported discontinued operations included a $99.1 million pre-tax Industrial separation charge, primarily legal, consulting and advisory fees. Industrial discontinued operations recorded a net loss of $71.1 million attributable to the company, versus earnings of $58.5 million in Q1 2019.
- The effective tax rate was 49.1%, versus 12.1%, including a $37.0 million non-cash charge for valuation allowances on deferred tax assets following the separation. Other income included a $17.4 million adjustment correcting an overstatement of a legacy legal liability from prior years.
- The 2.625% notes due May 2020, with $299.9 million principal, were redeemed in April. The filing also notes expected payments to Gardner Denver for certain transferred benefit-plan funding requirements and a final working-capital adjustment within 90 days of the transaction.
Risks and contingencies
- COVID-19 could further impair demand, operations, supplier availability, cash flows and access to financing; the filing highlights possible shutdowns, worker absenteeism, sole- or limited-source suppliers and financial-market volatility.
- Asbestos-related liabilities totaled $532.6 million, with $277.7 million of probable insurance recoveries recorded. Management cautions that actual claims and recoveries may differ materially from estimates. Environmental reserves were $40.4 million.
- The company is also subject to product-liability, environmental, tax and other legal proceedings. Management generally did not expect these matters to materially adversely affect the company, subject to the stated estimation uncertainties.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter orders, revenue, margins, cash generation and the timing or substance of any restored guidance.
- Whether operating cash flow and working capital recover, and how much of reported cash is practically available to U.S. operations.
- Post-separation debt maturities, the April 2020 note redemption, benefit-plan funding obligations and the final working-capital settlement with Gardner Denver.
- Actual separation and transformation costs versus the stated stranded-cost savings, and whether the expected dividend level is maintained.
- Developments in asbestos claims and insurance recoveries, tax valuation allowances and the company’s contingent liabilities.