Trane Technologies plc — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Trane Technologies is a global climate-solutions company serving buildings, homes and transportation through its Trane and Thermo King brands. Results are presented after the February 29, 2020 separation of the Industrial segment; its historical results are classified as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3,495.5 million | $3,470.9 million | $9,275.6 million | $9,892.2 million |
| Operating income | $566.9 million | $536.5 million | $1,144.8 million | $1,339.9 million |
| Operating margin | 16.2% | 15.5% | 12.3% | 13.5% |
| Continuing-operations earnings attributable to ordinary shareholders | $406.1 million | $382.6 million | $731.5 million | $935.9 million |
| Diluted EPS, continuing operations | $1.67 | $1.57 | $3.01 | $3.82 |
| Segment Adjusted EBITDA | $701.1 million | $658.7 million | $1,606.9 million | $1,712.7 million |
- Q3 gross margin increased to 32.5% from 31.8%; year-to-date gross margin declined to 30.8% from 31.1%.
- Q3 net earnings attributable to Trane Technologies were $400.6 million, or $1.64 diluted EPS, including a $5.5 million discontinued-operations loss. Nine-month net earnings were $610.2 million, or $2.51 diluted EPS, including a $120.4 million discontinued-operations loss.
- Continuing operating cash flow for the nine months was $1,132.9 million, versus $894.5 million. Free cash flow, a non-GAAP measure, was $1,128.5 million versus $776.3 million. Total operating cash flow, including discontinued operations, was $808.1 million.
- Cash and equivalents were $3,190.1 million at September 30, 2020, up from $1,278.6 million at year-end 2019. The increase included a $1.9 billion special cash payment connected with the Industrial separation.
- Total debt was $5,269.3 million, down from $5,573.2 million; the debt-to-total-capital ratio rose to 45.2% from 43.3%. The company had $2.0 billion of unused revolving credit commitments and no commercial paper outstanding.
- Capital expenditures were $89.1 million for the nine months, compared with $151.6 million. Dividends paid to ordinary shareholders were $380.3 million.
Material changes versus comparable periods
- Q3 revenue rose 0.7%, with pricing and currency gains offsetting lower volume. Year-to-date revenue fell 6.2%, mainly from pandemic-related volume declines across regions.
- Q3 operating income increased $30.4 million and operating margin improved 70 basis points, reflecting pricing, cost controls and favorable currency, partly offset by mix, lower volume and fixed-cost under-absorption.
- Year-to-date operating income fell $195.1 million. Segment Adjusted EBITDA decreased 6.2%; Americas and EMEA declined, while Asia Pacific was approximately flat. Year-to-date margins fell in Americas but improved in EMEA and Asia Pacific.
- Year-to-date continuing earnings declined to $741.2 million from $946.2 million. The effective tax rate increased to 23.2% from 16.9%, including a $37.0 million non-cash deferred-tax valuation allowance charge.
- The company completed the Industrial separation in February. Its nine-month discontinued-operations loss included $113.9 million of separation costs and a $23.6 million loss on the deconsolidation of Aldrich and its subsidiary.
Outlook, management commentary and risks
- Management did not reinstate 2020 financial guidance, citing uncertainty in end markets and limited visibility amid COVID-19. It said all production facilities were open and reported no major supply-chain disruptions during Q3.
- Management planned to restore annual merit increases and resume its balanced capital-allocation strategy. It expected to maintain the 2020 dividend at $0.53 quarterly ($2.12 annualized).
- Post-separation cost-reduction targets were $100 million in 2020 and a further $40 million in 2021; management expected to incur approximately $100 million to $150 million in transformation and restructuring costs. Nine-month restructuring charges were $71.3 million.
- COVID-19 risks include demand weakness, operational interruptions, supplier disruptions, cost pressures, foreign-exchange movements and volatility or reduced access in credit markets. Management said the extent of future effects could not be estimated reliably.
- Aldrich and Murray, subsidiaries assigned legacy asbestos liabilities, filed for Chapter 11 on June 18 and were deconsolidated. The company recorded a $53.6 million retained equity investment and a $248.8 million liability under funding agreements. The ultimate asbestos liability, trust funding requirement and case timing remain uncertain; the funding obligation could change.
- Other notable items included a $17.4 million adjustment correcting an overstated legacy legal liability and $39.3 million of environmental reserves. The company also had $31.0 million accrued for ongoing restructuring actions.
- Management stated that existing cash, operating cash generation, credit lines and expected capital-market access should fund operating and capital needs for at least the next 12 months. The separation-related working-capital, cash and debt adjustments and certain benefit-plan funding determinations remained in progress.
Important facts for investors to verify
- Whether demand, volumes and margins recover, and whether the company provides updated full-year guidance.
- The outcome and duration of the Aldrich and Murray Chapter 11 cases, any extension of the stay protecting other Trane entities, and the eventual funding required under the agreements.
- Completion of the remaining separation-related cash, working-capital, debt and benefit-plan adjustments.
- Progress against the 2020–2021 cost-savings targets, associated restructuring spending and the planned dividend and capital-allocation actions.
- Cash-flow comparability: continuing operating cash flow improved, while total operating cash flow was affected by discontinued operations; free cash flow is non-GAAP.