Trane Technologies plc — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise noted. Trane Technologies designs, manufactures, sells and services HVAC and transport refrigeration products and solutions, including through its Trane and Thermo King brands.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $3,355.5 million | $3,017.6 million | +11.2% |
| Gross profit / margin | $989.0 million / 29.5% | $953.2 million / 31.6% | Margin down 210 bps |
| Operating income / margin | $388.2 million / 11.6% | $353.2 million / 11.7% | Income +$35.0 million |
| Continuing-operations earnings | $270.4 million | $236.9 million | +$33.5 million |
| Net earnings attributable to Trane Technologies | $260.2 million | $235.2 million | +$25.0 million |
| Diluted EPS | $1.10 | $0.97 | Continuing-operations EPS: $1.13 vs. $0.96 |
| Segment Adjusted EBITDA | $508.2 million | $504.0 million | +0.8% |
| Cash from continuing operating activities | $(3.9) million | $262.9 million | Down $266.8 million |
Revenue growth reflected 7.3% pricing and 5.1% volume growth, partly offset by 1.2% unfavorable currency translation. Cost of goods sold rose faster than revenue, primarily due to direct-material and freight inflation; price realization partly offset the pressure. Selling and administrative expense was nearly flat in dollars and fell to 17.9% of revenue from 19.9%. Interest expense declined to $56.0 million from $60.7 million, mainly following prior debt repayments. The effective tax rate was 18.4%, versus 17.0%.
Segments: Americas revenue increased 13.2% to $2,633.2 million, while Segment Adjusted EBITDA margin fell to 15.4% from 16.5%. EMEA revenue declined 0.6% to $441.3 million (up 6.2% excluding currency); margin fell to 13.4% from 17.3%. Asia Pacific revenue increased 13.3% to $281.0 million; margin fell to 15.5% from 17.5%. Across regions, inflation and supply-chain and logistics productivity impacts pressured margins.
Cash, debt and liquidity
- Cash and cash equivalents were $1,348.4 million at March 31, down from $2,159.2 million at year-end 2021. Total debt was $4,843.0 million, nearly unchanged from $4,842.1 million. Debt-to-total capital was 44.6%, versus 43.6%.
- Cash from continuing operations was $(3.9) million, reflecting higher working capital and $91.8 million of QSF funding allocated to continuing operations. The company’s non-GAAP free cash flow was $27.3 million versus $235.9 million; its definition adds back specified restructuring, transformation and QSF payments and should be considered alongside GAAP cash flow.
- Continuing investing cash outflow was $82.7 million, including $74.8 million of capital expenditures. Financing cash outflow was $534.6 million, including $350.0 million of share repurchases and $155.9 million of dividends. The quarterly dividend declared was $0.67 per share.
- The company had no commercial paper outstanding and $2.0 billion of revolving credit commitments unused at quarter-end. On April 25, 2022, it replaced its $1.0 billion facility maturing in 2023 with a new $1.0 billion facility maturing in 2027. Management said available cash, operating cash generation, credit lines and capital-market access were expected to meet operating and capital needs for at least the next 12 months.
Changes, outlook and material matters
- Outlook and commentary: Management reported high end-market demand and expected markets to improve as COVID-19 effects ease, while describing economic conditions as mixed. It identified persistent supply-chain and resource constraints, inflation, possible higher interest rates and tighter financial conditions as risks. The filing provides no specific quarterly or full-year revenue or earnings guidance.
- Geopolitical exposure: The company halted new orders and shipments into and out of Russia and Belarus in line with sanctions. It reported no material operating impact as of March 31, 2022, but said wider consequences, including supply, currency and cyber risks, were uncertain.
- Asbestos proceedings: A $270 million qualified settlement fund was funded on March 2, 2022; $91.8 million was allocated to continuing operations and $178.2 million to discontinued operations in cash flows. A proposed plan contemplates $545 million of trust funding, including $540 million cash and a $5 million note, subject to court approval and arrangements concerning insurance assets. The current-claimants committee is not party to the agreement in principle, has been permitted to pursue certain claims, and the company is contesting them. Approval, ultimate liability and timing remain uncertain.
- Other items: Discontinued operations recorded a $7.0 million loss, compared with $0.9 million earnings a year earlier. An independent-dealer channel acquisition closed April 1, 2022. The company estimated approximately $110 million of additional annual savings by 2023 under its transformation initiatives, after $190 million in savings through 2021; it had incurred approximately $127 million of costs cumulatively through March 31, 2022, against expected costs of up to $150 million through 2022.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing continues to offset material, freight and logistics inflation, and whether segment margins recover.
- Working-capital movements and operating cash conversion, including the effect of asbestos-related funding on reported cash flows.
- Developments, court rulings, funding obligations and insurance arrangements in the Aldrich and Murray Chapter 11 proceedings.
- Cash deployment through the $3.0 billion share-repurchase authorization, dividends, debt service and the refinancing completed after quarter-end.
- Any impact from COVID-19, China lockdowns, Russia-Ukraine developments, supply constraints, inflation or tightening financial conditions on demand and operations.