Trane Technologies(TT) - 2019 Q4 - Annual Report

Part I Business Ingersoll-Rand operates globally in Climate and Industrial segments, generating $13.1 billion and $3.5 billion in 2019 revenue respectively, and is strategically separating its Industrial business Business Segments and Products The company operates through Climate and Industrial segments, offering a diverse range of HVAC, transport refrigeration, and industrial products under well-known brands 2019 Net Revenues by Segment (USD millions) | Segment | 2019 Net Revenues (USD millions) | | :--- | :--- | | Climate | $13,075.9 | | Industrial | $3,523.0 | - The company generates revenue through a diverse portfolio of industrial and commercial products under well-recognized brands including American Standard®, ARO®, Club Car®, Ingersoll-Rand®, Thermo King®, and Trane®[15] - A comprehensive list of products and services is provided for both the Climate and Industrial segments, covering everything from air conditioners and chillers to air compressors and golf vehicles[20] Strategic Transactions In 2019, the company initiated a strategic separation of its Industrial segment with Gardner Denver and acquired Precision Flow Systems to enhance its portfolio - Announced a definitive agreement in April 2019 to separate the Industrial segment (IR Industrial) via a spin-off and merge it with Gardner Denver (GDI), with the remaining Climate business to be renamed Trane Technologies plc[22][139] - In May 2019, acquired 100% of Precision Flow Systems (PFS), a manufacturer of precision flow control equipment, which is reported in the Industrial segment[23][140] - In 2018, the company formed a 50% joint venture with Mitsubishi Electric Corporation to market and sell VRF and ductless HVAC systems in the U.S. and Latin America[24][141] Market and Operations The company operates in competitive global markets, with 34% of 2019 revenues from outside the U.S. and a diversified customer base, competing on various factors including price and quality - The company competes with a wide variety of competitors, from regional specialists to large corporations, on factors including price, quality, service, and technology[26][27] - In 2019, approximately 34% of net revenues were derived from outside the U.S., with products sold in over 100 countries[29] - No single customer accounted for more than 10% of consolidated net revenues in 2017, 2018, or 2019[30] Backlog and Seasonality Total order backlog decreased from $3.4 billion in 2018 to $3.1 billion in 2019, with the business experiencing seasonality, particularly in HVAC sales during Q2 and Q3 Order Backlog (2018-2019) (USD millions) | In millions | 2019 | 2018 | | :--- | :--- | :--- | | Climate | $2,513.3 | $2,914.4 | | Industrial | $622.5 | $514.8 | | Total | $3,135.8 | $3,429.2 | - Demand for commercial and residential HVAC products is seasonally higher in the second and third quarters, corresponding with spring and summer in northern hemisphere markets[34] Risk Factors The company faces diverse risks including global economic volatility, intense competition, cybersecurity threats, commodity price fluctuations, and significant uncertainties related to its pending Industrial segment separation and tax implications Operational and Market Risks Global operations face economic, political, and trade risks, intense competition, and are vulnerable to capital market instability, currency fluctuations, commodity price volatility, and cyclical demand - Global operations are subject to risks including economic conditions, trade protection measures (tariffs, quotas), currency instability, and political instability[53][57] - The company faces significant competition and its growth relies on the successful development and commercialization of new products in a rapidly changing technological environment[54][55] - Volatility in commodity prices (e.g., steel, non-ferrous metals) could increase costs, and the company may not be able to pass these on to customers[69][70] - Demand for products is cyclical and seasonal, with HVAC sales influenced by weather and construction market health, while industrial demand is tied to customer capital expenditures[77][78][79] Strategic and Transactional Risks Strategic transactions, especially the pending Reverse Morris Trust with GDI, pose risks including non-completion, business disruption, failure to achieve synergies, and potential adverse tax consequences - The pending Reverse Morris Trust transaction with GDI is subject to various risks, including failure to obtain shareholder and regulatory approvals, which could prevent its completion[101][102][104] - Uncertainty about the GDI transaction could adversely affect employee retention, customer and supplier relationships, and distract management[106] - There is a risk that the spin-off and merger may not qualify as a tax-free transaction under the U.S. tax code, which could result in substantial U.S. federal income taxes for the company and/or its shareholders[108][111] - Following the separation, the remaining company (Trane Technologies) will be less diversified and more focused on climate control solutions, potentially increasing its vulnerability to market changes[107] Legal, Regulatory, and Technology Risks The company faces risks from legal proceedings like asbestos claims, cybersecurity threats, extensive environmental regulations, and challenges in protecting its intellectual property - The company is involved in legal proceedings, including asbestos-related matters, and an adverse outcome could materially impact financial results[64] - Security breaches or disruptions of information technology systems, networks, or products could compromise proprietary information and negatively impact business operations[68] - Global climate change concerns and related regulations, such as the phase-down of certain refrigerants, create regulatory uncertainty and could impact product demand and development costs[74][75] Corporate Structure and Tax Risks The company's Irish incorporation exposes it to risks from changes in tax laws, potential Irish dividend withholding tax, and differences in corporate law that may offer less shareholder protection - Changes in tax laws, such as the U.S. Tax Cuts and Jobs Act, or adverse determinations by tax authorities could increase the company's tax burden and negatively affect financial results[90][91] - Being an Irish company, differences in corporate law compared to the U.S. may afford less protection to shareholders, particularly concerning director duties and shareholder lawsuits[95][96] - Dividends may be subject to Irish dividend withholding tax (currently 25%), although exemptions are available for U.S. and other treaty-country residents who complete the necessary forms[98] Properties As of year-end 2019, the company owned or leased approximately 33 million square feet globally, including 59 manufacturing plants, which are deemed suitable for its business needs - The company operates 59 manufacturing and assembly plants worldwide, with a total of approximately 33 million square feet of owned or leased space as of year-end 2019[114] - Principal plant facilities for the Climate segment are located in the Americas (e.g., multiple sites in the U.S., Mexico, Brazil), Europe (e.g., France, Germany, Ireland), and Asia (e.g., China, Thailand)[115] - Principal plant facilities for the Industrial segment are located in the Americas (e.g., multiple sites in the U.S.), Europe (e.g., France, Italy, UK), and Asia (e.g., China, India)[115] Legal Proceedings The company is involved in various legal proceedings, including asbestos-related lawsuits concerning historical products, but does not expect a material adverse impact on its financial condition - The company is involved in various lawsuits and legal proceedings but does not expect them to have a material adverse impact on its financial condition or cash flows[117] - Certain subsidiaries are defendants in asbestos-related lawsuits concerning historical products like pumps, boilers, and brake shoes, and the company states it was not a producer or manufacturer of asbestos[118][43][480] Mine Safety Disclosures This item is not applicable to the company - Not applicable[120] Part II Market for Common Equity and Shareholder Matters Ingersoll-Rand's shares trade on the NYSE, with $250 million in Q4 2019 repurchases and $750 million remaining under authorization, and its stock outperformed key indices over five years Q4 2019 Share Repurchases | Period | Total Shares Purchased (thousands) | Average Price Paid per Share (USD) | Value of Shares Remaining for Purchase (USD thousands) | | :--- | :--- | :--- | :--- | | Oct 2019 | 0.4 | $117.02 | $999,961 | | Nov 2019 | 1,016.6 | $129.43 | $868,382 | | Dec 2019 | 897.9 | $132.10 | $749,959 | | Total Q4 | 1,914.9 | $130.68 | $749,959 | - During 2019, the company repurchased approximately $750 million of its ordinary shares, leaving $750 million available under the 2018 Board authorization of $1.5 billion[142][123] - The company's stock (IR) outperformed the S&P 500 and S&P 500 Industrials indices over the five-year period ending December 31, 2019, with a cumulative total return of 131% compared to 74% and 57% for the indices, respectively[127] Selected Financial Data Key financial data for 2019 shows net revenues of $16.6 billion, stable net earnings from continuing operations at $1.37 billion, increased assets and debt due to acquisitions, and rising diluted EPS and dividends per share Selected Financial Data (2018-2019) (USD millions, except per share amounts) | In millions, except per share amounts | 2019 | 2018 | | :--- | :--- | :--- | | Net revenues | $16,598.9 | $15,668.2 | | Net earnings from continuing operations | $1,370.3 | $1,359.1 | | Total assets | $20,492.3 | $17,914.9 | | Total debt | $5,573.4 | $4,091.3 | | Diluted EPS from continuing operations | $5.61 | $5.43 | | Dividends declared per ordinary share | $2.12 | $1.96 | Management's Discussion and Analysis (MD&A) Management discusses 2019 financial performance, noting a 5.9% revenue increase to $16.6 billion, flat operating margins due to strategic costs, strong liquidity with $2.0 billion operating cash flow, and significant M&A and financing activities Overview and Significant Events In 2019, the company saw mixed market demand and undertook key strategic actions including the Industrial segment separation, PFS acquisition, $750 million in share repurchases, and a $1.5 billion senior note issuance - Economic conditions in 2019 were mixed: healthy demand for HVAC, moderated transport markets, and weak short-cycle industrial investment spending[136] - Announced the separation of the Industrial segment to combine with Gardner Denver (GDI), with the remaining company to be renamed Trane Technologies plc[139] - Acquired Precision Flow Systems (PFS) in May 2019, a manufacturer of precision flow control equipment[140] - Repurchased $750 million of ordinary shares in 2019 and increased the quarterly dividend by 18% to $0.53 per share[142][143] Consolidated Results of Operations In 2019, net revenues increased 5.9% to $16.6 billion driven by volume, acquisitions, and pricing, while operating margin remained flat at 12.2% due to strategic costs, and the effective tax rate rose to 20.3% Consolidated Results of Operations (2018-2019) (USD millions) | Dollar amounts in millions | 2019 | 2018 | Period Change | | :--- | :--- | :--- | :--- | | Net revenues | $16,598.9 | $15,668.2 | $930.7 | | Operating income | $2,017.6 | $1,917.4 | $100.2 | | Earnings from continuing operations | $1,387.9 | $1,379.0 | $8.9 | | Net earnings | $1,428.5 | $1,357.5 | $71.0 | Components of Net Revenue Change (2019 vs 2018) (Percentage Change (%)) | Component | Percentage Change (%) | | :--- | :--- | | Volume | 4.0% | | Acquisitions | 1.5% | | Pricing | 1.7% | | Currency translation | (1.3)% | | Total | 5.9% | - Operating margin remained flat at 12.2% as improved pricing and productivity were offset by material inflation, unfavorable product mix, and costs related to the Industrial Segment separation and PFS acquisition[154] Segment Results In 2019, the Climate segment's revenue grew 5.9% to $13.1 billion with improved margins, while the Industrial segment's revenue grew 6.0% to $3.5 billion primarily due to acquisitions, and unallocated corporate expenses rose significantly due to separation and acquisition costs Segment Performance (2019 vs 2018) (USD millions) | Segment (USD millions) | Net Revenues 2019 | Net Revenues 2018 | % Change | Operating Income 2019 | Operating Income 2018 | Operating Margin 2019 (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Climate | $13,075.9 | $12,343.8 | 5.9% | $1,908.5 | $1,766.2 | 14.6% | | Industrial | $3,523.0 | $3,324.4 | 6.0% | $455.0 | $405.3 | 12.9% | - Climate segment revenue growth was driven by volume (5.2%) and pricing (1.9%), with margins improving due to these factors and productivity gains[163] - Industrial segment revenue growth was driven by acquisitions (7.4%), which offset an organic volume decline (-0.6%) and negative currency impact (-2.0%)[164] - Unallocated corporate expenses increased by $91.8 million, primarily due to $94.6 million in Industrial Segment separation-related costs and $12.9 million in PFS acquisition-related costs[165] Liquidity and Capital Resources The company maintained strong liquidity with cash and equivalents increasing to $1.3 billion and operating cash flow from continuing activities rising to nearly $2.0 billion in 2019, while major cash uses included $1.5 billion for acquisitions and $1.26 billion returned to shareholders, leading to a debt-to-total capital ratio of 43.3% Key Liquidity Measures (at Dec 31) (USD millions) | In millions | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,303.6 | $903.4 | | Total debt | $5,573.4 | $4,091.3 | | Total Ingersoll-Rand plc shareholders' equity | $7,267.6 | $7,022.7 | | Debt-to-total capital ratio (%) | 43.3% | 36.7% | Cash Flow Summary (2018-2019) (USD millions) | In millions | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by continuing operating activities | $1,956.3 | $1,474.5 | | Net cash used in investing activities | ($1,780.0) | ($629.4) | | Net cash provided by (used in) financing activities | $270.5 | ($1,378.8) | - The company maintains two $1.0 billion revolving credit facilities, which were unused at year-end 2019[177] Critical Accounting Policies Management identifies critical accounting policies including annual impairment testing of goodwill and indefinite-lived intangible assets, accounting for business combinations, revenue recognition, asbestos-related liabilities, income taxes, and employee benefit plans, all requiring significant estimates and judgments - Goodwill ($6.8 billion) and indefinite-lived intangible assets ($2.8 billion) at year-end 2019 are tested annually for impairment using discounted cash flow and market approaches, which require significant management assumptions[197][72] - Asbestos matters require significant estimation to determine the liability for future claims, using an outside expert and key assumptions about claim filings and settlement values[209][279] - Revenue recognition involves judgment in identifying performance obligations and allocating transaction prices, especially for contracts with multiple goods and services[209][207] - Accounting for income taxes and employee benefit plans requires significant judgment regarding the interpretation of laws and actuarial assumptions (e.g., discount rates, return on assets)[208][210] Quantitative and Qualitative Disclosure About Market Risk The company is exposed to market risks from foreign currency, commodity prices, and interest rates, with its largest currency exposures in Euros and Chinese Yuan, and uses derivatives to hedge, while interest rate risk is low due to fixed-rate debt - The company's largest foreign currency revenue concentrations are in Euros and Chinese Yuan[215] - A sensitivity analysis indicates that a hypothetical 10% adverse change in exchange rates would cause an unrealized loss of approximately $23.2 million on currency derivative instruments as of December 31, 2019[217] - The debt portfolio is mainly composed of fixed-rate instruments, minimizing the impact of market interest rate fluctuations on results of operations[220] Financial Statements and Supplementary Data This section includes the company's consolidated financial statements for 2019, audited by PricewaterhouseCoopers LLP, and unaudited quarterly data illustrating the business's seasonal nature with Q2 and Q3 peaks - Presents the consolidated financial statements and the report of the independent registered public accounting firm, PricewaterhouseCoopers LLP[221] - Unaudited quarterly financial data for 2019 and 2018 is provided, illustrating the company's revenue seasonality with peaks in Q2 and Q3[221] Changes in and Disagreements with Accountants There were no changes in or disagreements with the company's accountants on accounting and financial disclosure - None[223] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with the latter assessment excluding the recently acquired PFS - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2019[224] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, with the assessment excluding the recently acquired Precision Flow Systems (PFS)[227][228] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2019[230] Other Information There is no information reported under this item Part III Directors, Executive Compensation, and Corporate Governance Information for Items 10 through 14, covering directors, executive compensation, and corporate governance, is incorporated by reference from the company's definitive 2020 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees and Services is incorporated by reference from the company's 2020 Proxy Statement[233][234][235] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including the merger agreement with Gardner Denver, debt indentures, credit agreements, management compensation plans, and certifications by the CEO and CFO - This section contains the index of all exhibits filed with the Form 10-K, including financial statements and schedules[239] - Key filed exhibits include the Separation and Distribution Agreement and Merger Agreement with Gardner Denver Holdings, Inc., various debt indentures, and executive compensation plans[242] Form 10-K Summary This item is not applicable - Not applicable[257]