Trane Technologies(TT) - 2021 Q4 - Annual Report

Part I Covers the company's business operations, risk factors, properties, and legal proceedings Business Trane Technologies, a global climate innovator, provides HVAC and transport refrigeration solutions through its Trane and Thermo King brands, focusing on sustainability and regional segments Overview and Reportable Segments Trane Technologies is a global climate innovator delivering sustainable HVAC and transport refrigeration solutions via Trane and Thermo King brands - Trane Technologies is a global climate innovator focused on sustainable and efficient solutions for buildings, homes, and transportation through its primary brands, Trane® and Thermo King®[18] - The company has made significant 2030 Sustainability Commitments, including the 'Gigaton Challenge' to reduce customer greenhouse gas emissions by one billion metric tons and achieving carbon-neutral operations[18] 2021 Net Revenues by Reportable Segment | Segment | 2021 Net Revenues (in billions) | Description | | :--- | :--- | :--- | | Americas | $11.0 | Commercial & residential HVAC, transport refrigeration in North & Latin America | | EMEA | $1.9 | Commercial HVAC, industrial processing, transport refrigeration in Europe, Middle East & Africa | | Asia Pacific | $1.2 | Commercial HVAC and transport refrigeration throughout the Asia Pacific region | Business Operations and Strategy The company operates in competitive global markets, focusing on R&D, sustainability, and managing seasonal demand and order backlogs - The company's products are sold in highly competitive global markets, with principal competition based on price, quality, delivery, service, technology, and innovation[22][23] - In 2021, approximately 29% of net revenues were derived from outside the U.S., with products sold in about 100 countries[25] - Demand for HVAC products is seasonal, with sales historically higher in the second and third quarters, corresponding to spring and summer in the northern hemisphere[28] - Research and development expenses totaled $193.5 million in 2021, with a focus on sustainability improvements like energy efficiency and the use of lower global warming potential refrigerants[29] Order Backlog (as of December 31) | In millions | 2021 | 2020 | | :--- | :--- | :--- | | Americas | $3,856.7 | $1,788.0 | | EMEA | $727.2 | $426.2 | | Asia Pacific | $852.8 | $680.6 | | Total | $5,436.7 | $2,894.8 | Corporate Transactions and Legal Matters This section details the 2020 Industrial segment separation and ongoing Chapter 11 bankruptcy proceedings for asbestos claims - On February 29, 2020, the company completed a Reverse Morris Trust transaction, separating its Industrial segment (Ingersoll Rand Industrial) and receiving a special cash payment of $1.9 billion[39] - In 2021, the company paid Ingersoll Rand $49.5 million to settle post-transaction items related to working capital, cash, and benefit plan funding levels[40] - Subsidiaries Aldrich and Murray filed for Chapter 11 bankruptcy on June 18, 2020, to resolve all current and future asbestos-related claims through a §524(g) trust[42][43] - In January 2022, the Bankruptcy Court approved the funding of a $270.0 million trust (QSF) to facilitate the resolution of asbestos claims, with funding expected in Q1 2022[44][45] Human Capital Management The company manages human capital through diversity initiatives, strong safety records, and employee retention programs Employee Statistics (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Total Employees | ~37,000 | | Employees Outside U.S. | ~13,000 | | Women in Global Workforce | 25.5% | | Racially/Ethnically Diverse (U.S.) | 36.4% | | Women in Leadership | 23.1% | 2021 Employee Retention Rates (excluding retirements) | Category | Retention Rate | | :--- | :--- | | Key Talent (High Performing/Potential) | 94.6% | | Company-wide (Voluntary) | 89.5% | - The company fosters diversity and inclusion through various initiatives, including Employee Resource Groups (ERGs), Women's Leadership Development Programs, and membership in coalitions like Paradigm for Parity and OneTen[53][54] - In 2021, the company maintained a strong safety record with a Lost-time Incident Rate below 0.10 and a Recordable Rate below 1.00, while implementing extensive COVID-19 safety protocols[57] Risk Factors The company faces significant risks from economic uncertainties, supply chain disruptions, litigation, cybersecurity threats, and regulatory changes Economic and Business Risks This section outlines risks from economic disruption, supply chain issues, commodity price volatility, and intense market competition - The COVID-19 pandemic continues to pose risks through economic disruption, supply chain delays, worker absenteeism, and increased operational costs[67][68][69] - The company is exposed to risks from commodity shortages, supply chain constraints, and price volatility for materials like steel and non-ferrous metals, which could adversely affect financial results[74][75] - The business faces significant competition worldwide from large corporations and smaller local operators, with a risk of disruptive technologies from non-traditional competitors[77] Litigation and Regulatory Risks This section details litigation risks from Chapter 11 asbestos claims and regulatory challenges related to climate change and sustainability - The Chapter 11 cases of subsidiaries Aldrich and Murray present significant risks and uncertainties regarding the ultimate determination of asbestos liability and the ability to consummate a reorganization plan[87][92][95] - Global climate change and related environmental regulations, particularly concerning refrigerants, could require costly product changes and impact the company's competitive position and results[104] - Failure to achieve the company's 2030 sustainability commitments, such as the 'Gigaton Challenge,' could result in reputational harm[105] Cybersecurity, Tax, and Transaction Risks This section covers risks from cyber attacks, tax law changes, potential taxability of past transactions, and complexities of Irish domicile - The company is vulnerable to cyber attacks and security breaches of its IT systems and products, which could compromise proprietary information, disrupt operations, and lead to litigation or fines[97][98] - Changes in tax laws, such as the U.S. TCJA and OECD proposals for a global minimum tax, could materially increase the company's tax burden and effective tax rate[111][112] - There is a risk that the 2020 Reverse Morris Trust transaction could be determined to be taxable for U.S. or Irish tax purposes, potentially resulting in significant tax liabilities for the company and its shareholders[117][118] - Being an Irish-domiciled company governed by the Irish Companies Act presents risks, as Irish law differs from U.S. law and may offer less protection to security holders[122][123] Properties The company operates 35 manufacturing and assembly plants globally, owning or leasing approximately 27 million square feet of space - The company operates 35 manufacturing and assembly plants across the world, with locations in the Americas, EMEA, and Asia Pacific regions[129][130] Legal Proceedings This section details ongoing Chapter 11 bankruptcy proceedings for subsidiaries Aldrich and Murray to resolve asbestos-related claims - Subsidiaries Aldrich and Murray filed for Chapter 11 bankruptcy to permanently resolve asbestos-related claims through a §524(g) trust[132][133] - An agreement in principle was reached with the future asbestos claimants' representative to fund the trust with $545.0 million, consisting of $540.0 million in cash and a $5.0 million promissory note[134] - In January 2022, the Bankruptcy Court approved the initial funding of a $270.0 million Qualified Settlement Fund (QSF), which is expected to be funded in Q1 2022[135][136] Part II Details common equity market, financial performance analysis, market risk, and internal controls Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section covers the company's common equity market, share repurchase activities, and cumulative total shareholder return performance Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased (000's) | Average Price Paid per Share | Total Value of Program Purchases ($000's) | | :--- | :--- | :--- | :--- | | October 2021 | 0.7 | $174.74 | — | | November 2021 | 1,195.8 | $191.14 | $228,573 | | December 2021 | 1,384.3 | $196.32 | $271,430 | | Total | 2,580.8 | $193.91 | $500,003 | - In February 2021, the Board authorized a new $2.0 billion share repurchase program. As of December 31, 2021, approximately $1.4 billion remained available under this authorization[142] Cumulative Total Shareholder Return (2016-2021) | Company/Index | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Trane Technologies | $100 | $121 | $127 | $188 | $269 | $380 | | S&P 500 | $100 | $122 | $116 | $153 | $181 | $233 | | S&P 500 Industrials Index | $100 | $121 | $105 | $136 | $151 | $182 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, liquidity, capital resources, and critical accounting estimates for the fiscal year 2021 Results of Operations This section details the company's consolidated and segment-level financial performance, including revenue growth, gross profit, and operating income Consolidated Results of Operations (2021 vs. 2020) | In millions | 2021 | 2020 | Period Change | | :--- | :--- | :--- | :--- | | Net revenues | $14,136.4 | $12,454.7 | $1,681.7 | | Gross profit | $4,469.6 | $3,803.4 | $666.2 | | Operating income | $2,023.3 | $1,532.8 | $490.5 | | Earnings from continuing operations | $1,457.2 | $991.4 | $465.8 | | Net earnings | $1,436.6 | $870.0 | $566.6 | - Net revenues increased 13.5% in 2021, driven by a 7.5% increase in volume, 3.6% from pricing, 1.6% from acquisitions, and 0.8% from favorable currency translation[170] - Gross profit margin increased by 110 basis points to 31.6% in 2021, primarily due to price realization and productivity benefits, which were partially offset by material and freight inflation[171] Segment Performance (2021 vs. 2020) | Segment | Net Revenues 2021 (in millions) | % Change | Segment Adjusted EBITDA 2021 (in millions) | % Change | Margin 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Americas | $10,957.1 | 13.1% | $2,008.8 | 19.7% | 18.3% | | EMEA | $1,944.9 | 18.0% | $359.2 | 35.2% | 18.5% | | Asia Pacific | $1,234.4 | 10.1% | $228.5 | 21.0% | 18.5% | Liquidity and Capital Resources This section assesses the company's cash position, debt levels, cash flow activities, and capital allocation strategies Key Liquidity Measures (as of December 31) | In millions | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,159.2 | $3,289.9 | | Total debt | $4,842.1 | $5,272.1 | | Total equity | $6,273.1 | $6,427.1 | | Debt-to-total capital ratio | 43.6% | 45.1% | Cash Flow Summary (Years ended December 31) | In millions | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from continuing operating activities | $1,594.4 | $1,766.2 | | Net cash used in continuing investing activities | ($545.7) | ($338.5) | | Net cash (used in) from continuing financing activities | ($2,127.6) | $884.3 | - In 2021, the company repurchased and canceled $1.1 billion of its ordinary shares, completing its 2018 authorization and initiating repurchases under its new $2.0 billion 2021 authorization[193] - The quarterly dividend was increased by 11% in February 2021 to $0.59 per share and by another 14% in February 2022 to $0.67 per share[194] - The company expects to fund a $270.0 million Qualified Settlement Fund (QSF) in Q1 2022 related to the Aldrich and Murray Chapter 11 proceedings[199] Critical Accounting Estimates This section outlines key accounting judgments for goodwill impairment, revenue recognition, and employee benefit plan costs - Goodwill and indefinite-lived intangible assets are tested for impairment annually or when a triggering event occurs. Fair value is determined using a weighted combination of discounted cash flow, market multiple, and similar transaction methods[227][230] - Revenue recognition requires judgment, particularly for contracts recognized over time using the cost-to-cost input method and for arrangements with multiple performance obligations[233][234] - Determining costs for employee benefit plans, such as pensions, depends on various actuarial assumptions including discount rates, expected return on assets, and mortality rates, which are reviewed at each measurement date[236] Quantitative and Qualitative Disclosure About Market Risk The company is exposed to market risks from fluctuations in foreign currency exchange rates, commodity prices, and interest rates. It uses derivative instruments to manage these exposures - The company's largest foreign currency exposures are to the Euro and Chinese Yuan. A hypothetical 10% unfavorable change in the average exchange rate would reduce translated Net revenues by approximately $135 million (Euro) and $70 million (Yuan), respectively[240] - A sensitivity analysis on currency derivative instruments at year-end 2021 showed that a hypothetical 10% adverse change in exchange rates would result in an unrealized loss of approximately $18.1 million[242] - A sensitivity analysis on commodity derivative instruments at year-end 2021 showed that a hypothetical 10% decrease in commodity prices would result in an unrealized loss of approximately $7.5 million[243] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[247] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021. This assessment was audited and confirmed by PricewaterhouseCoopers LLP[250][251] Part III Details corporate governance, executive compensation, security ownership, related party transactions, and auditor fees Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information concerning directors, delinquent Section 16(a) reports, and corporate governance is incorporated by reference from the 2022 Proxy Statement[256] Executive Compensation Details on executive and director compensation are incorporated by reference from the 2022 Proxy Statement - All information related to executive and director compensation is incorporated by reference from the 2022 Proxy Statement[257] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2022 Proxy Statement - Information on security ownership and equity compensation plans is incorporated by reference from the 2022 Proxy Statement[258] Certain Relationships and Related Transactions, and Director Independence Details on related person transactions and director independence are incorporated by reference from the 2022 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the 2022 Proxy Statement[259] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement[260] Part IV Covers exhibits and financial statement schedules Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item contains the list of financial statements, schedules, and exhibits filed with the Form 10-K[263][264]