Trane Technologies(TT) - 2022 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1 - Financial Statements The company reports increased Q1 2022 revenues and earnings but a decrease in operating cash flow Condensed Consolidated Financial Statements Q1 2022 results show revenue growth to $3.36 billion, while net cash from operations turned negative Key Financial Results | In millions, except per share amounts | 2022 | 2021 | | :--- | :--- | :--- | | Net revenues | $3,355.5 | $3,017.6 | | Operating income | $388.2 | $353.2 | | Net earnings attributable to Trane Technologies plc | $260.2 | $235.2 | | Diluted EPS (Continuing operations) | $1.13 | $0.96 | | Diluted EPS (Net earnings) | $1.10 | $0.97 | Condensed Consolidated Balance Sheets | In millions | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $6,030.5 | $6,470.9 | | Total assets | $17,636.9 | $18,059.8 | | Total current liabilities | $4,594.4 | $4,752.4 | | Total liabilities | $11,620.4 | $11,786.7 | | Total equity | $6,016.5 | $6,273.1 | Condensed Consolidated Statements of Cash Flows | In millions | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(188.2) | $260.1 | | Net cash provided by (used in) investing activities | $(83.3) | $(113.7) | | Net cash provided by (used in) financing activities | $(534.6) | $(554.9) | | Net increase (decrease) in cash and cash equivalents | $(810.8) | $(451.9) | Notes to Condensed Consolidated Financial Statements Notes detail inventory increases, stable debt, share repurchases, and a $270 million asbestos settlement fund - On June 18, 2020, subsidiaries Aldrich and Murray filed for Chapter 11 bankruptcy to resolve all current and future asbestos-related claims, leading to their deconsolidation[25] - In Q1 2022, the company repurchased $350.0 million of its ordinary shares and authorized a new $3.0 billion share repurchase program[62] - On March 2, 2022, a $270.0 million Qualified Settlement Fund (QSF) was funded to address asbestos claims, resulting in a significant operating cash outflow[99] Inventories | In millions | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Raw materials | $496.3 | $404.6 | | Work-in-process | $270.7 | $215.9 | | Finished goods | $1,188.7 | $982.9 | | Total | $1,872.3 | $1,530.8 | Net Revenues by Segment | In millions | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Americas | $2,633.2 | $2,325.7 | | EMEA | $441.3 | $443.9 | | Asia Pacific | $281.0 | $248.0 | | Total Net revenues | $3,355.5 | $3,017.6 | Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by pricing, offset by margin pressure from inflation and supply chain issues Results of Operations Q1 2022 net revenues rose 11.2% on pricing and volume, but gross margin declined 210 basis points from inflation - The 11.2% increase in Net revenues was driven by a 7.3% contribution from pricing and a 5.1% contribution from volume[127] - Gross profit margin decreased by 210 basis points primarily due to significant direct material and freight inflation, partially offset by price realization[128] Consolidated Results of Operations | In millions | 2022 | 2021 | | :--- | :--- | :--- | | Net revenues | $3,355.5 | $3,017.6 | | Gross profit | $989.0 | $953.2 | | Gross profit % | 29.5% | 31.6% | | Operating income | $388.2 | $353.2 | | Operating income % | 11.6% | 11.7% | Segment Results The Americas segment led revenue growth, while all segments saw margin declines due to inflation and supply chain issues - Americas Segment Adjusted EBITDA margin decreased by 110 basis points to 15.4% due to significant material and freight inflation and supply chain challenges[139] - EMEA and Asia Pacific Segment Adjusted EBITDA margins decreased by 390 and 200 basis points, respectively, due to inflation and supply chain challenges[142][144] Segment Performance | Segment | Net Revenues 2022 (M) | % Change | Segment Adjusted EBITDA 2022 (M) | EBITDA Margin 2022 | | :--- | :--- | :--- | :--- | :--- | | Americas | $2,633.2 | 13.2% | $405.6 | 15.4% | | EMEA | $441.3 | (0.6)% | $59.1 | 13.4% | | Asia Pacific | $281.0 | 13.3% | $43.5 | 15.5% | Liquidity and Capital Resources The company maintained strong liquidity, deploying capital for share repurchases and dividends despite lower operating cash flow - The company repurchased $350.0 million of its ordinary shares during Q1 2022 and authorized a new $3.0 billion share repurchase program in February 2022[148] Financial Position | In millions | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,348.4 | $2,159.2 | | Total debt | $4,843.0 | $4,842.1 | | Total equity | $6,016.5 | $6,273.1 | | Debt-to-total capital ratio | 44.6% | 43.6% | Free Cash Flow (Non-GAAP) | In millions | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) continuing operating activities | $(3.9) | $262.9 | | Capital expenditures | $(74.8) | $(43.9) | | QSF funding (continuing operations component) | $91.8 | — | | Free cash flow (Non-GAAP) | $27.3 | $235.9 | Item 3 - Quantitative and Qualitative Disclosures about Market Risk Market risk disclosures are incorporated by reference from the company's 2021 Annual Report on Form 10-K - The company's disclosures regarding its exposure to market risk are incorporated by reference from its Annual Report on Form 10-K for the fiscal year ended December 31, 2021[183] Item 4 - Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Based on an evaluation as of March 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures are effective[184] - There were no material changes in the company's internal control over financial reporting during the first quarter of 2022[185] PART II OTHER INFORMATION Item 1 - Legal Proceedings The company addresses asbestos claims through subsidiary bankruptcy proceedings, including a $270 million settlement fund - The Chapter 11 filings for subsidiaries Aldrich and Murray aim to permanently resolve all current and future asbestos-related claims[190] - An agreement in principle would establish a trust funded with $545.0 million to resolve all asbestos claims[191] - On March 2, 2022, the company funded a $270.0 million Qualified Settlement Fund (QSF) as part of the bankruptcy proceedings[193] Item 1A - Risk Factors A new risk factor regarding the Russia-Ukraine conflict is disclosed, potentially heightening economic and supply chain risks - A new risk factor has been added regarding the Russian invasion of Ukraine, though the direct impact is not expected to be material as of March 31, 2022[196] - The conflict in Ukraine may heighten other existing risks, such as supply chain disruptions and increased risk of cyberattacks[197] Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased $350 million of shares in Q1 2022 and authorized a new $3 billion repurchase program - In February 2022, the Board of Directors authorized a new $3.0 billion share repurchase program[198] Share Repurchases | Period | Total shares purchased (000's) | Average price paid per share | Total purchased as part of program (000's) | | :--- | :--- | :--- | :--- | | Jan 2022 | 1,715.1 | $184.11 | 1,711.3 | | Feb 2022 | 258.7 | $167.43 | 206.4 | | Mar 2022 | 130.8 | $152.06 | — | | Total | 2,104.6 | $180.07 | 1,917.7 | Item 6 - Exhibits This section lists filed exhibits, including required CEO/CFO certifications and financial statements in iXBRL format - The exhibits filed with this report include CEO and CFO certifications pursuant to Sarbanes-Oxley and financial data in iXBRL format[200]