Trane Technologies(TT) - 2022 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the company's condensed consolidated financial statements and management's discussion and analysis for the period Financial Statements The company reported substantial revenue and earnings growth for the first nine months of 2022, alongside a decrease in cash due to financing activities and asbestos liabilities Condensed Consolidated Statements of Operations | In millions, except per share data | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | | Net revenues | $11,917.9 | $10,567.1 | | Operating income | $1,838.3 | $1,587.6 | | Net earnings attributable to Trane | $1,317.4 | $1,105.6 | | Diluted EPS (Continuing operations) | $5.66 | $4.61 | Condensed Consolidated Balance Sheets | In millions | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $6,299.1 | $6,470.9 | | Total assets | $17,739.8 | $18,059.8 | | Total current liabilities | $5,545.5 | $4,752.4 | | Total liabilities | $11,871.4 | $11,786.7 | | Total equity | $5,868.4 | $6,273.1 | Condensed Consolidated Statements of Cash Flows | In millions | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $743.7 | $1,161.2 | | Net cash from investing activities | ($325.8) | ($208.8) | | Net cash from financing activities | ($1,413.0) | ($1,465.0) | | Net (decrease) in cash | ($1,079.0) | ($551.1) | Notes to Condensed Consolidated Financial Statements Notes detail revenue by geography, segment performance, asbestos-related liabilities, and a Commercial HVAC dealer acquisition Net Revenues by Geographic Segment (in millions) | In millions | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | | Americas | $9,501.0 | $8,207.6 | | EMEA | $1,476.0 | $1,462.1 | | Asia Pacific | $940.9 | $897.4 | | Total Net revenues | $11,917.9 | $10,567.1 | Segment Adjusted EBITDA (in millions) | In millions | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | | Americas Segment Adjusted EBITDA | $1,805.5 | $1,571.7 | | EMEA Segment Adjusted EBITDA | $246.2 | $283.4 | | Asia Pacific Segment Adjusted EBITDA | $168.6 | $163.8 | | Total Segment Adjusted EBITDA | $2,220.3 | $2,018.9 | - On March 2, 2022, the company funded a $270.0 million qualified settlement fund (QSF) related to the Aldrich and Murray asbestos Chapter 11 proceedings, resulting in an operating cash outflow with $91.8 million allocated to continuing operations and $178.2 million to discontinued operations[110] - On April 1, 2022, the company acquired a Commercial HVAC independent dealer for an aggregate cash payment of $110.0 million, reported within the Americas segment[88] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong financial performance driven by demand and pricing, offsetting inflation, with robust liquidity supporting strategic investments and shareholder returns Results of Operations Consolidated net revenues increased by 12.8% to $11.9 billion, driven by pricing and volume, despite a 100 basis point decrease in gross profit margin Net Revenue Change Drivers | Revenue Change Driver | Nine Months Ended Sep 30, 2022 vs 2021 | | :--- | :--- | | Pricing | 9.5% | | Volume | 4.7% | | Acquisitions | 0.6% | | Currency translation | (2.0)% | | Total | 12.8% | Net Revenues by Segment (in millions) | In millions | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Americas Net Revenues | $9,501.0 | $8,207.6 | | EMEA Net Revenues | $1,476.0 | $1,462.1 | | Asia Pacific Net Revenues | $940.9 | $897.4 | - Gross profit margin for the nine months of 2022 decreased by 100 basis points to 31.4% compared to 32.4% in 2021, primarily due to significant direct material and freight inflation and unfavorable productivity from supply chain challenges, partially offset by improved pricing[151] Liquidity and Capital Resources Liquidity remains solid despite a decrease in cash and cash equivalents due to significant share repurchases and dividend payments - During the nine months ended September 30, 2022, the company repurchased and canceled $900.0 million of its ordinary shares and paid $467.0 million in dividends to ordinary shareholders[180][194] Key Liquidity Metrics (in millions) | In millions | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,080.2 | $2,159.2 | | Total debt | $4,837.4 | $4,842.1 | | Debt-to-total capital ratio | 45.2% | 43.6% | - Free cash flow, a non-GAAP measure, was $891.0 million for the nine months ended September 30, 2022, compared to $1,081.6 million for the same period in 2021[196] Quantitative and Qualitative Disclosures about Market Risk The company's market risk disclosures remain unchanged from its prior annual report on Form 10-K - There are no new quantitative or qualitative disclosures about market risk; the company refers to its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for this information[214] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2022, the company's disclosure controls and procedures are effective[215] - No changes in the company's internal control over financial reporting occurred during the third quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls[216] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and required exhibits Legal Proceedings The company is actively pursuing Chapter 11 proceedings for asbestos claims, including funding a trust and defending against challenges to its corporate restructuring - The goal of the Aldrich and Murray Chapter 11 filings is to permanently resolve all current and future asbestos-related claims by creating a trust under section 542(g) of the Bankruptcy Code[221] - An agreement in principle was reached to fund the trust with $545.0 million, comprised of $540.0 million in cash and a $5.0 million promissory note[222] - On March 2, 2022, a $270.0 million Qualified Settlement Fund (QSF) was funded, while the committee representing current asbestos claimants (ACC) has been granted standing to pursue causes of action, including fraudulent conveyance, against the company, which the company is vigorously opposing[224] Risk Factors Significant risks are identified concerning the Aldrich and Murray Chapter 11 cases, including asbestos liability determination and potential legal challenges - The company identifies various risks and uncertainties related to the Aldrich and Murray Chapter 11 cases, which could have a material effect on the business[228] - Specific risks include the ultimate determination of asbestos liability, the outcome of negotiations with the current asbestos claimants' committee (ACC), and the ACC's pursuit of legal action against the company, including claims of fraudulent conveyance related to the 2020 corporate restructuring[233][234] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.6 million ordinary shares in Q3 2022 as part of its ongoing share repurchase program Share Repurchase Activity (Q3 2022) | Period | Total shares purchased (000's) | Average price paid per share | | :--- | :--- | :--- | | July 2022 | 0.5 | $131.37 | | August 2022 | 724.3 | $159.71 | | September 2022 | 865.3 | $155.58 | | Total Q3 2022 | 1,590.1 | $157.45 | - In Q3 2022, the company repurchased $250.0 million of its ordinary shares, leaving approximately $500 million remaining under the 2021 Authorization, with a new $3.0 billion share repurchase program authorized in February 2022 to commence upon completion of the 2021 program[239] Exhibits This section lists all exhibits filed, including CEO and CFO certifications and iXBRL financial statements - The exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[242]