Trane Technologies(TT) - 2022 Q4 - Annual Report

Part I Business Trane Technologies, a global climate innovator, provides sustainable HVAC and transport refrigeration solutions, managing strong demand, supply chain issues, and asbestos liabilities - Trane Technologies is a global climate innovator providing sustainable and efficient solutions via its Trane® and Thermo King® brands17 2022 Net Revenues by Reportable Segment (in millions) | Segment | 2022 Net Revenues (in millions) | | :--- | :--- | | Americas | $12,640.8 | | EMEA | $2,034.5 | | Asia Pacific | $1,316.4 | Order Backlog (in millions) | Segment | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Americas | $5,325.2 | $3,856.7 | | EMEA | $616.1 | $727.2 | | Asia Pacific | $941.8 | $852.8 | | Total | $6,883.1 | $5,436.7 | - The company's backlog significantly increased in 2022 due to strong demand for sustainability-focused products, despite supply chain and resource constraints impacting production34 - Research and development expenses totaled $211.2 million in 2022, focusing on sustainability improvements like energy efficiency and lower global warming potential refrigerants30 - Indirect subsidiaries Aldrich Pump LLC and Murray Boiler LLC filed for Chapter 11 bankruptcy in June 2020 to resolve asbestos-related claims via a trust44 45 Human Capital Metrics (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Employees | ~39,000 | | Women in Global Workforce | 25.7% | | Racially/Ethnically Diverse (U.S.) | 37.4% | | Women in Leadership/Management | 24.2% | | Key Talent Retention Rate (2022) | 93.1% | | Voluntary Retention Rate (2022) | 86.3% | Risk Factors The company faces significant risks from economic conditions, supply chain disruptions, inflation, geopolitical conflicts, asbestos litigation, cybersecurity, and regulatory and tax changes - Economic risks include pandemic impacts, commodity shortages, supply chain disruptions, inflation, and geopolitical conflicts, leading to the company's exit from Russian and Belarusian markets67 70 82 - Significant litigation risk arises from the Chapter 11 bankruptcy cases of Aldrich and Murray subsidiaries, with uncertainties regarding final asbestos liability and trust establishment86 87 88 - The company is vulnerable to cybersecurity risks, including attacks on IT systems and products, potentially compromising data, leading to litigation, harming reputation, and increasing compliance challenges from evolving data privacy laws92 94 95 - Regulatory risks include compliance with complex environmental laws, especially those concerning refrigerants and climate change, potentially requiring costly product changes and impacting competitiveness, with failure to meet 2030 sustainability commitments posing reputational risk99 101 102 - Tax-related risks include potential changes in U.S. or foreign tax laws, such as the OECD's Pillar Two global minimum tax, which could materially increase the tax burden, and risks that the 2020 Reverse Morris Trust transaction could be deemed taxable110 111 118 - Risks related to the company's Irish domicile include differences in corporate law offering less shareholder protection than the U.S., and potential Irish dividend withholding tax on dividends paid121 122 124 Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None Properties As of December 31, 2022, Trane Technologies owned or leased approximately 28 million square feet globally, operating 38 manufacturing plants worldwide - The company operates 38 manufacturing and assembly plants worldwide, located across the Americas, EMEA, and Asia Pacific regions129 130 Legal Proceedings The company is involved in various legal proceedings, most significantly asbestos-related bankruptcy cases of subsidiaries Aldrich and Murray - The company's most significant legal matter involves the asbestos-related bankruptcy cases of its subsidiaries, Aldrich and Murray132 - In the normal course of business, the company is involved in various lawsuits, claims, and legal proceedings not expected to have a material adverse impact131 Mine Safety Disclosures The company reports no mine safety disclosures - None Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Trane Technologies' shares trade on NYSE under 'TT'; the company repurchased $300.0 million in Q4 2022 and authorized a new $3.0 billion buyback, outperforming market indices Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased (000's) | Average Price Paid per Share | Total Shares Purchased as part of Program (000's) | | :--- | :--- | :--- | :--- | | Oct 2022 | 0.2 | $153.71 | — | | Nov 2022 | 1,536.9 | $173.50 | 1,536.9 | | Dec 2022 | 191.1 | $175.00 | 190.5 | | Total | 1,728.2 | N/A | 1,727.4 | - In February 2022, the Board authorized a new $3.0 billion share repurchase program, commencing after the 2021 authorization, which had approximately $200 million remaining as of December 31, 2022136 Five-Year Cumulative Total Shareholder Return (2017-2022) | Company/Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Trane Technologies | $100 | $104 | $155 | $222 | $313 | $265 | | S&P 500 | $100 | $96 | $126 | $149 | $191 | $157 | | S&P 500 Industrials Index | $100 | $87 | $112 | $124 | $151 | $142 | Reserved This item is reserved - None Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Trane Technologies achieved $16.0 billion net revenue, a 13.1% increase, and $2.4 billion operating income, while managing asbestos liabilities and capital allocation Consolidated Results of Operations (in millions) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net revenues | $15,991.7 | $14,136.4 | 13.1% | | Gross profit | $4,964.8 | $4,469.6 | 11.1% | | Operating income | $2,418.9 | $2,023.3 | 19.6% | | Earnings from continuing operations | $1,796.2 | $1,457.2 | 23.3% | | Net earnings | $1,774.7 | $1,436.6 | 23.5% | - The 13.1% increase in 2022 net revenues was driven by 9.6% pricing and 4.9% volume growth, plus 0.8% from acquisitions, partially offset by 2.2% unfavorable currency translation159 - Gross profit margin decreased by 60 basis points to 31.0% in 2022, primarily due to significant material and freight inflation and supply chain productivity challenges, partially offset by price increases160 Segment Performance (in millions) | Segment | Net Revenues 2022 | % Change vs 2021 | Segment Adjusted EBITDA 2022 | % Change vs 2021 | | :--- | :--- | :--- | :--- | :--- | | Americas | $12,640.8 | 15.4% | $2,326.3 | 15.8% | | EMEA | $2,034.5 | 4.6% | $338.1 | (5.9)% | | Asia Pacific | $1,316.4 | 6.6% | $248.3 | 8.7% | - The company funded a $270.0 million Qualified Settlement Fund (QSF) on March 2, 2022, related to the asbestos-claim bankruptcy proceedings of its subsidiaries Aldrich and Murray150 Free Cash Flow Reconciliation (in millions) | Description | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by continuing operating activities | $1,698.7 | $1,594.4 | | Capital expenditures | (291.8) | (223.0) | | Adjustments (Restructuring, QSF funding, etc.) | 158.6 | 59.5 | | Free cash flow (Non-GAAP) | $1,565.5 | $1,430.9 | - The company repurchased $1.2 billion of ordinary shares in 2022 and increased its quarterly dividend by 12% to $0.75 per share, effective Q1 2023180 181 - Critical accounting estimates include goodwill impairment testing, where reporting unit fair values exceeded carrying values by over 200%, using discount rates of 10.0%-12.0% and a terminal growth rate of 3.0%215 218 Quantitative and Qualitative Disclosure About Market Risk The company manages market risks from foreign currency, commodity prices, and interest rates using derivatives, with Euro and Chinese Yuan as largest currency exposures and minimal interest rate risk - The company's largest foreign currency exposures are to the Euro and Chinese Yuan; a hypothetical 10% unfavorable change would decrease 2022 net revenues by approximately $140 million (Euro) and $60 million (Yuan)229 - A sensitivity analysis indicated a hypothetical 10% adverse change in exchange rates would result in an unrealized loss of approximately $7.5 million on currency derivative instruments at year-end 2022231 - The company hedges commodity price volatility for materials like aluminum and copper; a hypothetical 10% decrease in commodity prices would result in an unrealized loss of approximately $9.0 million on derivative instruments at year-end 2022232 - Interest rate exposure is limited as the debt portfolio primarily consists of fixed-rate instruments233 Financial Statements The company's Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in the Form 10-K, starting on page F-1 - The Consolidated Financial Statements and the report from PricewaterhouseCoopers LLP are presented starting on page F-1 of the report234 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes reported in Q4 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022236 - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2022, with this assessment audited by PricewaterhouseCoopers LLP239 240 - There were no material changes in internal control over financial reporting during the fourth quarter of 2022241 Other Information The company reports no other information for this item - None Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company's filing - Not Applicable Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 proxy statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement245 Executive Compensation Information on executive compensation, including Compensation Discussion and Analysis, is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement246 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, and equity compensation plans, is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement247 Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related person transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement248 Principal Accountant Fees and Services Information regarding fees paid to and services provided by the principal independent auditors is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement249 Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, providing a detailed index of all filed exhibits - This section provides an index of all exhibits filed as part of the Form 10-K252 254 Form 10-K Summary This item is not applicable to the company's filing - Not applicable