01—Abstract
Summary
Summary of the 10-K filed February 9, 2021. Cited figures are marked; the original filing is the authoritative source.
Trane Technologies plc (TT) closed 2020 with net revenues of $12.45 billiona, down 4.8% from $13.08 billion in 2019, driven by a 5.5% volume decline that was partially offset by 0.8% pricing gains.
The decline was concentrated in Asia Pacific (down 10.6%) and EMEA (down 6.5%), while the Americas fell 3.7%. Despite lower volume, gross margin held flat at 30.5%, and Segment Adjusted EBITDA declined only 2.8% to $2.13 billionb. Reported GAAP net earnings attributable to Trane fell to $854.9 million (diluted EPS $3.52) from $1.41 billion, reflecting the Reverse Morris Trust separation of the Industrial segment and $(122.3) million of discontinued operations losses.
Continuing-operations diluted EPS was $4.02c versus $4.69 in 2019. Cash generation and balance sheet flexibility improved meaningfully. Free cash flow rose to $1.71 billion from $1.37 billion, aided by working capital improvements and a $1.9 billion special cash payment received in connection with the Transaction.
Cash and equivalents ended the year at $3.29 billion, and total debt declined to $5.27 billiond, with a debt-to-total-capital ratio of 45.1%. Management resumed share repurchases in Q4 2020, and in February 2021 the Board authorized a new $2.0 billion buyback program and raised the quarterly dividend 11% to $0.59 per share. Key risks for investors center on the asbestos-related Chapter 11 proceedings of Aldrich Pump and Murray Boiler, which were deconsolidated as of June 18, 2020.
The company recorded a $248.8 million liability for its Funding Agreement obligations, and the ultimate exposure remains uncertain. Additional risks include the ongoing COVID-19 pandemic, tax-free treatment of the Reverse Morris Trust under Sections 355 and 368, and the goodwill and intangible asset base of roughly $8.6 billion, which could require impairment charges if conditions deteriorate. The company's backlog grew 15.2% to $2.89 billion, providing some visibility into 2021 shipments.
02—Key points
Key Highlights
- Net revenues fell 4.8% to $12.45 billion, with volume down 5.5% and pricing up 0.8%, while Asia Pacific declined 10.6% and EMEA declined 6.5%.
- Gross profit margin held flat at 30.5% and Segment Adjusted EBITDA declined only 2.8% to $2.13 billion, reflecting cost containment, deflation, and improved pricing.
- GAAP diluted EPS was $3.52 versus $5.77 in 2019, weighed down by $(122.3) million of discontinued operations losses tied to the Industrial separation and Aldrich deconsolidation.
- Free cash flow increased 25% to $1.71 billion, supported by lower inventories and higher payables, and cash on hand reached $3.29 billion.
- Total debt decreased to $5.27 billion, with a debt-to-total-capital ratio of 45.1% and no financial covenants on public debt.
- Board authorized a new $2.0 billion share repurchase program in February 2021 and raised the quarterly dividend 11% to $0.59 per share.
- Aldrich Pump and Murray Boiler Chapter 11 cases remain pending; Trane recorded a $248.8 million liability under the Funding Agreements, with ultimate exposure uncertain.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Trane Technologies kept $0.07.
- Revenue$12.45B100.0%
- Cost of revenue−$8.65B69.5%
- Gross profit$3.80B30.5%
- Operating costs−$2.27B18.2%
- Operating income$1.53B12.3%
- Interest, other & tax−$677.9M5.4%
- Net income$854.9M6.9%
Where FY2020 revenue went
$12.45B- Cost of revenue: $8.65B, 69% of revenue
- SG&A: $2.27B, 18% of revenue
- Net income: $854.9M, 6.9% of revenue
- R&D: $165.0M, 1.3% of revenue
- Interest, other & tax: $677.9M, 5.4% of revenue
Kept 6.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 9, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $12.45B$13.08B | −4.8% |
| Cost of Revenue | $8.65B$9.09B | −4.8% |
| Gross Profit | $3.80B$3.99B | −4.7% |
| R&D Expenses | $165.00M$174.20M | −5.3% |
| SG&A Expenses | $2.27B$2.32B | −2.1% |
| Operating Income | $1.53B$1.67B | −8.2% |
| Interest Expense | $248.70M$242.80M | +2.4% |
| Net Income | $854.90M$1.43B | −40.2% |
| EPS (Basic) | $3.56$5.84 | −39.0% |
| EPS (Diluted) | $3.52$5.77 | −39.0% |
| Shares Outstanding (Basic) | 240.10M241.60M | −0.6% |
| Shares Outstanding (Diluted) | 243.10M244.40M | −0.5% |
05—Questions
Frequently Asked Questions
Why did reported net earnings fall so sharply in 2020?
Net earnings attributable to Trane fell to $854.9 million from $1.41 billion. Continuing operations earnings declined about 15% on lower volumes and higher tax expense (effective rate 23.0% vs. 17.1%), while discontinued operations swung to a $(122.3) million loss, driven by $114.2 million of Industrial separation costs and a $25.8 million loss on deconsolidating Aldrich.
How exposed is Trane to the asbestos bankruptcy of Aldrich and Murray?
Trane deconsolidated Aldrich and Murray as of June 18, 2020, and no longer controls them. It recorded a $248.8 million liability for its obligation under the Funding Agreements to cover their costs and any trust funding shortfall. Management believes it has no direct responsibility beyond these agreements, but the company acknowledges that claimants may still pursue it and that the ultimate obligation is uncertain.
What drove the strong cash flow in 2020 despite lower earnings?
Continuing operating cash flow rose to $1.77 billion from $1.52 billion, primarily due to improved working capital, including lower inventory and higher accounts payable. Capital expenditures fell to $146.2 million, and the $1.9 billion special cash payment from the Reverse Morris Trust transaction was received as a financing inflow, though it is a one-time item and should not be treated as recurring cash generation.
What is the outlook for 2021 based on backlog and management commentary?
Total backlog grew 15.2% to $2.89 billion at year-end 2020, with Americas backlog up 12.3% and Asia Pacific up 16.5%. Management expects most of the backlog to ship in 2021 and said market conditions should improve as vaccine distribution expands, though it cautioned that visibility remains limited and that COVID-19 resurgence could delay recovery.
Is the dividend and buyback capacity sustainable?
Dividends paid totaled $507.3 million in 2020 and free cash flow of $1.71 billion covered them comfortably. Share repurchases resumed in Q4 2020, and the company retains about $500 million under the 2018 authorization plus a new $2.0 billion program. Investment-grade ratings (Baa2/BBB) and $2.0 billion of undrawn revolving credit support this capacity, though the 2021 maturity of $775.6 million in debt will need to be managed.
06—Continue