TRANE TECHNOLOGIES PLC The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q; and under Part I, Item 1A - Risk Factors in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report. Overview OrganizationalTrane Technologies plc is a global climate innovator. We bring efficient and sustainable climate solutions to buildings, homes and transportation driven by strategic brands Trane® and Thermo King® and an environmentally responsible portfolio of products and services. Prior to the separation of our Industrial segment onFebruary 29, 2020 , we announced a new organizational model and business segment structure designed to enhance our regional go-to-market capabilities, aligning the structure with our strategy and increased focus on climate innovation. Under the revised structure, we created three new regional operating segments from the former climate segment, which also serve as our reportable segments. •Our Americas segment innovates for customers in theNorth America andLatin America regions. TheAmericas segment encompasses commercial heating and cooling systems, building controls, and energy services and solutions; residential heating and cooling; and transport refrigeration systems and solutions. •Our EMEA segment innovates for customers in theEurope ,Middle East andAfrica regions. The EMEA segment encompasses heating and cooling systems, services and solutions for commercial buildings, and transport refrigeration systems and solutions. •Our Asia Pacific segment innovates for customers throughout theAsia Pacific region. TheAsia Pacific segment encompasses heating and cooling systems, services and solutions for commercial buildings and transport refrigeration systems and solutions. This model is designed to create deep customer focus and relevance in markets around the world. All prior period comparative segment information has been recast to reflect the current reportable segments. Significant Events Reorganization of Aldrich and Murray OnJune 18, 2020 (Petition Date), our indirect wholly-owned subsidiariesAldrich Pump LLC (Aldrich) andMurray Boiler LLC (Murray) each filed a voluntary petition for reorganization under Chapter 11 of Title 11 ofthe United States Code (the Bankruptcy Code) in theUnited States Bankruptcy Court for the Western District of North Carolina inCharlotte (theBankruptcy Court ). Only Aldrich and Murray have filed for Chapter 11 relief. Neither Aldrich's wholly-owned subsidiary, 200Park, Inc. (200 Park), Murray's wholly-owned subsidiary,ClimateLabs LLC (ClimateLabs),Trane Technologies plc nor its other subsidiaries (the Trane Companies) are part of the Chapter 11 filings. The goal of these Chapter 11 filings is an efficient and permanent resolution of all current and future asbestos claims through court approval of a plan of reorganization, which would establish, in accordance with section 524(g) of the Bankruptcy Code, a trust to pay all asbestos claims. Such a resolution, if achieved, would likely include a channeling injunction to enjoin asbestos claims resolved in the Chapter 11 cases from being filed or pursued against us or our affiliates. The Chapter 11 cases remain pending as ofSeptember 30, 2020 . From an accounting perspective, we no longer have control over Aldrich and Murray as of the Petition Date as their activities are subject to review and oversight by theBankruptcy Court . Therefore, Aldrich and its wholly-owned subsidiary 200 Park and Murray and its wholly-owned subsidiary ClimateLabs were deconsolidated as of the Petition Date and their respective assets and liabilities were derecognized from our Condensed Consolidated Financial Statements. As a result, we recorded an equity investment for an aggregate of$53.6 million within Other noncurrent assets in the Condensed Consolidated Balance Sheet. Simultaneously, we recognized a liability of$248.8 million within Other noncurrent liabilities in the Condensed Consolidated Balance Sheet related to our obligation under the Funding Agreements. The liability recorded may be subject to change based on the facts and circumstances of the Chapter 11 proceedings. As a result of these actions, we recognized an aggregate loss of$22.7 million in our Condensed Consolidated Statements of Comprehensive Income (Loss). A gain of$0.9 million related to Murray and its wholly-owned subsidiary ClimateLabs was recorded within Other income/ (expense), net and a loss of$23.6 million related to Aldrich and its wholly-owned subsidiary 34 -------------------------------------------------------------------------------- Table of Contents 200 Park was recorded within Discontinued operations, net of tax. Additionally, the deconsolidation resulted in an investing cash outflow of$41.7 million in our Condensed Consolidated Statements of Cash Flows, of which$10.8 million was recorded within continuing operations. Separation of Industrial Segment Businesses OnFebruary 29, 2020 (Distribution Date), we completed ourReverse Morris Trust transaction (the Transaction) withGardner Denver Holdings, Inc. (Gardner Denver) whereby we separated our former Industrial segment (Ingersoll Rand Industrial ) through a pro rata distribution to shareholders of record as ofFebruary 24, 2020 .Ingersoll Rand Industrial then merged into a wholly-owned subsidiary of Gardner Denver, which changed its name to Ingersoll-Rand Inc. Upon close of the Transaction, our existing shareholders received 50.1% of the shares of Gardner Denver common stock on a fully-diluted basis and Gardner Denver stockholders retained 49.9% of the shares of Gardner Denver on a fully diluted basis. As a result, our shareholders received .8824 shares of Gardner Denver common stock with respect to each share owned as ofFebruary 24, 2020 . In connection with the Transaction,Ingersoll-Rand Services Company , an affiliate ofIngersoll Rand Industrial , borrowed an aggregate principal amount of$1.9 billion under a senior secured first lien term loan facility (Term Loan), the proceeds of which were used to make a special cash payment of$1.9 billion to a subsidiary of ours. The obligations under the Term Loan were retained byIngersoll-Rand Services Company , which following the Transaction is a wholly-owned subsidiary of Gardner Denver. In connection with the Transaction, we entered into several agreements covering supply, administrative and tax matters to provide or obtain services on a transitional basis for varying periods after the Distribution Date. The agreements cover services such as manufacturing, information technology, human resources and finance. Income and expenses under these agreements are not expected to be material. In accordance with several customary transaction-related agreements between the us and Gardner Denver, the parties are in a process to determine final adjustments to working capital, cash and indebtedness amounts as of the Distribution Date, as well as another process to determine funding levels related to pension plans, non-qualified deferred compensation plans and retiree health benefits. As ofSeptember 30, 2020 , both are ongoing in accordance with the timelines established in the transaction-related agreements. COVID-19 Global Pandemic InMarch 2020 , theWorld Health Organization declared the outbreak of a respiratory disease caused by a newly discovered coronavirus, known now as COVID-19, as a global pandemic and recommended containment and mitigation measures worldwide. Beginning in the first quarter, many countries responded by implementing measures to combat the outbreak which impacted global business operations and resulted in our decision to temporarily close or limit our workforce to essential crews within many facilities throughout the world in order to ensure employee safety. In addition, our non-essential employees were instructed to work from home in compliance with global government stay-in-place protocols. We have been adversely impacted by the COVID-19 global pandemic. Temporary facility closures beginning in the first quarter disrupted results in theAsia Pacific region with impacts more widely felt throughout operations in theAmericas and EMEA in the months thereafter. During the second quarter, we began to reopen facilities while maintaining appropriate health and safety precautions. However, the challenges in connection with the pandemic continued as we experienced lower volume which negatively impacted revenue, supply chain disruptions and unfavorable foreign currency exchange rate movements. In response, we proactively initiated cost cutting actions in an effort to mitigate the impact of the pandemic on our business. This included reducing discretionary spending, suspending our share repurchase program, restricting travel, delaying merit increases and implementing employee furloughs in certain markets. We continue to navigate the new realities brought about by the COVID-19 global pandemic as well as any impact on our liquidity needs and ability to access capital markets. Despite these challenges, all production facilities remain open and we continue to sell, install and service our products. During the third quarter, we did not experience any major disruptions in our supply chain and continued to focus on health and safety precautions to protect our employees and customers. In addition, we intend to move forward with several restorative actions that include the reinstatement of annual merit increases and the execution of our balanced capital allocation strategy. Operationally, our financial reporting systems, internal control over financial reporting and disclosure controls and procedures continue to operate effectively despite a remote workforce. We will continue to monitor the ongoing situation as it evolves globally and will assess any potential impacts to our business and financial position. The preparation of financial statements requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses, as well as the disclosure of contingencies because they may arise from matters that are inherently uncertain. The financial statements reflect our best estimates as ofSeptember 30, 2020 (including as it relates to the actual and potential future impacts of the global pandemic) with respect to the recoverability of our assets, including our receivables and long-lived assets such as goodwill and intangibles. However, due to significant uncertainty surrounding the COVID-19 global pandemic, management's judgment regarding this could change in the future. In addition, 35 -------------------------------------------------------------------------------- Table of Contents while our results of operations, cash flows and financial condition could be negatively impacted, the extent of the impact cannot be estimated with certainty at this time As part of the response to COVID-19 global pandemic, many countries implemented emergency economic relief plans as a way of minimizing the economic impact of this health crisis. We are evaluating the potential benefits from certain of these measures and will continue to monitor the plans as they are finalized and implemented. Inthe United States , the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted onMarch 27, 2020 providing numerous tax provisions and other stimulus measures. We are currently applying the CARES Act to our operations, which includes the deferral of employer social security payroll tax payments under the CARES Act untilJanuary 1, 2021 , with 50 percent owed onDecember 31, 2021 and the other half owed onDecember 31, 2022 . Trends and Economic Events We are a global corporation with worldwide operations. As a global business, our operations are affected by worldwide, regional and industry-specific economic factors as well as political and social factors wherever we operate or do business. Our geographic diversity and the breadth of our product and services portfolios have helped mitigate the impact of any one industry or the economy of any single country on our consolidated operating results. Given our broad range of products manufactured and geographic markets served, management uses a variety of factors to predict the outlook for our company. We monitor key competitors and customers in order to gauge relative performance and the outlook for the future. We regularly perform detailed evaluations of the different market segments we are serving to proactively detect trends and to adapt our strategies accordingly. In addition, we believe our order rates are indicative of future revenue and thus are a key measure of anticipated performance. Current economic conditions are uncertain as a result of the COVID-19 global pandemic, impacting both the global Heating, Ventilation and Air Conditioning (HVAC) and Transport end-markets as well as limiting visibility in the factors used to predict the outlook for our company. As a result, we have not reinstated financial guidance for 2020 but we remain confident in our sustainability strategy and remain in a strong financial position. We believe we have a solid foundation of global brands that are highly differentiated in all of our major product lines. Our geographic and product diversity coupled with our large installed product base provides growth opportunities within our service, parts and replacement revenue streams. In addition, we are investing substantial resources to innovate and develop new products and services which we expect will drive our future growth. 36 -------------------------------------------------------------------------------- Table of Contents Results of Operations In connection with the completion of the Transaction, we do not beneficially own anyIngersoll Rand Industrial shares of common stock and no longer consolidateIngersoll Rand Industrial in our financial statements. As a result, the following Management's Discussion and Analysis of Financial Condition and Results of Operations presents the results ofIngersoll Rand Industrial as a discontinued operation for periods prior to the Distribution date. In addition, the assets and liabilities ofIngersoll Rand Industrial have been recast to held-for-sale atDecember 31, 2019 . Three Months EndedSeptember 30, 2020 Compared to the Three Months EndedSeptember 30, 2019 - Consolidated Results 2020 2019 Period % of % of Dollar amounts in millions 2020 2019 Change revenues revenues Net revenues$ 3,495.5 $ 3,470.9 $ 24.6 Cost of goods sold (2,360.8) (2,366.6) 5.8 67.5 % 68.2 % Gross profit 1,134.7 1,104.3 30.4 32.5 % 31.8 % Selling and administrative expenses (567.8) (567.8) - 16.3 % 16.3 % Operating income 566.9 536.5 30.4 16.2 % 15.5 % Interest expense (62.4) (63.9) 1.5 Other income/(expense), net (4.5) (5.8) 1.3 Earnings before income taxes 500.0 466.8 33.2 Benefit (provision) for income taxes (89.9) (80.5) (9.4) Earnings from continuing operations 410.1 386.3 23.8 Discontinued operations, net of tax (5.5) 77.1 (82.6) Net earnings (loss)$ 404.6 $ 463.4 $ (58.8) Net Revenues Net revenues for the three months endedSeptember 30, 2020 increased by 0.7%, or$24.6 million , compared with the same period in 2019, which resulted from the following: Volume (0.5) % Pricing 1.0 % Currency translation 0.2 % Total 0.7 % In light of the current economic environment resulting from the COVID-19 global pandemic, strong operational performance helped mitigate its impacts and increased Net revenues by 70 basis points. Other key drivers included improved pricing and favorable foreign currency exchange rate movements, partially offset by lower volumes in most of our businesses which continue to be impacted by the COVID-19 global pandemic. Refer to the "Results by Segment" below for a discussion of Net Revenues by segment. Gross Profit Margin Gross profit margin for the three months endedSeptember 30, 2020 increased 70 basis points to 32.5% compared to 31.8% for the same period of 2019. The increase was primarily driven by improved pricing, cost containment initiatives and favorable foreign currency exchange rate movements. These increases were partially offset by unfavorable product mix due to lower volumes in higher margin products, the under absorption of fixed production overhead costs and inflation. Although we continue to be impacted by the COVID-19 global pandemic, mitigation actions supported modest revenue growth. 37 -------------------------------------------------------------------------------- Table of Contents Selling and Administrative Expenses Selling and administrative expenses for the three months endedSeptember 30, 2020 remained flat at$567.8 million compared with the same period of 2019. Due to the COVID-19 global pandemic, we initiated cost containment actions in order to mitigate its impacts on our business. As a result, we benefited from reduced discretionary spending and lower compensation due to reduced headcount and delayed merit increases. These amounts were offset by higher spending on restructuring and transformation initiatives associated with the completion of the Transaction. Selling and administrative expenses as a percentage of net revenues for the three months endedSeptember 30, 2020 remained flat at 16.3% compared to the same period of 2019 primarily due to cost containment actions offset by higher restructuring and transformation spend during the period. Interest Expense Interest expense for the three months endedSeptember 30, 2020 decreased by$1.5 million compared with the same period of 2019 primarily due to the redemption of our$300.0 million of 2.625% Senior notes inApril 2020 and repayment of$179.0 million of commercial paper during the third quarter of 2019. Other Income/(Expense), Net The components of Other income/(expense), net for the three months endedSeptember 30 were as follows: In millions 2020 2019 Interest income/(loss)$ 1.9 $ (1.1) Exchange gain/(loss) (2.5) (4.0)
Other components of net periodic benefit cost (3.9) (7.2)
Other activity, net - 6.5 Other income/(expense), net$ (4.5) $ (5.8) Other income /(expense), net includes the results from activities other than normal business operations such as interest income and foreign currency gains and losses on transactions that are denominated in a currency other than an entity's functional currency. In addition, we include the components of net periodic benefit cost for pension and post retirement obligations other than the service cost component. Other activity, net primarily includes items associated with certain legal matters as well as asbestos-related activities. Provision for Income Taxes For the three months endedSeptember 30, 2020 , our effective tax rate was 18.0% which was lower than theU.S. Statutory rate of 21% primarily due to a$24.5 million reduction in valuation allowances on deferred taxes associated with net operating losses partially offset by a related$12.4 million expense resulting from revised income projections of a planned restructuring in a non-U.S. tax jurisdiction. In addition, excess tax benefits from employee share-based payments and earnings in non-U.S. jurisdictions, which in aggregate have a lower effective tax rate, provided tax rate benefits. These amounts were partially offset byU.S. state and local taxes and certain non-deductible employee expenses. The reduction of the valuation allowances and related expense decreased the effective tax rate by 2.4%. For the three months endedSeptember 30, 2019 our effective tax rate was 17.2% which was lower than theU.S. Statutory rate of 21% primarily due to a reduction in deferred tax asset valuation allowances for certain non-U.S. net deferred tax assets and earnings in non-U.S. jurisdictions, which in aggregate have a lower effective tax rate. These amounts were partially offset by U.S.state and local income taxes and certain non-deductible expenses. Discontinued Operations The components of Discontinued operations, net of tax for the three months endedSeptember 30 were as follows: In millions 2020
2019
Net revenues $ - $
873.4
Pre-tax earnings (loss) from discontinued operations (7.7) 117.3 Tax benefit (expense)
2.2 (40.2)
Discontinued operations, net of tax$ (5.5) $
77.1
Discontinued operations are retained obligations from previously sold businesses, including amounts related toIngersoll Rand Industrial as part of the completion of the Transaction and asbestos-related activities of Aldrich through the Petition Date. In addition, the three months endedSeptember 30, 2020 andSeptember 30, 2019 includes pre-taxIngersoll Rand Industrial separation costs primarily related to legal, consulting and advisory fees of$2.3 million and$29.0 million , respectively. 38 -------------------------------------------------------------------------------- Table of Contents The components of Discontinued operations, net of tax for the three months endedSeptember 30 were as follows: In millions 2020 2019
Nine Months Ended
2020 2019
% of % of
Dollar amounts in millions 2020 2019 Period Change revenues revenues
Net revenues $ 9,275.6 $ 9,892.2 $ (616.6)
Cost of goods sold (6,420.1) (6,818.6) 398.5 69.2 % 68.9 %
Gross profit 2,855.5 3,073.6 (218.1) 30.8 % 31.1 %
Selling and administrative expenses (1,710.7) (1,733.7) 23.0 18.5 % 17.6 %
Operating income 1,144.8 1,339.9 (195.1) 12.3 % 13.5 %
Interest expense (186.8) (179.4) (7.4)
Other income/(expense), net 7.6 (21.7) 29.3
Earnings before income taxes 965.6 1,138.8 (173.2)
Benefit (provision) for income taxes (224.4) (192.6) (31.8)
Earnings from continuing operations 741.2 946.2 (205.0)
Discontinued operations, net of tax (120.4) 181.2 (301.6)
Net earnings (loss) $ 620.8 $ 1,127.4 $ (506.6)
Net Revenues
Net revenues for the nine months ended September 30, 2020 decreased by 6.2%, or
$616.6 million , compared with the same period in 2019, which resulted from the
following:
Volume/product mix (6.7) %
Pricing 0.8 %
Currency translation (0.3) %
Total (6.2) %
We continue to be impacted by the economic environment resulting from the
COVID-19 global pandemic, but strong third quarter operational results helped
mitigate a challenging first half of 2020. The decrease in Net revenues is
primarily related to lower volumes across each of our segments. Temporary
facility closures beginning in the first quarter disrupted results in the Asia
Pacific region with impacts more widely felt throughout operations in the
Americas and EMEA in the months thereafter. Unfavorable foreign currency
exchange rate movements further contributed to the year-over-year decrease,
partially offset by improved pricing. Refer to the "Results by Segment" below
for a discussion of Net Revenues by segment.
Gross Profit Margin
Gross profit margin for the nine months ended September 30, 2020 decreased by 30
basis points to 30.8% compared to 31.1% for the same period of 2019. The
decrease was primarily driven by unfavorable product mix due to lower volumes on
higher margin products and the under absorption of fixed production overhead
costs. These decreases were partially offset by cost containment initiatives,
improved pricing and material deflation.
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Selling and Administrative Expenses
Selling and administrative expenses for the nine months ended September 30, 2020
decreased by 1.3%, or $23.0 million , compared with the same period of 2019. Due
to the COVID-19 global pandemic, we initiated cost containment actions in order
to mitigate its impacts on our business. As a result, we benefited from employee
furloughs in certain regions, delayed merit increases and reduced discretionary
spending. These amounts were partially offset by higher spending on
restructuring and transformation initiatives associated with the completion of
the Transaction. However, selling and administrative expenses as a percentage of
net revenues for the nine months ended September 30, 2020 increased 90 basis
points from 17.6% to 18.5% primarily due to lower comparable revenue
year-over-year.
Interest Expense
Interest expense for the nine months ended September 30, 2020 increased $7.4
million compared with the same period of 2019 due to the $1.5 billion issuance
of Senior notes during the first quarter of 2019. The increase was partially
offset by the redemption of our $300.0 million of 2.625% Senior notes in April
2020 and repayment of commercial paper of $179.0 million during the third
quarter of 2019.
Other Income/(Expense), Net
The components of Other income/(expense), net for the nine months ended
September 30 are as follows:
In millions 2020 2019
Interest income/(loss) $ 3.6 $ 0.4
Exchange gain/(loss) (8.5) (9.4)
Other components of net periodic benefit cost (9.0) (25.3)
Other activity, net 21.5 12.6
Other income/(expense), net $ 7.6 $ (21.7)
Other income /(expense), net includes the results from activities other than
normal business operations such as interest income and foreign currency gains
and losses on transactions that are denominated in a currency other than an
entity's functional currency. In addition, we include the components of net
periodic benefit cost for pension and post retirement obligations other than the
service cost component. Other activity, net primarily includes items associated
with certain legal matters as well as asbestos-related activities through the
Petition Date. During the nine months ended September 30, 2020 , the Company
recorded a $17.4 million adjustment to correct an overstatement of a legacy
legal liability that originated in prior years and a gain of $0.9 million
related to the deconsolidation of Murray and its wholly-owned subsidiary
ClimateLabs within other activity, net.
Provision for Income Taxes
For the nine months ended September 30, 2020 , our effective tax rate was 23.2%
which was higher than the U.S. Statutory rate of 21% due to a $37.0 million
non-cash charge related to the establishment of valuation allowances on net
deferred tax assets, primarily net operating losses in certain tax jurisdictions
as a result of the completion of the Transaction, U.S. state and local taxes and
certain non-deductible employee expenses. These amounts were partially offset by
excess tax benefits from employee share-based payments, a $3.9 million benefit
primarily related to a reduction in valuation allowances on deferred taxes
related to net operating losses as a result of a planned restructuring in a
non-U.S. tax jurisdiction and earnings in non-U.S. jurisdictions, which in
aggregate have a lower effective tax rate. The impact of the changes in the
valuation allowances increased the effective tax rate by 3.4%. The effective tax
rate for the nine months ended September 30, 2019 was 16.9% which was lower than
the U.S. statutory rate of 21% primarily due to excess tax benefits from
employee share-based payments, a reduction in deferred tax asset valuation
allowances for certain non-U.S. net deferred tax assets, a reduction in our
unrecognized tax benefits due to the settlement of an audit in a major tax
jurisdiction and earnings in non-U.S. jurisdictions, which in aggregate have a
lower effective tax rate. These amounts were partially offset by U.S. state and
local taxes and certain non-deductible expenses.
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Discontinued Operations
The components of Discontinued operations, net of tax for the nine months ended
September 30 were as follows:
In millions 2020 2019
Net revenues$ 469.8 $
2,555.8
Pre-tax earnings (loss) from discontinued operations (131.1)
273.4
Tax benefit (expense) 10.7
(92.2)
Discontinued operations, net of tax$ (120.4) $
181.2
Discontinued operations are retained obligations from previously sold businesses, including amounts related toIngersoll Rand Industrial as part of the completion of the Transaction and asbestos-related activities of Aldrich through the Petition Date. In addition, the nine months endedSeptember 30, 2020 includes pre-taxIngersoll Rand Industrial separation costs primarily related to legal, consulting and advisory fees of$113.9 million and a loss of$23.6 million related to the deconsolidation of Aldrich and its wholly-owned subsidiary 200 Park. The nine months endedSeptember 30, 2019 includes$45.1 million of pre-taxIngersoll Rand Industrial separation costs. The components of Discontinued operations, net of tax for the nine months endedSeptember 30 were as follows: In millions 2020 2019
Three Months EndedSeptember 30, 2020 Compared to the Three Months EndedSeptember 30, 2019 - Segment Results We operate under three regional operating segments designed to create deep customer focus and relevance in markets around the world. •Our Americas segment innovates for customers in theNorth America andLatin America regions. TheAmericas segment encompasses commercial heating and cooling systems, building controls, and energy services and solutions; residential heating and cooling; and transport refrigeration systems and solutions. •Our EMEA segment innovates for customers in theEurope ,Middle East andAfrica region. The EMEA segment encompasses heating and cooling systems, services and solutions for commercial buildings, and transport refrigeration systems and solutions. •Our Asia Pacific segment innovates for customers throughout theAsia Pacific region. TheAsia Pacific segment encompasses heating and cooling systems, services and solutions for commercial buildings and transport refrigeration systems and solutions. Management measures operating performance based on net earnings excluding interest expense, income taxes, depreciation and amortization, restructuring, unallocated corporate expenses and discontinued operations (Segment Adjusted EBITDA). Segment Adjusted EBITDA is not defined under accounting principles generally accepted inthe United States of America (GAAP) and may not be comparable to similarly-titled measures used by other companies and should not be considered a substitute for net earnings or other results reported in accordance with GAAP. We believe Segment Adjusted EBITDA provides the most relevant measure of profitability as well as earnings power and the ability to generate cash. This measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and we use this measure for business planning purposes. Segment Adjusted EBITDA also provides a useful tool for assessing the comparability between periods and our ability to generate cash from operations sufficient to pay taxes, to service debt and to undertake capital expenditures because it eliminates non-cash charges such as depreciation and amortization expense. 41 -------------------------------------------------------------------------------- Table of Contents The following discussion compares our results for each of our three reportable segments for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . In millions 2020 2019 % change Americas Net revenues$ 2,745.8 $ 2,707.5 1.4 % Segment Adjusted EBITDA 555.0 529.9 4.7 % Segment Adjusted EBITDA as a percentage of net revenues 20.2 % 19.6 % EMEA Net revenues$ 445.2 $ 456.3 (2.4) % Segment Adjusted EBITDA 87.6 82.0 6.8 % Segment Adjusted EBITDA as a percentage of net revenues 19.7 % 18.0 % Asia Pacific Net revenues$ 304.5 $ 307.1 (0.8) % Segment Adjusted EBITDA 58.5 46.8 25.0 % Segment Adjusted EBITDA as a percentage of net revenues 19.2 % 15.2 % Total Net revenues$ 3,495.5 $ 3,470.9 0.7 % Total Segment Adjusted EBITDA 701.1 658.7 6.4 %
Net revenues for the three months endedSeptember 30, 2020 increased by 1.4% or$38.3 million , compared with the same period of 2019. The components of the period change were as follows: Volume 0.8 % Pricing 1.0 % Currency translation (0.4) % Total 1.4 % TheAmericas region continued to be impacted by the economic environment resulting from the COVID-19 global pandemic. However, strong operating performance was primarily driven by our Residential and Commercial HVAC businesses. The increase in Net revenues primarily related to improved pricing and higher volumes, partially offset by unfavorable foreign currency exchange rate movements. Segment Adjusted EBITDA margin for the three months endedSeptember 30, 2020 increased by 60 basis points to 20.2% compared to 19.6% for the same period in 2019. The increase was primarily driven by improved pricing, cost containment initiatives and strong productivity. These amounts were partially offset by unfavorable product mix due to lower volumes on higher margin products and the under absorption of fixed production overhead costs. 42 -------------------------------------------------------------------------------- Table of Contents EMEA Net revenues for the three months endedSeptember 30, 2020 decreased by 2.4% or$11.1 million , compared with the same period of 2019. The components of the period change were as follows: Volume (6.3) % Pricing 0.6 % Currency translation 3.3 % Total (2.4) % The EMEA region continued to be impacted by the economic environment resulting from the COVID-19 global pandemic. The decrease in Net revenues primarily related to lower volumes in each of our businesses. These amounts were partially offset by favorable foreign currency exchange rate movements and improved pricing. Segment Adjusted EBITDA margin for the three months endedSeptember 30, 2020 increased by 170 basis points to 19.7% compared to 18.0% for the same period of 2019. The increase was primarily driven by cost containment initiatives, favorable foreign currency exchange rate movements and improved pricing. These amounts were partially offset by material inflation, the under absorption of fixed production overhead costs and unfavorable product mix due to lower volumes on higher margin products. Asia Pacific Net revenues for the three months endedSeptember 30, 2020 decreased by 0.8% or$2.6 million , compared with the same period of 2019. The components of the period change were as follows: Volume (3.5) % Pricing 1.8 % Currency translation 0.9 % Total (0.8) % TheAsia Pacific region continued to be impacted by the economic environment resulting from the COVID-19 global pandemic. The decrease in Net revenues primarily related to lower volumes in our Commercial HVAC business. This amount was partially offset by improved pricing and favorable foreign currency exchange rate movements. Segment Adjusted EBITDA margin for the three months endedSeptember 30, 2020 increased by 400 basis points to 19.2% compared to 15.2% for the same period of 2019. The increase was primarily driven by cost containment initiatives, improved pricing and productivity. These amounts were partially offset by unfavorable product mix due to lower volumes on higher margin products and unfavorable foreign currency exchange rate movements. 43 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2020 Compared to the Nine Months EndedSeptember 30, 2019 - Segment Results The following discussion compares our results for each of our three reportable segments for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . In millions 2020 2019 % change Americas Net revenues$ 7,300.0 $ 7,685.5 (5.0) % Segment Adjusted EBITDA 1,287.6 1,388.3 (7.3) % Segment Adjusted EBITDA as a percentage of net revenues 17.6 % 18.1 % EMEA Net revenues$ 1,182.7 $ 1,289.4 (8.3) % Segment Adjusted EBITDA 190.1 196.1 (3.1) % Segment Adjusted EBITDA as a percentage of net revenues 16.1 % 15.2 % Asia Pacific Net revenues$ 792.9 $ 917.3 (13.6) % Segment Adjusted EBITDA 129.2 128.3 0.7 % Segment Adjusted EBITDA as a percentage of net revenues 16.3 % 14.0 % Total net revenues$ 9,275.6 $ 9,892.2 (6.2) % Total Segment Adjusted EBITDA 1,606.9 1,712.7 (6.2) %
Net revenues for the nine months endedSeptember 30, 2020 decreased by 5.0% or$385.5 million , compared with the same period of 2019. The components of the period change were as follows: Volume (5.7) % Pricing 1.0 % Currency translation (0.3) % Total (5.0) % TheAmericas region continued to be impacted by the economic environment resulting from the COVID-19 global pandemic, however strong third quarter operational results helped mitigate a challenging first half. The decrease in Net revenues primarily related to lower volumes in each of our businesses during the first half of 2020. In addition, unfavorable foreign currency exchange rate movements further contributed to the year-over-year decrease, partially offset by favorable pricing. Segment Adjusted EBITDA margin for the nine months endedSeptember 30, 2020 decreased by 50 basis points to 17.6% compared to 18.1% for the same period of 2019. The decrease was primarily driven by unfavorable product mix due to lower volumes on higher margin products and the under absorption of fixed production overhead costs. These amounts were partially offset by improved pricing, cost containment initiatives and material deflation. EMEA Net revenues for the nine months endedSeptember 30, 2020 decreased by 8.3% or$106.7 million , compared with the same period of 2019. The components of the period change were as follows: Volume (8.4) % Pricing 0.2 % Currency translation (0.1) % Total (8.3) % 44
-------------------------------------------------------------------------------- Table of Contents The EMEA region continued to be heavily impacted by the economic environment resulting from the COVID-19 global pandemic. The decrease in Net revenues primarily related to lower volumes and unfavorable foreign currency exchange rate movements. These amounts were partially offset by improved pricing. Segment Adjusted EBITDA margin for the nine months endedSeptember 30, 2020 increased by 90 basis points to 16.1% compared to 15.2% for the same period of 2019. The increase was primarily driven by cost containment initiatives, favorable foreign currency exchange rate movements and improved pricing. These amounts were partially offset by unfavorable product mix due to lower volumes on higher margin products and the under absorption of fixed production overhead costs.Asia Pacific Net revenues for the nine months endedSeptember 30, 2020 decreased by 13.6% or$124.4 million , compared with the same period of 2019. The components of the period change were as follows: Volume (13.4) % Pricing 0.5 % Currency translation (0.7) % Total (13.6) % TheAsia Pacific region continued to be heavily impacted by the economic environment resulting from the COVID-19 global pandemic. The decrease in Net revenues primarily related to lower volumes since the beginning of the year. In addition, unfavorable foreign currency exchange rate movements further contributed to the year-over-year decrease, partially offset by improved pricing. Segment Adjusted EBITDA margin for the nine months endedSeptember 30, 2020 increased by 230 basis points to 16.3% compared to 14.0% for the same period of 2019. The increase was primarily driven by cost containment initiatives, improved pricing and material deflation. These amounts were partially offset by unfavorable product mix due to lower volumes on higher margin products and the under absorption of fixed production overhead costs. Liquidity and Capital Resources We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments and income tax payments. Our cash requirements primarily consist of the following: •Funding of working capital •Funding of capital expenditures •Dividend payments •Debt service requirements Our primary sources of liquidity include cash balances on hand, cash flow from operations, proceeds from debt offerings, commercial paper, and borrowing availability under our existing credit facilities. We earn a significant amount of our operating income in jurisdictions where it is deemed to be permanently reinvested. Our most prominent jurisdiction of operation is theU.S. We expect existing cash and cash equivalents available to theU.S. operations, the cash generated by ourU.S. operations, our committed credit lines as well as our expected ability to access the capital and debt markets will be sufficient to fund ourU.S. operating and capital needs for at least the next twelve months and thereafter for the foreseeable future. In addition, we expect existing non-U.S. cash and cash equivalents and the cash generated by our non-U.S. operations will be sufficient to fund our non-U.S. operating and capital needs for at least the next twelve months and thereafter for the foreseeable future. The maximum aggregate amount of unsecured commercial paper notes available to be issued, on a private placement basis, under the commercial paper program is$2.0 billion , of which the company had no outstanding balance as ofSeptember 30, 2020 . As ofSeptember 30, 2020 , we had$3,190.1 million of cash and cash equivalents on hand, of which$2,465.2 million was held by non-U.S. subsidiaries. Cash and cash equivalents held by our non-U.S. subsidiaries are generally available for use in ourU.S. operations via intercompany loans, equity infusions or via distributions from direct or indirectly owned non-U.S. subsidiaries for which we do not assert permanent reinvestment. As a result of the Tax Cuts and Jobs Act in 2017, additional repatriation opportunities to access cash and cash equivalents held by non-U.S. subsidiaries have been created. In general, repatriation of cash to theU.S. can be completed with no significant incrementalU.S. tax. However, to the extent that we repatriate funds from non-U.S. subsidiaries for which we assert permanent reinvestment to fund ourU.S. operations, we would be required to accrue and pay applicable non-U.S. taxes. As ofSeptember 30, 2020 , we currently have no plans to repatriate funds from subsidiaries for which we assert permanent reinvestment. 45 -------------------------------------------------------------------------------- Table of Contents Share repurchases are made from time to time in accordance with management's capital allocation strategy, subject to market conditions and regulatory requirements. InOctober 2018 , our Board of Directors authorized the repurchase of up to$1.5 billion of our ordinary shares under a share repurchase program (2018 Authorization) upon completion of the prior authorized share repurchase program. During the nine months endedSeptember 30, 2020 , no amounts were repurchased or cancelled leaving approximately$750 million remaining under the 2018 Authorization atSeptember 30, 2020 . In addition, we expect to maintain the dividend at the current level of$0.53 per share, or$2.12 per share on an annualized basis, in 2020. The first, second and third quarter 2020 dividend was paid during the nine months endedSeptember 30, 2020 and our fourth quarter dividend was declared inOctober 2020 . We continue to actively manage and strengthen our business portfolio to meet the current and future needs of our customers. We achieve this partly through engaging in research and development and sustaining activities and partly through acquisitions. Each year, we make a significant investment in new product development and new technology innovation as they are key factors in achieving our strategic objectives as a leader in the climate sector. We have increased our investments in research and development in each of the last three years and intensified our focus on key priorities in our business. We also focus on partnering with our suppliers and technology providers to align their investment decisions with our technical requirements. In addition, we have a strong focus on sustaining activities, which include costs incurred to reduce production costs, improve existing products, create custom solutions for customers and provide support to our manufacturing facilities. Combined, these costs account for approximately two percent of net revenues each year. In pursuing our business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments. Since 2018, we have acquired several businesses and entered into a joint venture that complements existing products and services further enhancing our product portfolio. Most recently, we completed aReverse Morris Trust transaction with Gardner Denver whereby we separatedIngersoll Rand Industrial from our business portfolio, transforming the Company into a global climate innovator. We recognized separation-related costs of$113.9 million during the nine months endedSeptember 30, 2020 and$94.6 million during the year endedDecember 31, 2019 . These expenditures were incurred in order to facilitate the transaction and are included within discontinued operations. We incur ongoing costs associated with restructuring initiatives intended to result in improved operating performance, profitability and working capital levels. Actions associated with these initiatives may include workforce reductions, improving manufacturing productivity, realignment of management structures and rationalizing certain assets. Post separation, we intend to reduce costs by$100 million in 2020 and an additional$40 million in 2021. In order to realize our cost savings target, we expect to incur expenses of approximately$100 million to$150 million using a combination of transformation activities and restructuring actions. We believe that our existing cash flow, committed credit lines and access to the capital markets will be sufficient to fund share repurchases, dividends, research and development, sustaining activities, business portfolio changes and ongoing restructuring actions. Certain of our subsidiaries entered into funding agreements with Aldrich and Murray pursuant to which those subsidiaries are obligated, among other things, to pay the costs and expenses of Aldrich and Murray during the pendency of the Chapter 11 cases to the extent distributions from their respective subsidiaries are insufficient to do so and to provide an amount for the funding for a trust established pursuant to section 524(g) of the Bankruptcy Code, to the extent that the other assets of Aldrich and Murray are insufficient to provide the requisite trust funding. As the COVID-19 global pandemic impacts both the broader economy and our operations, we will continue to assess our liquidity needs and our ability to access capital markets. A continued worldwide disruption could materially affect economies and financial markets worldwide, resulting in an economic downturn that could affect demand for our products, our ability to obtain financing on favorable terms and otherwise adversely impact our business, financial condition and results of operations. The COVID-19 global pandemic created substantial volatility in the short-term credit markets during the first half of the year. Recurring volatility could impact the cost of our credit facilities, the cost of any borrowing we might make under those facilities or the cost of any commercial paper we may issue, to the extent we were to either draw on our facilities or issue commercial paper. See Part II, Item 1A. Risk Factors for more information. 46 -------------------------------------------------------------------------------- Table of Contents Liquidity The following table contains several key measures of our financial condition and liquidity at the period ended: September 30, December 31, In millions 2020 2019 Cash and cash equivalents$ 3,190.1 $ 1,278.6 Short-term borrowings and current maturities of long-term debt (1) 775.1 650.3 Long-term debt 4,494.2 4,922.9 Total debt 5,269.3 5,573.2Total Trane Technologies plc shareholders' equity 6,366.7 7,267.6 Total equity 6,381.0 7,312.4 Debt-to-total capital ratio 45.2 % 43.3 % (1) The$300.0 million of 2.625% Senior notes due inMay 2020 were redeemed inApril 2020 . The$300.0 million of 2.900% Senior notes are due inFebruary 2021 . The$125.0 million of 9.000% Debentures are due inAugust 2021 . Debt and Credit Facilities Our short-term obligations primarily consist of current maturities of long-term debt. In addition, we have outstanding$343.0 million of fixed rate debentures that contain a put feature that the holders may exercise on each anniversary of the issuance date. If exercised, we are obligated to repay in whole or in part, at the holder's option, the outstanding principal amount (plus accrued and unpaid interest) of the debentures held by the holder. We also maintain a commercial paper program which is used for general corporate purposes. Under the program, the maximum aggregate amount of unsecured commercial paper notes available to be issued, on a private placement basis, is$2.0 billion . We had no outstanding balance under our commercial paper program as ofSeptember 30, 2020 andDecember 31, 2019 . See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding the terms of our short-term obligations. Our long-term obligations primarily consist of long-term debt with final maturity dates ranging between 2021 and 2049. In addition, we maintain two$1.0 billion senior unsecured revolving credit facilities, one of which matures inMarch 2022 and the other inApril 2023 . The facilities provide support for our commercial paper program and can be used for working capital and other general corporate purposes. Total commitments of$2.0 billion were unused atSeptember 30, 2020 andDecember 31, 2019 . See Note 7 to the Condensed Consolidated Financial Statements and further below in Supplemental Guarantor Financial Information for additional information regarding the terms of our long-term obligations and their related guarantees. Cash Flows The following table reflects the major categories of cash flows for the nine months endedSeptember 30 . For additional details, see the Condensed Consolidated Statements of Cash Flows in the Condensed Consolidated Financial Statements.
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