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 Item 1A. Risk Factors in this Annual Report on Form 10-K. 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 Annual Report. This section discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 have been excluded in this Form 10-K and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2018 . Overview Organization We are a diversified, global company that provides products, services and solutions to enhance the quality, energy efficiency and comfort of air in homes and buildings, transport and protect food and perishables and increase industrial productivity and efficiency. Our business segments consist of Climate and Industrial, both with strong brands and highly differentiated products within their respective markets. We generate revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as American Standard®, ARO®, Club Car®, Ingersoll-Rand®, Thermo King® and Trane®. To achieve our mission of being a world leader in creating comfortable, sustainable and efficient environments, we continue to focus on growth by increasing our recurring revenue stream from parts, service, controls, used equipment and rentals; and to continuously improve the efficiencies and capabilities of the products and services of our businesses. We also continue to focus on operational excellence strategies as a central theme to improving our earnings and cash flows. 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 factors, wherever we operate or do business. Our geographic and industry 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 the broad range of products manufactured and geographic markets served, management uses a variety of factors to forecast the outlook for the 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 a key measure of anticipated performance. In those industry segments where we are a capital equipment provider, revenues depend on the capital expenditure budgets and spending patterns of our customers, who may delay or accelerate purchases in reaction to changes in their businesses and in the economy. Current economic conditions have moderated during the year and are mixed between the businesses in which we participate. Heating, Ventilation, and Air Conditioning (HVAC) equipment, replacement, services, controls and aftermarket continue to experience healthy demand. In addition, Residential and Commercial markets have seen continued momentum inthe United States , positively impacting the results of our HVAC businesses. While geopolitical uncertainty exists in markets such asEurope ,Asia andLatin America , we expect growth in our HVAC markets in 2020. Transport markets moderated in the second half of 2019 and we expect softer Transport markets in 2020.Global Industrial markets have moderated during the year and are now mixed with continued economic uncertainty driving weak short-cycle Industrial investment spending. We expect growth at the enterprise level to continue in 2020, benefiting from operational excellence initiatives, new product launches and continued sales excellence programs. We believe we have a solid foundation of global brands that are highly differentiated in all of our major product lines. Our growing geographic and industry 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. 22
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Significant Events Separation of Industrial Segment Businesses InApril 2019 ,Ingersoll-Rand plc and Gardner Denver Holdings, Inc. (GDI) announced that they entered into definitive agreements pursuant to which we will separate our Industrial segment businesses (IR Industrial ) by way of spin-off to our shareholders and then combine with GDI to create a new company focused on flow creation and industrial technologies. This business is expected to be renamedIngersoll-Rand Inc. Our remaining HVAC and transport refrigeration businesses, reported under the Climate segment, will focus on climate control solutions for buildings, homes and transportation and be renamedTrane Technologies plc . The transaction is expected to close by early 2020, subject to approval by GDI's shareholders, regulatory approvals and customary closing conditions. Acquisitions and Equity Investments During 2019, we acquired several businesses that complement existing products and services. InMay 2019 , we acquired 100% of the outstanding stock of Precision Flow Systems (PFS). PFS, reported in the Industrial segment, is a manufacturer of precision flow control equipment including precision dosing pumps and controls that serve the global water, oil and gas, agriculture, industrial and specialty market segments. Acquisitions within the Climate segment consisted of an independent dealer to support the ongoing strategy to expand our distribution network inNorth America as well as other businesses that strengthen our product portfolio. During 2018, we acquired several businesses and entered into a joint venture. InMay 2018 , we completed our investment of a 50% ownership interest in a joint venture with Mitsubishi Electric Corporation (Mitsubishi). The joint venture, reported within the Climate segment, focuses on marketing, selling and supporting variable refrigerant flow (VRF) and ductless heating and air conditioning systems through Trane, American Standard and Mitsubishi channels in theU.S. and select Latin American countries. InJanuary 2018 , we acquired 100% of the outstanding stock ofICS Group Holdings Limited (ICS Cool Energy ). The acquired business, reported within the Climate segment, specializes in the temporary rental of energy efficient chillers for commercial and industrial buildings acrossEurope . It also sells, permanently installs and services high performance temperature control systems for all types of industrial processes. Share Repurchase Program and Dividends Share repurchases are made from time to time in accordance with management's capital allocation strategy, subject to market conditions and regulatory requirements. InFebruary 2017 , our Board of Directors authorized the repurchase of up to$1.5 billion of our ordinary shares under a share repurchase program (the 2017 Authorization) upon completion of the prior authorized share repurchase program. Repurchases under the 2017 Authorization began inMay 2017 and ended inDecember 2018 , completing the program. 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 2017 Authorization. No material amounts were repurchased under this program in 2018. During the year endedDecember 31, 2019 , we repurchased and canceled approximately$750 million of our ordinary shares leaving approximately$750 million remaining under the 2018 Authorization. InJune 2018 , we announced an increase in our quarterly share dividend from$0.45 to$0.53 per ordinary share. This reflected an 18% increase that began with ourSeptember 2018 payment and an 83% increase since the beginning of 2016. Looking forward, we expect to maintain our current quarterly share dividend through 2020 and then continue our long-standing capital deployment priorities to raise the dividend with earnings growth for 2021 and beyond. Issuance of Senior Notes InMarch 2019 , we issued$1.5 billion principal amount of senior notes in three tranches throughIngersoll-Rand Luxembourg Finance S.A. , an indirect, wholly-owned subsidiary. The tranches consist of$400 million aggregate principal amount of 3.500% senior notes due 2026,$750 million aggregate principal amount of 3.800% senior notes due 2029 and$350 million aggregate principal amount of 4.500% senior notes due 2049. The net proceeds were used to finance the acquisition of PFS and for general corporate purposes. InFebruary 2018 , we issued$1.15 billion principal amount of senior notes in three tranches through an indirect, wholly-owned subsidiary. The tranches consist of$300 million aggregate principal amount of 2.900% senior notes due 2021,$550 million aggregate principal amount of 3.750% senior notes due 2028 and$300 million aggregate principal amount of 4.300% senior notes due 2048. InMarch 2018 , we used the proceeds to fund the redemption of$750 million aggregate principal amount of 6.875% senior notes due 2018 and$350 million aggregate principal amount of 2.875% senior notes due 2019, with the remainder used for general corporate purposes. 23
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Results of Operations Our Climate segment delivers energy-efficient products and innovative energy services. It includes Trane® and American Standard® Heating & Air Conditioning which provide heating, ventilation and air conditioning (HVAC) systems, and commercial and residential building services, parts, support and controls; energy services and building automation through Trane Building AdvantageTM and NexiaTM ; and Thermo King® transport temperature control solutions. Our Industrial segment delivers products and services that enhance energy efficiency, productivity and operations. It includes compressed air and gas systems and services, power tools, material handling systems, fluid management systems, as well as Club Car ® golf, utility and consumer low-speed vehicles. Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 - Consolidated Results 2019 2018 % of % of Dollar amounts in millions 2019 2018 Period Change Revenues Revenues Net revenues$ 16,598.9 $ 15,668.2 $
930.7
Cost of goods sold (11,451.5 ) (10,847.6 ) (603.9 ) 69.0% 69.2% Selling and administrative expenses (3,129.8 ) (2,903.2 ) (226.6 ) 18.8% 18.6% Operating income 2,017.6 1,917.4 100.2 12.2% 12.2% Interest expense (243.0 ) (220.7 ) (22.3 ) Other income/(expense), net (33.0 ) (36.4 ) 3.4 Earnings before income taxes 1,741.6 1,660.3 81.3 Provision for income taxes (353.7 ) (281.3 ) (72.4 ) Earnings from continuing operations 1,387.9 1,379.0
8.9
Discontinued operations, net of tax 40.6 (21.5 ) 62.1 Net earnings$ 1,428.5 $ 1,357.5 $ 71.0 Net Revenues Net revenues for the year endedDecember 31, 2019 increased by 5.9%, or$930.7 million , compared with the same period of 2018. The components of the period change are as follows: Volume 4.0 % Acquisitions 1.5 % Pricing 1.7 % Currency translation (1.3 )% Total 5.9 % The increase was primarily driven by higher volumes in our Climate segment. Improved pricing, along with incremental revenues from acquisitions, further contributed to the year-over-year increase. However, each segment was impacted by unfavorable foreign currency exchange rate movements. Refer to the "Results by Segment" below for a discussion of Net Revenues by segment. 24
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Cost of Goods Sold Cost of goods sold for the year endedDecember 31, 2019 increased by 5.6%, or$603.9 million , compared with the same period of 2018. The increase was primarily driven by volume growth, with equipment sales growing faster than service and parts sales, which are lower cost. In addition, incremental cost of goods sold related to revenues from acquisitions, material inflation, higher tariffs and acquisition related inventory step-up further contributed to the year-over-year increase. These increases were partially offset by favorable foreign currency exchange rate movements. Cost of goods sold as a percentage of net revenues was relatively flat year-over-year, decreasing 20 basis points from 69.2% of net revenues in 2018 to 69.0% of net revenues in 2019. Selling and Administrative Expenses Selling and administrative expenses for the year endedDecember 31, 2019 increased by 7.8%, or$226.6 million , compared with the same period of 2018. The increase in selling and administrative expenses was primarily driven by higher compensation and benefit charges related to variable compensation, Industrial Segment separation-related costs and PFS acquisition-related costs. In addition, amortization of intangibles related to the PFS acquisition further contributed to the year-over-year increase. Selling and administrative expenses as a percentage of net revenues increased 20 basis points from 18.6% to 18.8% in 2019 primarily due to the Industrial Segment separation-related costs and PFS acquisition-related costs, which increased Selling and administrative expenses as a percentage of net revenues by 60 basis points in 2019. Operating Income/Margin Operating margin remained flat at 12.2% for the year endedDecember 31, 2019 compared with the same period of 2018. Factors impacting operating margin included material and other inflation, an unfavorable shift in product mix primarily related to faster growth in equipment sales compared to higher margin service and parts sales, Industrial Segment separation-related costs and PFS acquisition-related costs, increased spending on business investments and unfavorable foreign currency exchange rate movements. These unfavorable impacts were offset by improved pricing and productivity gains. Refer to the "Results by Segment" below for a discussion of operating margin by segment. Interest Expense Interest expense for the year endedDecember 31, 2019 increased by$22.3 million compared with the same period of 2018. The increase primarily relates to new debt issuances during the first quarter of 2019 and 2018. During the first quarter of 2018, we incurred$15.4 million of premium expense and$1.2 million of unamortized costs in Interest expense as a result of the redemption of$1.1 billion of senior notes. Other income/(expense), net The components of Other income/(expense), net, for the years endedDecember 31 are as follows: In millions 2019 2018 Period Change Interest income$ 3.1 $ 6.4 $ (3.3 ) Foreign currency exchange gain (loss) (12.3 ) (17.6 )
5.3
Other components of net periodic benefit cost (39.3 ) (21.9 )
(17.4 )
Other activity, net 15.5 (3.3 ) 18.8
Other income/(expense), net $ (33.0 ) $ (36.4 ) $ 3.4
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 our Trane business for the settlement of asbestos-related claims, insurance
settlements on asbestos-related matters and the revaluation of its liability and
corresponding insurance asset for potential future claims and recoveries.
Provision for Income Taxes
The 2019 effective tax rate was 20.3% which is slightly lower than the U.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 excess tax
benefits from employee share-based payments. These amounts were partially offset
by U.S. state and local taxes, an increase in a deferred tax asset valuation
allowance for certain state net deferred tax assets and certain non-deductible
expenses. In addition, the reduction was also driven by earnings in non-U.S.
jurisdictions, which in aggregate, have a lower effective tax rate. Revenues
from non-U.S. jurisdictions accounted for approximately 34% of our total 2019
revenues, such that a material portion of our pretax income was earned and
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taxed outside theU.S. at rates ranging from 0% to 38%. When comparing the results of multiple reporting periods, among other factors, the mix of earnings betweenU.S. and foreign jurisdictions can cause variability in our overall effective tax rate. The 2018 effective tax rate was 16.9% which is lower than theU.S. Statutory rate of 21% primarily due to the measurement period adjustment related to the change in permanent reinvestment assertion on unremitted earnings of certain foreign subsidiaries, the deduction for Foreign Derived Intangible Income, the recognition of excess tax benefits from employee share based payments and a reduction in a valuation allowance for certain state net deferred tax assets. This decrease was partially offset by the measurement period adjustment related to a valuation allowance on excess foreign tax credits,U.S. state and local income taxes and certain non-deductible employee expenses. In addition, the reduction was also driven by earnings in non-U.S. jurisdictions, which in aggregate, have a lower effective tax rate. Revenues from non-U.S. jurisdictions accounted for approximately 36% of our total 2018 revenues, such that a material portion of our pretax income was earned and taxed outside theU.S. at rates ranging from 0% to 38%. When comparing the results of multiple reporting periods, among other factors, the mix of earnings betweenU.S. and foreign jurisdictions can cause variability in our overall effective tax rate. Discontinued Operations The components of Discontinued operations, net of tax for the years endedDecember 31 are as follows: In millions 2019 2018 Period Change Pre-tax earnings (loss) from discontinued operations$ 54.8 $ (85.5 ) $ 140.3 Tax benefit (expense) (14.2 ) 64.0 (78.2 ) Discontinued operations, net of tax$ 40.6 $ (21.5
)
Discontinued operations are retained obligations from previously sold businesses, including amounts related to the 2013 spin-off of our commercial and residential security business, that primarily include ongoing expenses for postretirement benefits, product liability and legal costs. In addition, we include costs associated withIngersoll-Rand Company for the settlement and defense of asbestos-related claims, insurance settlements on asbestos-related matters and the revaluation of our liability for potential future claims and recoveries. During 2019, we reached settlements with several insurance carriers associated with pending asbestos insurance coverage litigation. Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 - Results by Segment Segment operating income on an as reported basis is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for performance reviews, compensation and resource allocation. For these reasons, we believe that Segment operating income represents the most relevant measure of segment profit and loss. We define Segment operating margin as Segment operating income as a percentage of Net revenues. Dollar amounts in millions 2019 2018 Period Change % Change Climate Net Revenues$ 13,075.9 $ 12,343.8 $ 732.1 5.9 % Segment operating income 1,908.5 1,766.2 142.3 8.1 % Segment operating income as a percentage of net revenues 14.6 % 14.3 % Industrial Net Revenues 3,523.0 3,324.4 198.6 6.0 % Segment operating income 455.0 405.3 49.7 12.3 % Segment operating income as a percentage of net revenues 12.9 % 12.2 % Total net revenues$ 16,598.9 $ 15,668.2 $ 930.7 5.9 % Reconciliation to Operating Income Segment operating income from reportable segments 2,363.5 2,171.5 192.0 8.8 % Unallocated corporate expenses (345.9 ) (254.1 ) (91.8 ) 36.1 % Total operating income$ 2,017.6 $ 1,917.4 $ 100.2 5.2 % 26
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Climate
Net revenues for the year endedDecember 31, 2019 increased by 5.9% or$732.1 million , compared with the same period of 2018. The components of the period change are as follows: Volume 5.2 % Pricing 1.9 % Currency translation (1.2 )% Total 5.9 % Segment operating margin increased 30 basis points to 14.6% for the year endedDecember 31, 2019 , compared with 14.3% for the same period of 2018. The increase was primarily driven by higher volume, improved pricing and productivity gains, partially offset by increased spend on investments and restructuring, material and other inflation and a shift in product mix, primarily related to faster growth in equipment sales compared to higher margin service and parts sales. Industrial Net revenues for the year endedDecember 31, 2019 increased by 6.0% or$198.6 million , compared with the same period of 2018. The components of the period change are as follows: Volume (0.6 )% Acquisitions 7.4 % Pricing 1.2 % Currency translation (2.0 )% Total 6.0 % Segment operating margin increased 70 basis points to 12.9% for the year endedDecember 31, 2019 compared with 12.2% for the same period of 2018. The increase was primarily driven by productivity benefits, decreased spending on restructuring and pricing improvements, partially offset by lower volumes, unfavorable foreign currency movements, material and other inflation and a shift in product mix, primarily related to faster growth in equipment sales compared to higher margin service and parts sales. Unallocated Corporate Expense Unallocated corporate expense for the year endedDecember 31, 2019 increased by 36.1% or$91.8 million , compared with the same period of 2018. The primary drivers of the increase were due to Industrial Segment separation-related costs of$94.6 million and PFS acquisition-related transaction costs of$12.9 million . These costs were partially offset by lower functional 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 flows 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. As ofDecember 31, 2019 , we had$1,303.6 million of cash and cash equivalents on hand, of which$931.3 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 27
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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 ofDecember 31, 2019 , we currently have no plans to repatriate funds from subsidiaries for which we assert permanent reinvestment. Share repurchases are made from time to time in accordance with management's capital allocation strategy, subject to market conditions and regulatory requirements. InFebruary 2017 , our Board of Directors authorized the repurchase of up to$1.5 billion of our ordinary shares under a share repurchase program (the 2017 Authorization) upon completion of the prior authorized share repurchase program. Repurchases under the 2017 Authorization began inMay 2017 and ended inDecember 2018 , completing the program. 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 2017 Authorization. No material amounts were repurchased under this program in 2018. During the year endedDecember 31, 2019 , we repurchased and canceled approximately$750 million of our ordinary shares leaving approximately$750 million remaining under the 2018 Authorization. InJune 2018 , we announced an increase in our quarterly share dividend from$0.45 to$0.53 per ordinary share. This reflected an 18% increase that began with ourSeptember 2018 payment and an 83% increase since the beginning of 2016. Looking forward, we expect to maintain our current quarterly share dividend through 2020 and then continue our long-standing capital deployment priorities to raise the dividend with earnings growth for 2021 and beyond. We continue to be active with acquisitions and joint venture activity. Since the beginning of 2018, we entered into a joint venture and acquired several businesses, including channel acquisitions, that complement existing products and services further growing our product portfolio. InMay 2019 , we acquired all the outstanding capital stock of PFS and utilized net proceeds from our$1.5 billion senior note debt issuance to finance the transaction. In addition, we have incurred approximately$95 million in costs related to the separation ofIR Industrial as previously described. We anticipate to incur costs at the high end of the$150 million to$200 million range related to the separation activities. Lastly, 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 through 2021, we expect to reduce stranded costs by$100 million and expect to incur$100 million to$150 million in cost to realize the stranded cost savings. We expect that our available cash flow, committed credit lines and access to the capital markets will be sufficient to fund share repurchases, dividends, ongoing restructuring actions, acquisitions, separation-related activities and joint venture activity. Liquidity The following table contains several key measures of our financial condition and liquidity at the periods endedDecember 31 : In millions 2019
2018
Cash and cash equivalents$ 1,303.6 $ 903.4 Short-term borrowings and current maturities of long-term debt (1) 650.5 350.6 Long-term debt (2) 4,922.9 3,740.7 Total debt 5,573.4 4,091.3Total Ingersoll-Rand plc shareholders' equity 7,267.6 7,022.7 Total equity 7,312.4 7,064.8 Debt-to-total capital ratio 43.3 % 36.7 % (1) During the first quarter of 2018, we redeemed our 6.875% Senior notes due 2018 and our 2.875% Senior notes due 2019. During the second quarter of 2019, we reclassified our 2.625% Senior notes dueMay 2020 from noncurrent to current. (2) We issued$1.15 billion principal amount of senior notes duringFebruary 2018 and$1.5 billion principal amount of senior notes duringMarch 2019 . Debt and Credit Facilities Our short-term obligations primarily consists of current maturities of long-term debt including$299.8 million of 2.625% Senior notes due inMay 2020 . 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 as of 28
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December 31, 2019 . We had no commercial paper outstanding atDecember 31, 2019 andDecember 31, 2018 . See Note 8 to the 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 5-year,$1.0 billion revolving credit facilities. Each senior unsecured credit facility, one of which matures inMarch 2021 and the other inApril 2023 , provides 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 atDecember 31, 2019 andDecember 31, 2018 . See Note 8 and Note 23 to the Consolidated Financial Statements for additional information regarding the terms of our long-term obligations and their related guarantees. Pension Plans Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contribution and expense by better matching the characteristics of the plan assets to that of the plan liabilities. Our approach to asset allocation is to increase fixed income assets as the plan's funded status improves. We monitor plan funded status and asset allocation regularly in addition to investment manager performance. In addition, we monitor the impact of market conditions on our defined benefit plans on a regular basis. None of our defined benefit pension plans have experienced a significant impact on their liquidity due to market volatility. See Note 12 to the Consolidated Financial Statements for additional information regarding pensions. Cash Flows The following table reflects the major categories of cash flows for the years endedDecember 31 , respectively. For additional details, please see the Consolidated Statements of Cash Flows in the Consolidated Financial Statements. In millions 2019
2018
Net cash provided by (used in) continuing operating activities
$ 1,474.5 Net cash provided by (used in) investing activities (1,780.0 ) (629.4 ) Net cash provided by (used in) financing activities 270.5
(1,378.8 )
Operating Activities Net cash provided by continuing operating activities for the year endedDecember 31, 2019 was$1,956.3 million , of which net income provided$2,015.9 million after adjusting for non-cash transactions. Changes in other assets and liabilities used$59.6 million . Net cash provided by continuing operating activities for the year endedDecember 31, 2018 was$1,474.5 million , of which net income provided$1,794.3 million after adjusting for non-cash transactions. Changes in other assets and liabilities used$319.8 million . The year-over-year increase in net cash provided by continuing operating activities was primarily driven by higher net earnings as well as a focus on working capital whereby lower inventory levels and improvements in accounts receivable efforts more than offset reductions in outstanding accounts payable balances. Investing Activities Cash flows from investing activities represents inflows and outflows regarding the purchase and sale of assets. Primary activities associated with these items include capital expenditures, proceeds from the sale of property, plant and equipment, acquisitions, investments in joint ventures and divestitures. During the year endedDecember 31, 2019 , net cash used in investing activities from continuing operations was$1,780.0 million . The primary driver of the usage was attributable to acquisitions in the period, including PFS, in which the total outflow, net of cash acquired, was approximately$1.5 billion . Other outflows included capital expenditures of$254.1 million . During the year endedDecember 31, 2018 , net cash used in investing activities from continuing operations was$629.4 million . The primary driver of the usage is attributable to the acquisition of several businesses and the investment of a 50% ownership interest in a joint venture with Mitsubishi. The total outflow, net of cash acquired, was$285.2 million . Other outflows included capital expenditures of$365.6 million . Financing Activities Cash flows from financing activities represent inflows and outflows that account for external activities affecting equity and debt. Primary activities associated with these actions include paying dividends to shareholders, repurchasing our own shares, issuing our stock and debt transactions. During the year endedDecember 31, 2019 , net cash provided by financing activities from continuing operations was$270.5 million . The primary driver of the inflow related to the issuance of$1.5 billion of senior notes during the period to finance the acquisition of PFS and other general corporate expenses. This amount was partially offset by the repurchase of 6.4 million ordinary shares totaling$750.1 million and$510.1 million of dividends paid to ordinary shareholders. During the year endedDecember 31, 2018 , net cash used in financing activities from continuing operations was$1,378.8 million . Primary drivers of the cash outflow related to the repurchase of 9.7 million ordinary shares totaling$900.2 million and$479.5 million of 29
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dividends paid to ordinary shareholders. In addition, we issued$1.15 billion of senior notes which was predominately offset by the redemption of$1.1 billion of senior notes. Discontinued Operations Cash flows from discontinued operations primarily represent ongoing costs associated with postretirement benefits, product liability and legal costs from previously sold businesses. Net cash used in discontinued operating activities during the year endedDecember 31, 2019 was$36.8 million and primarily related to ongoing costs, partially offset by settlements reached with several insurance carriers associated with pending asbestos insurance coverage litigation. Net cash used in discontinued operating activities for the year endedDecember 31, 2018 was$66.7 million and primarily related to ongoing costs. Capital Resources Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the cash generated from our operations, our committed credit lines and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures, dividends, share repurchases, upcoming debt maturities, and other liquidity requirements associated with our operations for the foreseeable future. Capital expenditures were$254.1 million ,$365.6 million and$221.3 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Our investments continue to improve manufacturing productivity, reduce costs, provide environmental enhancements, upgrade information technology infrastructure and security and advanced technologies for existing facilities. The capital expenditure program for 2020 is estimated to be approximately one to two percent of revenues, including amounts approved in prior periods. Many of these projects are subject to review and cancellation at our option without incurring substantial charges. For financial market risk impacting the Company, see Item 7A. "Quantitative and Qualitative Disclosure About Market Risk." Capitalization In addition to cash on hand and operating cash flow, we maintain significant credit availability under our Commercial Paper Program. Our ability to borrow at a cost-effective rate under the Commercial Paper Program is contingent upon maintaining an investment-grade credit rating. As ofDecember 31, 2019 , our credit ratings were as follows, remaining unchanged from 2018: Short-term Long-term Moody's P-2 Baa2 Standard and Poor's A-2 BBB The credit ratings set forth above are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating. Our public debt does not contain financial covenants and our revolving credit lines have a debt-to-total capital covenant of 65%. As ofDecember 31, 2019 , our debt-to-total capital ratio was significantly beneath this limit. Contractual Obligations The following table summarizes our contractual cash obligations by required payment period: Less than 1 - 3 3 - 5 More than In millions 1 year years years 5 years Total Long-term debt$ 650.5 (a)$ 440.2 $ 1,215.0 $ 3,307.2 $ 5,612.9 Interest payments on long-term debt 240.3 446.7 384.3 1,802.9 2,874.2 Purchase obligations 1,020.0 - - - 1,020.0 Operating leases 192.3 258.4 115.3 68.1 634.1 Total contractual cash obligations$ 2,103.1 $ 1,145.3 $ 1,714.6
(a) Includes
The scheduled maturities of these bonds range between 2027 and 2028.
Future expected obligations under our pension and postretirement benefit plans,
income taxes, environmental, asbestos-related, and product liability matters
have not been included in the contractual cash obligations table above.
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Pensions
AtDecember 31, 2019 , we had a net unfunded liability of$714.4 million , which consists of noncurrent pension assets of$50.4 million and current and non-current pension benefit liabilities of$764.8 million . It is our objective to contribute to the pension plans to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required. We currently project that we will contribute approximately$90 million to our enterprise plans worldwide in 2020. The timing and amounts of future contributions are dependent upon the funding status of the plan, which is expected to vary as a result of changes in interest rates, returns on underlying assets, and other factors. Therefore, pension contributions have been excluded from the preceding table. See Note 12 to the Consolidated Financial Statements for additional information regarding pensions. Postretirement Benefits Other than Pensions AtDecember 31, 2019 , we had postretirement benefit obligations of$428.8 million . We fund postretirement benefit costs principally on a pay-as-you-go basis as medical costs are incurred by covered retiree populations. Benefit payments, which are net of expected plan participant contributions and Medicare Part D subsidy, are expected to be approximately$42 million in 2020. Because benefit payments are not required to be funded in advance, and the timing and amounts of future payments are dependent on the cost of benefits for retirees covered by the plan, they have been excluded from the preceding table. See Note 12 to the Consolidated Financial Statements for additional information regarding postretirement benefits other than pensions. Income Taxes AtDecember 31, 2019 , we have total unrecognized tax benefits for uncertain tax positions of$78.2 million and$16.9 million of related accrued interest and penalties, net of tax. The liability has been excluded from the preceding table as we are unable to reasonably estimate the amount and period in which these liabilities might be paid. See Note 18 to the Consolidated Financial Statements for additional information regarding income taxes, including unrecognized tax benefits. Contingent Liabilities We are involved in various litigation, claims and administrative proceedings, including those related to environmental, asbestos-related, and product liability matters. We believe that these liabilities are subject to the uncertainties inherent in estimating future costs for contingent liabilities, and will likely be resolved over an extended period of time. Because the timing and amounts of potential future cash flows are uncertain, they have been excluded from the preceding table. See Note 22 to the Consolidated Financial Statements for additional information regarding contingent liabilities. Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States (GAAP). The preparation of financial statements in conformity with those accounting principles requires management to use judgment 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 contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from these estimates. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known. The following is a summary of certain accounting estimates and assumptions made by management that we consider critical. •Goodwill and indefinite-lived intangible assets - We have significant
goodwill and indefinite-lived intangible assets on our balance sheet related
to acquisitions. These assets are tested and reviewed annually during the
fourth quarter for impairment or when there is a significant change in
events or circumstances that indicate that the fair value of an asset is
more likely than not less than the carrying amount of the asset.
The determination of estimated fair value requires us to make assumptions about estimated cash flows, including profit margins, long-term forecasts, discount rates and terminal growth rates. We developed these assumptions based on the market and geographic risks unique to each reporting unit. For our annual impairment testing performed during the fourth quarter of 2019, we calculated the fair value for each of the reporting units and indefinite-lived intangibles. Based on the results of these calculations and further outlined below, we determined that the fair value of the reporting units and indefinite-lived intangible assets exceeded their respective carrying values. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows.Goodwill - Impairment of goodwill is assessed at the reporting unit level and begins with a qualitative assessment to determine if it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for 31
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determining whether it is necessary to perform the goodwill impairment test under ASC 350, "Intangibles-Goodwill and Other" (ASC 350). For those reporting units that bypass or fail the qualitative assessment, the test compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, an impairment loss would be recognized for the amount by which the reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit. As quoted market prices are not available for our reporting units, the calculation of their estimated fair value is determined using three valuation techniques: a discounted cash flow model (an income approach), a market-adjusted multiple of earnings and revenues (a market approach), and a similar transactions method (also a market approach). The discounted cash flow approach relies on our estimates of future cash flows and explicitly addresses factors such as timing, growth and margins, with due consideration given to forecasting risk. The earnings and revenue multiple approach reflects the market's expectations for future growth and risk, with adjustments to account for differences between the guideline publicly traded companies and the subject reporting units. The similar transactions method considers prices paid in transactions that have recently occurred in our industry or in related industries. These valuation techniques are weighted 50%, 40% and 10%, respectively. Under the income approach, we assumed a forecasted cash flow period of five years with discount rates ranging from 10.0% to 13.0% and terminal growth rates ranging from 2.0% to 3.5%. Under the guideline public company method, we used an adjusted multiple ranging from 5.5 to 13.0 of projected earnings before interest, taxes, depreciation and amortization (EBITDA) based on the market information of comparable companies. Additionally, we compared the estimated aggregate fair value of our reporting units to our overall market capitalization. For all reporting units except one inLatin America , the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value) was a minimum of 32%. The one reporting unit with a percentage of carrying value less than 32% exceeded its carrying value by 5.4%. The reporting unit, reported within the Climate segment, has approximately$190 million of goodwill at the testing date. A significant increase in the discount rate, decrease in the long-term growth rate, or substantial reductions in our end markets and volume assumptions could have a negative impact on the estimated fair value of these reporting units. Other Indefinite-lived intangible assets - Impairment of other intangible assets with indefinite useful lives is first assessed using a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. This assessment is used as a basis for determining whether it is necessary to calculate the fair value of an indefinite-lived intangible asset. For those indefinite-lived assets where it is required, a fair value is determined on a relief from royalty methodology (income approach) which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value would be recognized as an impairment loss equal to that excess. In testing our other indefinite-lived intangible assets for impairment, we assumed forecasted revenues for a period of five years with discount rates ranging from 10.0% to 14.5%, terminal growth rates of 3.0%, and royalty rates ranging from 0.5% to 4.5%. A significant increase in the discount rate, decrease in the long-term growth rate, decrease in the royalty rate or substantial reductions in our end markets and volume assumptions could have a negative impact on the estimated fair values of any of our tradenames. • Long-lived assets and finite-lived intangibles - Long-lived assets and finite-lived intangibles are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an
asset may not be fully recoverable. Assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flows can be
generated. Impairment in the carrying value of an asset would be recognized
whenever anticipated future undiscounted cash flows from an asset are less
than its carrying value. The impairment is measured as the amount by which
the carrying value exceeds the fair value of the asset as determined by an
estimate of discounted cash flows. Changes in business conditions could
potentially require future adjustments to these valuations.
• Business combinations - In accordance with ASC 805, "Business Combinations"
(ASC 805), acquisitions are recorded using the acquisition method of
accounting. We include the operating results of acquired entities from their
respective dates of acquisition.We recognize and measure the identifiable
assets acquired, liabilities assumed, and any non-controlling interest as of
the acquisition date fair value. The valuation of intangible assets was
determined using an income approach methodology. Our key assumptions used in
valuing the intangible assets include projected future revenues, customer
attrition rates, royalty rates, tax rates and discount rates. The excess, if
any, of total consideration transferred in a business combination over the
fair value of identifiable assets acquired, liabilities assumed, and any
non-controlling interest is recognized as goodwill. Costs incurred as aresult of a business combination other than costs related to the issuance of
debt or equity securities are recorded in the period the costs are incurred.
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• Asbestos matters - Certain of our wholly-owned subsidiaries and former
companies are named as defendants in asbestos-related lawsuits in state and
federal courts. We record a liability for our actual and anticipated future
claims as well as an asset for anticipated insurance settlements. We engage
an outside expert to perform a detailed analysis and project an estimated
range of the total liability for pending and unasserted future
asbestos-related claims. In accordance with ASC 450, "Contingencies" (ASC
450), we record the liability at the low end of the range as we believe that
no amount within the range is a better estimate than any other amount. Our
key assumptions underlying the estimated asbestos-related liabilities
include the number of people occupationally exposed and likely to develop
asbestos-related diseases such as mesothelioma and lung cancer, the number
of people likely to file an asbestos-related personal injury claim against
us, the average settlement and resolution of each claim and the percentage
of claims resolved with no payment. Asbestos-related defense costs are
excluded from the asbestos claims liability and are recorded separately as
services are incurred. None of our existing or previously-owned businesses
were a producer or manufacturer of asbestos. We record certain income and
expenses associated with our asbestos liabilities and corresponding
insurance recoveries within Discontinued operations, net of tax, as they
relate to previously divested businesses, except for amounts associated with
Trane's asbestos liabilities and corresponding insurance recoveries which
are recorded within continuing operations. See Note 22 to the Consolidated
Financial Statements for further information regarding asbestos-related
matters.
• Revenue recognition - Revenue is recognized when control of a good orservice promised in a contract (i.e., performance obligation) is transferred
to a customer. Control is obtained when a customer has the ability to direct
the use of and obtain substantially all of the remaining benefits from that
good or service. A majority of our revenues are recognized at a
point-in-time as control is transferred at a distinct point in time per the
terms of a contract. However, a portion of our revenues are recognized over
time as the customer simultaneously receives control as we perform work
under a contract. For these arrangements, the cost-to-cost input method is
used as it best depicts the transfer of control to the customer that occurs
as we incurs costs. We adopted ASU No. 2014-09, "Revenue from Contracts with
Customers" (ASC 606), on
approach. Refer to Note 3, "Summary of Significant Accounting Policies" and
Note 13, "Revenue" for additional information related to the adoption of ASC
606.
The transaction price allocated to performance obligations reflects our expectations about the consideration we will be entitled to receive from a customer. To determine the transaction price, variable and noncash consideration are assessed as well as whether a significant financing component exists. We include variable consideration in the estimated transaction price when it is probable that significant reversal of revenue recognized would not occur when the uncertainty associated with variable consideration is subsequently resolved. We consider historical data in determining our best estimates of variable consideration, and the related accruals are recorded using the expected value method. We enter into sales arrangements that contain multiple goods and services, such as equipment, installation and extended warranties. For these arrangements, each good or service is evaluated to determine whether it represents a distinct performance obligation and whether the sales price for each obligation is representative of standalone selling price. If available, we utilize observable prices for goods or services sold separately to similar customers in similar circumstances to evaluate relative standalone selling price. List prices are used if they are determined to be representative of standalone selling prices. Where necessary, we ensure that the total transaction price is then allocated to the distinct performance obligations based on the determination of their relative standalone selling price at the inception of the arrangement. We recognize revenue for delivered goods or services when the delivered good or service is distinct, control of the good or service has transferred to the customer, and only customary refund or return rights related to the goods or services exist. For extended warranties and long-term service agreements, revenue for these distinct performance obligations are recognized over time on a straight-line basis over the respective contract term. • Income taxes - Deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and tax bases of assets
and liabilities, applying enacted tax rates expected to be in effect for the
year in which the differences are expected to reverse. We recognize future
tax benefits, such as net operating losses and tax credits, to the extent
that realizing these benefits is considered in our judgment to be more
likely than not. We regularly review the recoverability of our deferred tax
assets considering our historic profitability, projected future taxable
income, timing of the reversals of existing temporary differences and the
feasibility of our tax planning strategies. Where appropriate, we record a
valuation allowance with respect to a future tax benefit.
The provision for income taxes involves a significant amount of management
judgment regarding interpretation of relevant facts and laws in the
jurisdictions in which we operate. Future changes in applicable laws, projected
levels of taxable income, and tax planning could change the effective tax rate
and tax balances recorded by us. In addition, tax authorities periodically
review income tax returns filed by us and can raise issues regarding our filing
positions, timing and amount of income or deductions, and the allocation of
income among the jurisdictions in which we operate. A significant period of time
may elapse between the filing of an income tax return and the ultimate
resolution of an issue raised by a revenue authority with respect to that
return. We believe that we have adequately provided for any reasonably
foreseeable resolution of these matters. We will adjust our estimate if
significant events so dictate. To the extent that the ultimate results differ
from our
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original or adjusted estimates, the effect will be recorded in the provision for income taxes in the period that the matter is finally resolved. • Employee benefit plans - We provide a range of benefits to eligible
employees and retirees, including pensions, postretirement and
postemployment benefits. Determining the cost associated with such benefits
is dependent on various actuarial assumptions including discount rates,
expected return on plan assets, compensation increases, mortality, turnover
rates and healthcare cost trend rates. Actuarial valuations are performed to
determine expense in accordance with GAAP. Actual results may differ from
the actuarial assumptions and are generally accumulated and amortized into
earnings over future periods. We review our actuarial assumptions at each
measurement date and make modifications to the assumptions based on current
rates and trends, if appropriate. The discount rate, the rate of
compensation increase and the expected long-term rates of return on plan
assets are determined as of each measurement date.
The rate of compensation increase is dependent on expected future compensation levels. The expected long-term rate of return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return on plan assets is based on what is achievable given the plan's investment policy, the types of assets held and the target asset allocation. The expected long-term rate of return is determined as of each measurement date. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on input from our actuaries, outside investment advisors and information as to assumptions used by plan sponsors. Changes in any of the assumptions can have an impact on the net periodic pension cost or postretirement benefit cost. Estimated sensitivities to the expected 2020 net periodic pension cost of a 0.25% rate decline in the two basic assumptions are as follows: the decline in the discount rate would increase expense by approximately$8.8 million and the decline in the estimated return on assets would increase expense by approximately$7.7 million . A 0.25% rate decrease in the discount rate for postretirement benefits would increase expected 2020 net periodic postretirement benefit cost by$0.7 million and a 1.0% increase in the healthcare cost trend rate would increase the service and interest cost by approximately$0.5 million . Recent Accounting Pronouncements See Note 3 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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