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 I, Item 1A - Risk Factors in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 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. Separation of Industrial Segment Businesses OnFebruary 29, 2020 (Distribution Date), we completed ourReverse Morris Trust transaction (the Transaction) withGardner Denver Holdings, Inc. (Gardner Denver, which changed its name to Ingersoll Rand Inc. after the Transaction) whereby we distributedIngersoll-Rand U.S. HoldCo, Inc. , which contained our former Industrial segment (Ingersoll Rand Industrial ), through a pro rata distribution (the Distribution) to our shareholders of record as ofFebruary 24, 2020 .Ingersoll Rand Industrial then merged into a wholly-owned subsidiary of Gardner Denver. Upon close of the Transaction, our existing shareholders received approximately 50.1% of the shares of Gardner Denver common stock on a fully-diluted basis and Gardner Denver stockholders retained approximately 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. During the six months endedJune 30, 2021 , we recorded an accrual and corresponding reduction to Retained earnings of$49.5 million related to finalizing the agreement with Gardner Denver to settle certain transaction-related items. This adjustment is related to working capital, cash and indebtedness amounts as of the Distribution Date, as well as funding levels related to pension plans, non-qualified deferred compensation plans and retiree health benefits. After the Distribution Date, we do not beneficially own anyIngersoll Rand Industrial shares of common stock and no longer consolidateIngersoll Rand Industrial in our financial statements. In accordance with accounting principles generally accepted inthe United States of America (GAAP), the historical results ofIngersoll Rand Industrial are presented as a discontinued operation in the Condensed Consolidated Statements of Income (Loss) and Condensed Consolidated Statements of Cash Flows. Significant Events COVID-19 Global Pandemic InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. During the first half of 2020, the COVID-19 global pandemic adversely impacted our business globally including, but not limited to, lower end customer demand, certain supply chain delays, temporary facility closures and limitations of our workforce to essential crews only. In response, we proactively initiated cost cutting actions in an effort to mitigate the impact of the global pandemic on our business. Despite the challenges set forth by the COVID-19 global pandemic, throughout the second half of 2020 and continuing through the first half of 2021, we continued to sell, install and service our products, and we actively managed our supply chain to prevent any major delays. During the first half of 2021, we experienced significant increases in end market demand, executed price increases to cover rapidly increasing material, component and logistics costs, shifted to higher margin product sales and realized strong earnings growth as a result of strong execution across our organization. In addition, we continued to invest in our businesses, develop and launch new products and deliver innovative customer solutions for electrification of heating and transport, enhanced indoor air quality, and precise temperature control along the full vaccine cold chain. We expect continued increases in input material costs due to increased end customer demand, but to date have been able to recover these additional costs through corresponding price increases. We will continue to actively manage our supply chain and logistics providers to prevent major delays in selling, installing and servicing our products and will continue to monitor the ongoing COVID-19 global pandemic as it evolves and will assess any potential impacts to our business and financial statements as necessary. 29 -------------------------------------------------------------------------------- Table of Contents 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 (theBankruptcy Court ). As a result of the Chapter 11 filings, all asbestos-related lawsuits against Aldrich and Murray have been stayed due to the imposition of a statutory automatic stay applicable in Chapter 11 bankruptcy cases. 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 ofJune 30, 2021 . From an accounting perspective, we no longer had 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. 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. These factors include urbanization, resource constraints, climate change, workforce dynamics, indoor environmental quality and digital connectedness. As part of our longterm sustainability strategy, we innovate to provide solutions for our customers to address the impacts of these factors. 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 have shown improvement but remain mixed across our end markets. The COVID-19 global pandemic continues to impact both the global Heating, Ventilation and Air Conditioning (HVAC) and Transport end markets. As vaccine distribution and administration expands throughout 2021, market conditions are expected to improve across the geographies where we serve our customers. 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. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedJune 30, 2021 Compared to the Three Months EndedJune 30, 2020 - Consolidated Results 2021 2020 Period % of % of Dollar amounts in millions 2021 2020 Change revenues revenues Net revenues$ 3,829.7 $ 3,138.8 $ 690.9 Cost of goods sold (2,559.0) (2,160.5) (398.5) 66.8 % 68.8 % Gross profit 1,270.7 978.3 292.4 33.2 % 31.2 % Selling and administrative expenses (619.7) (554.8) (64.9) 16.2 % 17.7 % Operating income 651.0 423.5 227.5 17.0 % 13.5 % Interest expense (59.3) (61.3) 2.0 Other income/(expense), net 0.3 (0.4) 0.7 Earnings before income taxes 592.0 361.8 230.2 Benefit (provision) for income taxes (122.8) (83.5) (39.3) Earnings from continuing operations 469.2 278.3 190.9 Discontinued operations, net of tax (0.2) (36.2) 36.0 Net earnings$ 469.0 $ 242.1 $ 226.9 Net Revenues Net revenues for the three months endedJune 30, 2021 increased by 22.0%, or$690.9 million , compared with the same period in 2020, which resulted from the following: Volume 15.5 % Acquisitions 1.8 % Pricing 2.6 % Currency translation 2.1 % Total 22.0 % We were negatively impacted by the COVID-19 global pandemic in each of our segments during the second quarter of 2020, resulting in lower Net revenues in the comparable period. In addition, the increase in Net revenues was driven by increased end customer demand within all of our segments. Also during the fourth quarter of 2020 and in the first quarter of 2021, we completed three channel acquisitions, two of which were completed in theAmericas segment and the third which was completed within the EMEA segment, further driving an increase in Net revenues as compared to the prior year. 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 endedJune 30, 2021 increased 200 basis points to 33.2% compared to 31.2% for the same period of 2020. During the second quarter of 2021, price realization and favorable product mix outpaced material inflation. In addition, the increase was driven by strong productivity and lower spending on restructuring. Selling and Administrative Expenses Selling and administrative expenses for the three months endedJune 30, 2021 increased by 11.7%, or$64.9 million compared with the same period of 2020. The increase in Selling and administrative expenses was primarily driven by higher compensation and employee benefits due to prior year delays in merit increases and employee furloughs in certain regions and the completion of three channel acquisitions, partially offset by the realization of benefits from prior restructuring programs and transformation savings and lower spending on restructuring and transformation initiatives. Selling and administrative expenses as a percentage of Net revenues for the three months endedJune 30, 2021 decreased 150 basis points from 17.7% to 16.2% compared to the same period of 2020 primarily due to higher revenues during the period. 31 -------------------------------------------------------------------------------- Table of Contents Interest Expense Interest expense for the three months endedJune 30, 2021 decreased by 3.3%, or$2.0 million compared with the same period of 2020 primarily due to the repayment of$300.0 million of 2.900% Senior notes inFebruary 2021 . Other Income/(Expense), Net The components of Other income/(expense), net for the three months endedJune 30 were as follows: In millions 2021 2020 Interest income/(loss)$ 1.1 $ 1.8 Foreign currency exchange loss (3.0) (1.8)
Other components of net periodic benefit cost 1.2 (3.4) Other activity, net
1.0 3.0
Other income/(expense), net $ 0.3 $ (0.4)
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 certain legal matters as well as asbestos-related activities through the
Petition Date. During the three months ended June 30, 2020 , we recorded 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 three months ended June 30, 2021 , our effective tax rate was 20.7% which
was slightly lower than the U.S. statutory rate of 21% primarily due to excess
tax benefits from employee share-based payments and earnings in non-U.S.
jurisdictions, which in aggregate have a lower effective tax rate, partially
offset by the remeasurement of deferred taxes as a result of law changes in
certain non-U.S. tax jurisdictions, primarily in the United Kingdom and India ,
and U.S. state and local taxes. For the three months ended June 30, 2020 our
effective tax rate was 23.1% which was higher than the U.S. statutory rate of
21% due to a $19.8 million non-cash charge to establish valuation allowances on
deferred taxes related to net operating losses partially offset by a related
$11.6 million benefit both as a result of a planned restructuring in a non-U.S.
tax jurisdiction, U.S. state and local taxes and certain non-deductible employee
expenses. These amounts were partially offset by the deduction for Foreign
Derived Intangible Income (FDII) and earnings in non-U.S. jurisdictions, which
in aggregate have a lower effective tax rate. Establishing valuation allowances
and related benefit increased the effective tax rate by 2.3%.
Discontinued Operations
The components of Discontinued operations, net of tax for the three months ended
June 30 were as follows:
In millions 2021 2020
Net revenues $ - $ -Pre-tax earnings (loss) from discontinued operations (2.1) (47.9) Tax benefit (expense)
1.9 11.7
Discontinued operations, net of tax$ (0.2) $
(36.2)
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 three months endedJune 30, 2020 includes pre-taxIngersoll Rand Industrial separation costs primarily related to legal, consulting and advisory fees of$12.5 million and a loss of$23.6 million related to the deconsolidation of Aldrich and its wholly-owned subsidiary 200 Park. The components of Discontinued operations, net of tax for the three months endedJune 30 were as follows: In millions 2021 2020
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Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020 -
Consolidated Results
2021 2020
% of % of
Dollar amounts in millions 2021 2020 Period Change revenues revenues
Net revenues $ 6,847.3 $ 5,780.1 $ 1,067.2
Cost of goods sold (4,623.4) (4,059.3) (564.1) 67.5 % 70.2 %
Gross profit 2,223.9 1,720.8 503.1 32.5 % 29.8 %
Selling and administrative expenses (1,219.7) (1,142.9) (76.8) 17.8 % 19.8 %
Operating income 1,004.2 577.9 426.3 14.7 % 10.0 %
Interest expense (120.0) (124.4) 4.4
Other income/(expense), net (6.9) 12.1 (19.0)
Earnings before income taxes 877.3 465.6 411.7
Benefit (provision) for income taxes (171.2) (134.5) (36.7)
Earnings from continuing operations 706.1 331.1 375.0
Discontinued operations, net of tax 0.7 (114.9) 115.6
Net earnings $ 706.8 $ 216.2 $ 490.6
Net Revenues
Net revenues for the six months ended June 30, 2021 increased by 18.5%, or
$1,067.2 million , compared with the same period in 2020, which resulted from the
following:
Volume 12.7 %
Acquisitions 1.7 %
Pricing 2.3 %
Currency translation 1.8 %
Total 18.5 %
We were negatively impacted by the COVID-19 global pandemic in each of our
segments during the first and second quarter of 2020, resulting in lower Net
revenues in the comparable period. In addition, the increase in Net revenues was
driven by increased end customer demand within all of our segments. Also during
the fourth quarter of 2020 and in the first quarter of 2021, we completed three
channel acquisitions, two of which were completed in the Americas segment and
the third which was completed within the EMEA segment, further driving an
increase in Net revenues as compared to the prior year. Refer to the "Results by
Segment" below for a discussion of Net revenues by segment.
Gross Profit Margin
Gross profit margin for the six months ended June 30, 2021 increased by 270
basis points to 32.5% compared to 29.8% for the same period of 2020. During the
first half of 2021, price realization and favorable product mix outpaced
material inflation. In addition, the increase was driven by strong productivity
and lower spending on restructuring.
Selling and Administrative Expenses
Selling and administrative expenses for the six months ended June 30, 2021
increased by 6.7%, or $76.8 million , compared with the same period of 2020. The
increase in Selling and administrative expenses was primarily driven by higher
compensation and employee benefits due to prior year delays in merit increases
and employee furloughs in certain regions and the completion of three channel
acquisitions, partially offset by the realization of benefits from prior
restructuring programs and transformation savings, cost containment actions and
lower spending on restructuring and transformation initiatives. Selling and
administrative expenses as a percentage of Net revenues for the six months ended
June 30, 2021 decreased 200 basis points from 19.8% to 17.8% primarily due to
higher revenues during the period.
Interest Expense
Interest expense for the six months ended June 30, 2021 decreased by 3.5% or
$4.4 million compared with the same period of 2020 primarily due to the
repayment of $300.0 million of 2.900% Senior notes in February 2021 and $300.0
million of 2.625% Senior notes in April 2020 .
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Other Income/(Expense), Net
The components of Other income/(expense), net for the six months ended June 30
are as follows:
In millions 2021 2020
Interest income/(loss) $ 2.2 $ 1.7
Foreign currency exchange loss (6.7) (6.0)
Other components of net periodic benefit cost (4.5) (5.1)
Other activity, net 2.1 21.5
Other income/(expense), net $ (6.9) $ 12.1
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 six months ended June 30, 2020 , we 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 six months ended June 30, 2021 , our effective tax rate was 19.5% which
was lower than the U.S. statutory rate of 21% primarily due to excess tax
benefits from employee share-based payments and earnings in non-U.S.
jurisdictions, which in aggregate have a lower effective tax rate, partially
offset by the remeasurement of deferred taxes as a result of law changes in
certain non-U.S. tax jurisdictions, primarily in the United Kingdom and India ,
and U.S. state and local taxes. The effective tax rate for the six months ended
June 30, 2020 was 28.9% which was higher than the U.S. statutory rate of 21% due
to a $37.0 million non-cash charge to establish valuation allowances on net
deferred tax assets, primarily net operating losses in certain tax jurisdictions
as a result of the completion of the Transaction, a $19.8 million non-cash
charge to establish valuation allowances on deferred taxes related to net
operating losses partially offset by a related $11.6 million benefit both as a
result of a planned restructuring in a non-U.S. tax jurisdiction, 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, the
deduction for FDII and earnings in non-U.S. jurisdictions, which in aggregate
have a lower effective tax rate. Establishing valuation allowances and the
related tax benefit increased the effective tax rate by 9.7%.
Discontinued Operations
The components of Discontinued operations, net of tax for the six months ended
June 30 were as follows:
In millions 2021 2020
Net revenues $ - $ 469.8 Pre-tax earnings (loss) from discontinued operations (13.4) (123.4) Tax benefit (expense)
14.1 8.5
Discontinued operations, net of tax$ 0.7 $
(114.9)
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 six months endedJune 30, 2020 includes pre-taxIngersoll Rand Industrial separation costs primarily related to legal, consulting and advisory fees of$111.6 million and a loss of$23.6 million related to the deconsolidation of Aldrich and its wholly-owned subsidiary 200 Park. The components of Discontinued operations, net of tax for the six months endedJune 30 were as follows: In millions 2021 2020
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Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30,
2020 - 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 the North America and Latin
America regions. The Americas 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 the Europe , Middle East and Africa
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 the Asia Pacific
region. The Asia 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 in the 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.
The following discussion compares our results for each of our three reportable
segments for the three months ended June 30, 2021 compared to the three months
ended June 30, 2020 .
In millions 2021 2020 % change
Americas
Net revenues $ 2,971.6 $ 2,456.4 21.0 %
Segment Adjusted EBITDA 621.0 470.5 32.0 %
Segment Adjusted EBITDA as a percentage of net
revenues 20.9 % 19.2 %
EMEA
Net revenues $ 523.2 $ 373.2 40.2 %
Segment Adjusted EBITDA 107.3 59.3 80.9 %
Segment Adjusted EBITDA as a percentage of net
revenues 20.5 % 15.9 %
Asia Pacific
Net revenues $ 334.9 $ 309.2 8.3 %
Segment Adjusted EBITDA 63.0 60.1 4.8 %
Segment Adjusted EBITDA as a percentage of net
revenues 18.8 % 19.4 %
Total Net revenues $ 3,829.7 $ 3,138.8 22.0 %
Total Segment Adjusted EBITDA 791.3 589.9 34.1 %
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Americas
Net revenues for the three months ended June 30, 2021 increased by 21.0% or
$515.2 million , compared with the same period of 2020. The components of the
period change were as follows:
Volume 15.6 %
Acquisitions 2.0 %
Pricing 3.0 %
Currency translation 0.4 %
Total 21.0 %
The Americas segment was negatively impacted by the COVID-19 global pandemic
during the second quarter of 2020, resulting in lower Net revenues in the
comparable period. In addition, the increase in Net revenues was driven by
increased end customer demand in all of our businesses, favorable pricing and
the completion of two channel acquisitions during the fourth quarter of 2020.
Segment Adjusted EBITDA margin for the three months ended June 30, 2021
increased by 170 basis points to 20.9% compared to 19.2% for the same period in
2020. During the second quarter of 2021, price realization and favorable product
mix outpaced material and other inflation. In addition, strong execution,
increased volumes, productivity benefits and cost controls, partially offset by
business reinvestment further drove the increase in Segment Adjusted EBITDA as
compared to the prior year.
EMEA
Net revenues for the three months ended June 30, 2021 increased by 40.2% or
$150.0 million , compared with the same period of 2020. The components of the
period change were as follows:
Volume 27.0 %
Acquisitions 1.9 %
Transfer of sales from Asia Pacific segment 0.7 %
Pricing 0.9 %
Currency translation 9.7 %
Total 40.2 %
The EMEA segment was negatively impacted by the COVID-19 global pandemic during
the second quarter of 2020, resulting in lower Net revenues in the comparable
period. In addition, the increase in Net revenues was driven by continued
increase in end customer demand within both our Commercial HVAC and Transport
businesses as well as favorable impact from foreign currency translation. Also,
during the first quarter of 2021, we completed a channel acquisition, which is
managed in our EMEA segment, and includes sales formerly reported under our Asia
Pacific segment, further driving an increase in Net revenues as compared to the
prior year.
Segment Adjusted EBITDA margin for the three months ended June 30, 2021
increased by 460 basis points to 20.5% compared to 15.9% for the same period of
2020. During the second quarter of 2021, price realization and favorable product
mix outpaced material and other inflation. In addition, increased volumes,
strong execution, productivity benefits and cost controls further drove the
increase in Segment Adjusted EBITDA as compared to the prior year.
Asia Pacific
Net revenues for the three months ended June 30, 2021 increased by 8.3% or $25.7
million , compared with the same period of 2020. The components of the period
change were as follows:
Volume 0.8 %
Transfer of sales to EMEA segment (0.8) %
Pricing 1.6 %
Currency translation 6.7 %
Total 8.3 %
36-------------------------------------------------------------------------------- Table of Contents TheAsia Pacific segment was negatively impacted by the COVID-19 global pandemic during the second quarter of 2020, resulting in lower Net revenues in the comparable period. In addition, the increase in Net revenues was driven by favorable impact from foreign currency translation, favorable pricing and continued increase in end customer demand as a result of improved economic conditions as it relates to the COVID-19 global pandemic withinChina , partially offset by mixed results in the rest ofAsia and the transfer of sales related to the EMEA channel acquisition. Segment Adjusted EBITDA margin for the three months endedJune 30, 2021 decreased by 60 basis points to 18.8% compared to 19.4% for the same period of 2020. The decrease was primarily driven by material and other inflation and an unfavorable shift in product mix to lower margin products, partially offset by productivity benefits and price realization. Six Months EndedJune 30, 2021 Compared to the Six Months EndedJune 30, 2020 - Segment Results The following discussion compares our results for each of our three reportable segments for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . In millions 2021 2020 % change Americas Net revenues$ 5,297.3 $ 4,554.2 16.3 % Segment Adjusted EBITDA 1,004.8 732.6 37.2 % Segment Adjusted EBITDA as a percentage of net revenues 19.0 % 16.1 % EMEA Net revenues$ 967.1 $ 737.5 31.1 % Segment Adjusted EBITDA 184.0 102.5 79.5 % Segment Adjusted EBITDA as a percentage of net revenues 19.0 % 13.9 % Asia Pacific Net revenues$ 582.9 $ 488.4 19.3 % Segment Adjusted EBITDA 106.5 70.7 50.6 % Segment Adjusted EBITDA as a percentage of net revenues 18.3 % 14.5 % Total net revenues$ 6,847.3 $ 5,780.1 18.5 % Total Segment Adjusted EBITDA 1,295.3 905.8 43.0 %
Net revenues for the six months endedJune 30, 2021 increased by 16.3% or$743.1 million , compared with the same period of 2020. The components of the period change were as follows: Volume 11.6 % Acquisitions 1.9 % Pricing 2.6 % Currency translation 0.2 % Total 16.3 % TheAmericas segment was negatively impacted by the COVID-19 global pandemic in the latter part of the first quarter and the second quarter of 2020 resulting in lower Net revenues in the comparable period. In addition, the increase in Net revenues was driven by increased end customer demand in all of our businesses, favorable pricing and the completion of two channel acquisitions during the fourth quarter of 2020. Segment Adjusted EBITDA margin for the six months endedJune 30, 2021 increased by 290 basis points to 19.0% compared to 16.1% for the same period of 2020. During the first half of 2021, price realization and favorable product mix outpaced material and other inflation. In addition, strong execution, productivity benefits, increased volumes and cost controls, partially offset by business reinvestment further drove the increase in Segment Adjusted EBITDA as compared to the prior year. 37 -------------------------------------------------------------------------------- Table of Contents EMEA Net revenues for the six months endedJune 30, 2021 increased by 31.1% or$229.6 million , compared with the same period of 2020. The components of the period change were as follows: Volume 19.3 % Acquisitions 1.5 % Transfer of sales from Asia Pacific segment 0.7 % Pricing 0.6 % Currency translation 9.0 % Total 31.1 % The EMEA segment was negatively impacted by the COVID-19 global pandemic in the latter part of the first quarter and the second quarter of 2020 resulting in lower Net revenues in the comparable period. In addition, the increase in Net revenues was driven by increased end customer demand within both our Commercial HVAC and Transport businesses as well as favorable impact from foreign currency translation. Also, during the first quarter of 2021, we completed a channel acquisition, which is managed in our EMEA segment, and includes sales formerly reported under ourAsia Pacific segment, further driving an increase in Net revenues as compared to the prior year. Segment Adjusted EBITDA margin for the six months endedJune 30, 2021 increased by 510 basis points to 19.0% compared to 13.9% for the same period of 2020. During the first half of 2021, price realization and favorable product mix outpaced material and other inflation. In addition, increased volumes, strong execution, productivity benefits and cost controls further drove the increase in Segment Adjusted EBITDA as compared to the prior year.Asia Pacific Net revenues for the six months endedJune 30, 2021 increased by 19.3% or$94.5 million , compared with the same period of 2020. The components of the period change were as follows: Volume 12.7 % Transfer of sales to EMEA segment (1.1) % Pricing 1.3 % Currency translation 6.4 % Total 19.3 % TheAsia Pacific segment was negatively impacted by the COVID-19 global pandemic in the first and second quarters of 2020, resulting in lower Net revenues in the comparable period. In addition, the increase in Net revenues was driven by increased end customer demand as a result of improved economic conditions as it relates to the COVID-19 global pandemic withinChina , partially offset by mixed results in the rest ofAsia . Net revenues also increased from favorable foreign currency translation and favorable pricing, partially offset by the transfer of sales related to the EMEA channel acquisition. Segment Adjusted EBITDA margin for the six months endedJune 30, 2021 increased by 380 basis points to 18.3% compared to 14.5% for the same period of 2020. The increase was primarily driven by strong execution, productivity benefits, higher volumes as a result of increased customer demand from improved economic conditions as compared to prior year driven by the COVID-19 global pandemic and price realization, partially offset by material and other inflation. 38 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 30, 2021 . As ofJune 30, 2021 , we had$2,912.4 million of cash and cash equivalents on hand, of which$2,246.7 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 ofJune 30, 2021 , 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. 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). During the six months endedJune 30, 2021 , we repurchased and canceled$354.2 million of our ordinary shares leaving$145.8 million remaining under the 2018 Authorization atJune 30, 2021 . InFebruary 2021 , our Board of Directors authorized the repurchase of up to$2.0 billion of our ordinary shares under a new share repurchase program (2021 Authorization) upon completion of the 2018 Authorization. Subsequent toJune 30, 2021 , we repurchased and canceled the remaining$145.8 million under the 2018 Authorization and approximately$100 million under the 2021 Authorization, totaling to approximately$600 million of ordinary shares repurchased during the year. We expect to pay a competitive and growing dividend. InFebruary 2021 , we announced an 11% increase in our quarterly share dividend from$0.53 to$0.59 per ordinary share, or$2.36 per share annualized. The first and second quarter 2021 dividend was paid during the six months endedJune 30, 2021 and the third quarter 2021 dividend was declared inJune 2021 to be paid inSeptember 2021 . 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 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 annual Net revenues. 39 -------------------------------------------------------------------------------- Table of Contents 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 2019, we acquired several businesses, entered into a joint venture and invested in companies that complement existing products and services further enhancing our product portfolio. During the six months endedJune 30, 2021 , we deployed capital of$84.7 million attributable to acquisitions and investments. In addition, during 2020 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$114.2 million during the year endedDecember 31, 2020 . These expenditures were incurred in order to facilitate the Transaction and are included within Discontinued operations, net of tax. 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 committed to reduce costs by$140 million through 2021 and an additional$160 million by 2023 for a total of$300 million in total annual savings under our transformation initiatives. We believe that our existing cash flow, committed credit lines and access to the capital markets will be sufficient to fund share repurchases, dividends, research and development, sustaining activities, business portfolio changes and ongoing restructuring actions. Certain of our subsidiaries entered into funding agreements with Aldrich and Murray pursuant to which those subsidiaries are obligated, among other things, to pay the costs and expenses of Aldrich and Murray during the pendency of the Chapter 11 cases to the extent distributions from their respective subsidiaries are insufficient to do so and to provide an amount for the funding for a trust established pursuant to section 524(g) of the Bankruptcy Code, to the extent that the other assets of Aldrich and Murray are insufficient to provide the requisite trust funding. As the COVID-19 global pandemic impacts both the broader economy and our operations, we will continue to assess our liquidity needs and our ability to access capital markets. A continued worldwide disruption could materially affect economies and financial markets worldwide, resulting in an economic downturn that could affect demand for our products, our ability to obtain financing on favorable terms and otherwise adversely impact our business, financial condition and results of operations. See Part I, Item 1A - Risk Factors in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 for more information. Liquidity The following table contains several key measures of our financial condition and liquidity at the period ended: June 30, December 31, In millions 2021 2020 Cash and cash equivalents$ 2,912.4 $ 3,289.9 Short-term borrowings and current maturities of long-term debt (1) 475.4 775.6 Long-term debt 4,489.8 4,496.5 Total debt 4,965.2 5,272.1Total Trane Technologies plc shareholders' equity 6,457.3 6,407.7 Total equity 6,472.7 6,427.1 Debt-to-total capital ratio 43.4 % 45.1 % (1) The$300.0 million of 2.900% Senior notes were repaid 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$342.9 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 ofJune 30, 2021 andDecember 31, 2020 . See Note 7 to the Condensed Consolidated Financial Statements for additional information regarding the terms of our short-term obligations. 40
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Table of Contents Our long-term obligations primarily consist of long-term debt with final maturity dates ranging between 2023 and 2049. In addition, we maintain two$1.0 billion senior unsecured revolving credit facilities, one of which matures inApril 2023 and the other which matures inJune 2026 . 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 atJune 30, 2021 andDecember 31, 2020 . 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 six months endedJune 30 . For additional details, see the Condensed Consolidated Statements of Cash Flows in the Condensed Consolidated Financial Statements.
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