Trane Technologies plc (NYSE:TT)

The analysis of the annual current and deferred income tax expenses over the period from 2018 to 2022 reveals notable fluctuations and trends in the tax components affecting the overall tax expense.

Current Tax Expense

The current tax expense experienced a downward trend from 425,100 thousand US dollars in 2018 to 274,600 thousand in 2020, indicating a decrease of approximately 35% over two years. This decline was followed by an increase to 358,700 thousand in 2021 before decreasing again to 308,100 thousand in 2022. The fluctuations suggest variability in taxable income or tax rates applicable within these years, with the overall level in 2022 remaining lower than in 2018 but higher than in 2020.

Deferred Tax Expense (Benefit)

The deferred tax component presents more volatility over the period. In 2018, there was a substantial deferred tax benefit of -143,800 thousand US dollars, representing a reduction in tax expense. This shifted dramatically to a deferred tax expense of 16,800 thousand in 2019 and increased further to 22,200 thousand in 2020. Subsequently, the deferred tax returned to a benefit position of -25,200 thousand in 2021 before switching back to an expense of 67,800 thousand in 2022. This oscillation between benefit and expense reflects changes in timing differences related to income recognition and tax deductions, possibly influenced by accounting adjustments or tax regulation changes.

Total Tax Expense

The total tax expense shows a less consistent trajectory. After rising from 281,300 thousand in 2018 to 353,700 thousand in 2019, it declined to 296,800 thousand in 2020, increased again to 333,500 thousand in 2021, and reached its highest level of 375,900 thousand in 2022. The observed pattern indicates that overall tax obligations have increased over the five-year span, with 2022 recording the peak tax expense. This increase occurs despite the relatively lower current tax expense in 2022 compared to earlier years, driven in part by the reverted deferred tax expense.

The analysis of the annual tax-related financial metrics reveals several notable trends and fluctuations over the five-year period.

U.S. statutory income tax rate

The statutory tax rate remained stable at 21% throughout the period from 2018 to 2022, indicating no changes in the base federal corporate tax rate during this time.

Non-U.S. tax rate differential

The differential fluctuated, starting at -1.8% in 2018, slightly increasing to -1.9% in 2019, then decreasing markedly to -1.1% in 2020 before dropping further to -2.8% in 2021 and remaining steady at -2.8% in 2022. This suggests increasing tax advantages or lower tax rates in non-U.S. jurisdictions impacting overall tax expense.

Tax on U.S. subsidiaries on non-U.S. earnings

This measure varied throughout the timeframe, rising from 0.7% in 2018 to a peak of 1.1% in 2019, then declining sharply to 0.3% in 2020, dropping further to -0.3% in 2021, and rebounding to 0.3% in 2022. These fluctuations indicate variable tax impacts related to U.S. subsidiaries' treatment of foreign earnings.

State and local income taxes

This category displayed volatility, starting very low at 0.1% in 2018, spiking significantly to 3.1% in 2019 and further to 4.3% in 2020, before falling back to 2.0% in 2021 and decreasing further to 1.1% in 2022, reflecting varied state-level tax burdens or accounting treatments over the years.

Valuation allowances

Valuation allowances showed negative adjustments from 2019 onward, starting at -2.4% in 2019, moving to -1.1% in both 2020 and 2021, and slightly improving to -0.7% in 2022. The positive 0.7% in 2018 turned negative in subsequent years, possibly indicating changes in deferred tax asset realizability assessments.

Change in permanent reinvestment assertion, Transition tax, Remeasurement of deferred tax balances

These items have data only for 2018, where a -2.3% impact from permanent reinvestment assertion, a 1.5% impact from transition tax, and a 0.3% adjustment of deferred tax balances occurred, indicating significant one-time tax accounting events or policy changes during that year.

Stock-based compensation

Stock-based compensation consistently reduced the effective tax rate each year, with a generally increasing negative impact from -0.9% in 2018 to -1.8% in 2021, then diminishing to -0.8% in 2022, reflecting changing tax effects related to equity-based payments.

Expiration of carryforward tax attributes

Only present in 2020 at 1.1%, this indicates a one-time tax income effect due to expiration of tax loss or credit carryforwards.

Other adjustments

Other adjustments were volatile, shifting from a negative impact of -2.4% in 2018 to positive 0.9% in 2019 and 0.2% in 2020, rising to 1.6% in 2021, and then reverting to -0.8% in 2022. This variability suggests miscellaneous tax impacts subject to annual reclassification or events.

Effective tax rate

The effective tax rate showed a generally upward trend from 16.9% in 2018 to 23% in 2020, followed by a decline to 18.6% in 2021 and 17.3% in 2022. This pattern reflects a combination of tax planning, changes in international tax dynamics, and the influence of various adjustments described above.

Overall, the data indicate relative stability in statutory rates but notable variability in factors affecting the effective tax rate, with particular influence from state taxes, valuation allowances, and international tax rate differentials. The effective tax rate peaked in 2020 before declining in subsequent years, signaling potential improvements in tax efficiency or shifts in business operations or jurisdictions.

Inventory and Accounts Receivable

From 2018 to 2022, the gross values of inventory and accounts receivable decreased overall, moving from 20,300 thousand USD in 2018 to a low of 11,000 thousand USD in 2021, with a slight increase to 11,200 thousand USD in 2022. Correspondingly, the negative balances increased significantly in 2022, reaching -50,700 thousand USD, indicating a higher offset or contra account activity that year.

Fixed Assets and Intangibles

This category exhibited a sharp decline in gross values, starting at 39,200 thousand USD in 2018 and falling steadily each year to 2,600 thousand USD in 2022. The associated negative balances also decreased in magnitude but remained substantial, from -1,220,900 thousand USD in 2018 to -1,069,000 thousand USD in 2022, signaling an ongoing reduction in net book values or amortization impacts.

Operating Lease Liabilities and Right-of-Use Assets

Operating lease liabilities were introduced in 2019 with a high value of 140,200 thousand USD. They showed a moderate decline through 2020 but then increased slightly through 2022 to reach 112,000 thousand USD. The corresponding right-of-use assets mirrored this trend, though with decreasing amounts, representing the capitalized lease assets declining steadily, reaching -110,400 thousand USD in 2022.

Postemployment and Other Benefit Liabilities

Gross liabilities declined consistently from 386,100 thousand USD in 2018 to 254,600 thousand USD in 2022. In contrast, related negative balances increased moderately in absolute terms, but peaked in 2021 at -21,300 thousand USD before slightly reducing in 2022. This pattern suggests gradual settlement or revaluation of these benefit obligations.

Product Liability

The product liability account showed a significant reduction in gross values from 95,100 thousand USD in 2018 to a low of 4,600 thousand USD in 2021, with a slight increase to 5,500 thousand USD in 2022. Negative balances were minimal and irregular, indicating limited offsetting adjustments.

Funding Liability

This liability appeared in 2020 at 71,800 thousand USD and remained relatively stable through 2021 at 73,700 thousand USD. No data was reported for other years, suggesting intermittent or specifically timed financing activities.

Other Reserves and Accruals

There was a steady increase in gross reserves and accruals from 153,900 thousand USD in 2018 to 181,500 thousand USD in 2022. The corresponding negative balances, however, decreased from -11,800 thousand USD in 2018 to about -5,500 thousand USD in 2022, indicating possible net growth in this category's reserves.

Net Operating Losses and Credit Carryforwards

These assets peaked at 659,200 thousand USD in 2019, then declined progressively each year, reaching 346,000 thousand USD by 2022. The downward trend suggests a gradual utilization or reduction in loss carryforwards and tax credit benefits over the period.

Other Items

Other miscellaneous items showed fluctuations without a clear trend—starting at 28,600 thousand USD in 2018, increasing to 58,500 thousand USD in 2020, then declining to 29,000 thousand USD in 2021, and increasing again to 40,700 thousand USD in 2022. The corresponding negative balances varied similarly, indicating volatile components in this grouping.

Gross Deferred Tax Assets

Gross deferred tax assets rose from 1,313,100 thousand USD in 2018 to a peak of 1,512,600 thousand USD in 2019, followed by a marked decline to 954,100 thousand USD by 2022. This indicates a significant reduction in temporary differences or utilization of deferred tax assets over time.

Deferred Tax Valuation Allowances

Valuation allowances increased in absolute value from -332,200 thousand USD in 2018 to -373,700 thousand USD in 2019 but then decreased steadily to -199,800 thousand USD in 2022. The reduction suggests improving recoverability expectations for deferred tax assets.

Deferred Tax Assets Net of Valuation Allowances

Net deferred tax assets followed a similar pattern to gross assets, increasing from 980,900 thousand USD in 2018 to 1,138,900 thousand USD in 2019 before declining gradually to 754,300 thousand USD in 2022, reflecting changes in both gross assets and valuation allowances.

Undistributed Earnings of Foreign Subsidiaries

Negative values for undistributed earnings were consistent and relatively stable, ranging from -39,500 thousand USD in 2018 to approximately -28,000 thousand USD in 2022, suggesting no significant repatriation or changes in foreign earnings retention.

Gross Deferred Tax Liabilities

Gross deferred tax liabilities increased substantially from -1,312,300 thousand USD in 2018 to a peak of -1,603,500 thousand USD in 2019, then decreased steadily to -1,280,900 thousand USD by 2022. This pattern indicates fluctuations in timing differences that create deferred tax liabilities.

Net Deferred Tax Assets (Liabilities)

The net deferred tax position, a combination of deferred tax assets and liabilities, was negative throughout the period and fluctuated between -331,400 thousand USD in 2018 and -526,600 thousand USD in 2022, indicating a net deferred tax liability position that deepened over time despite some yearly variations.

The financial data over the five-year period reveals various trends in liabilities, equity, and net earnings for the company.

Total Liabilities (Reported and Adjusted)

The total reported liabilities exhibit a generally increasing pattern from 2018 to 2019, rising from approximately 10.85 billion US dollars to 13.18 billion US dollars. Following this peak, liabilities decreased in 2020 to around 11.73 billion and remained relatively stable through 2021 and 2022, with a slight increase in the final year to approximately 11.98 billion. Adjusted total liabilities follow a similar trajectory albeit at slightly lower amounts compared to the reported figures. The adjusted liabilities increased from about 10.52 billion in 2018 to 12.72 billion in 2019, then declined to 11.31 billion in 2020, with marginal changes over 2021 and 2022, ending near 11.45 billion. This indicates a peak in 2019 followed by stabilization in subsequent years.

Shareholders’ Equity (Reported and Adjusted)

Reported shareholders’ equity shows a decreasing trend over the period. Starting at approximately 7.02 billion in 2018, it slightly increased to 7.27 billion in 2019 but then declined steadily each year, reaching about 6.09 billion by 2022. Adjusted shareholders’ equity is consistently higher than reported equity, starting at approximately 7.35 billion in 2018 and peaking at around 7.73 billion in 2019. It subsequently declines annually to about 6.62 billion in 2022. The pattern indicates a diminishing equity base particularly after 2019, which might warrant further investigation into capital management or earnings retention.

Net Earnings Attributable to the Company (Reported and Adjusted)

Net earnings show some volatility. Reported net earnings increased from about 1.34 billion in 2018 to 1.41 billion in 2019, followed by a significant decline to approximately 855 million in 2020. Earnings recovered strongly post-2020, reaching 1.42 billion in 2021 and peaking at roughly 1.76 billion in 2022. Adjusted net earnings reflect a similar trend with smoother fluctuations, beginning at around 1.19 billion in 2018, increasing modestly to 1.43 billion in 2019, then decreasing to approximately 877 million in 2020. Afterward, earnings improved steadily, rising to 1.40 billion in 2021 and 1.82 billion in 2022. This demonstrates a recovery phase after a downturn in 2020, with 2022 yielding the highest earnings in the period considered.

The financial metrics over the five-year period exhibit notable trends in profitability, leverage, and returns, both on a reported and adjusted basis.

Net Profit Margin

Reported net profit margin started at 8.54% in 2018, remained nearly stable in 2019 at 8.5%, then declined significantly to 6.86% in 2020, likely reflecting external or internal challenges during that period. It rebounded sharply to 10.07% in 2021 and further increased to 10.98% in 2022. The adjusted net profit margin follows a similar trajectory but shows a slightly more optimistic trend, starting at 7.62% in 2018, increasing to 8.6% in 2019, dipping marginally in 2020 to 7.04%, then recovering strongly to 9.89% in 2021 and rising further to 11.41% in 2022. Overall, both reported and adjusted margins indicate recovery and improved profitability in the last two years, with the adjusted margin consistently higher, suggesting favorable impacts after tax adjustments.

Financial Leverage

Reported financial leverage displays a steady upward trend, increasing from 2.55 in 2018 to 2.97 in 2022, indicating a gradual rise in the use of debt or other liabilities relative to equity. Adjusted financial leverage mirrors this pattern but remains consistently lower than the reported figures, moving from 2.44 in 2018 to 2.73 in 2022. This upward progression suggests an increasing reliance on financial leverage over time, albeit with some moderation once deferred income tax adjustments are considered.

Return on Equity (ROE)

Reported ROE shows a significant dip in 2020, falling to 13.34% from nearly 19% in the prior two years, likely a consequence of the lower profit margin and other factors influencing equity returns. However, it recovers markedly to 22.75% in 2021 and climbs further to 28.85% in 2022, underscoring improved operational efficiency and profitability. Adjusted ROE follows a comparable pattern but is uniformly lower across all periods, starting at 16.23% in 2018 and ending at 27.58% in 2022, reflecting the effects of deferred tax considerations. The recovery and strong growth in recent years indicate enhanced shareholder value creation post-tax adjustments.

Return on Assets (ROA)

Reported ROA trends downward in 2020 to 4.71% from over 6% in previous years, then rebounds to 7.88% in 2021 and further to 9.71% in 2022. Adjusted ROA exhibits a slightly different pattern, with a minor increase in 2019, a dip in 2020, but notably ends higher at 10.09% in 2022 compared to reported values. This suggests improved asset utilization over time, particularly evident after accounting for deferred tax adjustments, which may enhance the efficiency perspective on asset base profitability.

Overall, the data reflects a company that experienced a dip in profitability and returns during 2020 but demonstrated strong recovery and growth in subsequent years. The use of financial leverage has gradually increased, possibly to support growth initiatives, and the adjusted metrics consistently portray a slightly more favorable financial position, highlighting the importance of considering deferred income tax impacts when assessing financial performance and stability.

The financial data reveals notable trends in the reported and adjusted earnings of the entity over the five-year period ending December 31, 2022. Both reported and adjusted net earnings demonstrate fluctuations, with an overall positive trajectory in the most recent years.

Reported Net Earnings

Reported net earnings attributable to the company increased from approximately 1.34 billion US dollars in 2018 to about 1.75 billion US dollars in 2022. A dip is evident in 2020, where earnings fell to around 854.9 million US dollars before rebounding significantly in 2021 and 2022. This pattern suggests temporary challenges in 2020, followed by strong recovery and growth in subsequent periods.

Adjusted Net Earnings

Adjusted net earnings follow a similar pattern to reported earnings, starting at about 1.19 billion US dollars in 2018, dropping in 2020 to 877.1 million US dollars, and then rising sharply to approximately 1.82 billion US dollars in 2022. The adjusted figures consistently remain lower than reported earnings, reflecting adjustments presumably related to non-recurring items or tax effects.

Reported Net Profit Margin

The reported net profit margin shows initial stability around 8.5% for 2018 and 2019, a decrease to 6.86% in 2020, and then a marked increase to 10.07% in 2021 and further to 10.98% in 2022. This trend indicates rising profitability efficiency after the 2020 downturn, suggesting improved operational performance or pricing power.

Adjusted Net Profit Margin

Adjusted net profit margin trends are aligned with reported margins, though adjusted margins start lower at 7.62% in 2018, increase to 8.6% in 2019, fall slightly in 2020 to 7.04%, and then rise substantially to 9.89% in 2021 and 11.41% in 2022. The adjusted margin consistently exceeds the reported margin in the later years, which may indicate better underlying earnings quality after adjusting for tax-related effects.

In summary, the data illustrates that despite a setback in 2020, both earnings and profitability margins have exhibited strong recovery and growth through 2021 and 2022. The adjusted data suggest that the core earning power of the entity has improved, with margins reaching their highest levels in the final year reported. These trends highlight resilience and an upward momentum in financial performance.

The analysis of the financial data over the five-year period reveals several notable trends in equity and leverage ratios.

Shareholders’ Equity (Reported vs. Adjusted)

Both reported and adjusted shareholders’ equity exhibit a downward trend from 2018 to 2022. Reported equity starts at approximately $7.02 billion in 2018 and decreases steadily to about $6.09 billion by the end of 2022. Similarly, adjusted equity follows the same trajectory but at slightly higher levels, beginning at approximately $7.35 billion in 2018 and declining to roughly $6.62 billion in 2022. The consistent gap between reported and adjusted equity suggests adjustments for tax-related items or deferrals that maintain a relatively stable premium over the reported figures.

Financial Leverage (Reported vs. Adjusted)

Financial leverage ratios show a gradually increasing pattern over the examined period. The reported financial leverage rises from 2.55 in 2018 to 2.97 in 2022, indicating a gradual increase in the use of debt relative to equity. The adjusted financial leverage mirrors this trend but maintains slightly lower values, moving from 2.44 to 2.73 over the same timeframe. This suggests that after accounting for deferred taxes or other adjustments, the leverage remains moderately lower, pointing to conservative adjustments impacting leverage assessment.

Overall Observations

The general decline in shareholders’ equity combined with the rising financial leverage indicates that the company has increased its financial obligations relative to its equity base throughout the period. The widening financial leverage ratios may signal enhanced risk exposure from a capital structure perspective. However, the adjusted figures indicate that when considering tax-related adjustments, both equity and leverage portray a somewhat less severe position, albeit following the same directional trend.

The analyzed financial data reflects the trends in earnings, equity, and return on equity (ROE) for the subject company over five consecutive years. The reported and adjusted figures illustrate variations that are critical for understanding financial performance and shareholder value.

Net Earnings

Reported net earnings attributable to the company experienced an overall upward trend, beginning at approximately $1.34 billion in 2018, peaking at $1.76 billion in 2022 after a dip in 2020 to $854.9 million. The adjusted net earnings follow a similar trajectory, starting at $1.19 billion in 2018, dropping to $877.1 million in 2020, and subsequently increasing to $1.82 billion in 2022. The decline in 2020 is notable and is likely reflective of adverse market or operational conditions during that period, with recovery evident in the subsequent years.

Shareholders’ Equity

Both reported and adjusted shareholders’ equity show a general declining trend over the period under review. Reported equity decreased from $7.02 billion in 2018 to approximately $6.09 billion in 2022. Adjusted equity similarly declined from $7.35 billion in 2018 to $6.62 billion in 2022. The decrease in equity suggests that despite fluctuations in earnings, the company's total equity base experienced shrinkage, which might be attributed to dividend distributions, share repurchases, or other equity adjustments.

Return on Equity (ROE)

Reported ROE exhibits an overall increasing trend from 19.05% in 2018 to 28.85% in 2022, with a dip in 2020 to 13.34%. Adjusted ROE mirrors this pattern, increasing from 16.23% in 2018 to 27.58% in 2022, with a low point of 12.84% in 2020. The rising ROE after 2020 indicates improved profitability relative to shareholders’ equity, underscoring enhanced efficiency or higher profit margins in the latter years.

In summary, the data reveals a significant dip in earnings and returns during 2020, followed by a robust recovery in 2021 and 2022. Despite this recovery in profitability, shareholders' equity has gradually decreased over the five-year span. The increased ROE in recent years evidences better utilization of the equity base to generate net earnings, a positive sign for investors concerning the company's financial efficiency and value generation capabilities.

The reported net earnings attributable to Trane Technologies plc exhibited notable fluctuations over the five-year period. Beginning at $1,337,600 thousand in 2018, earnings increased to $1,410,900 thousand in 2019, then declined substantially to $854,900 thousand in 2020. Following this downturn, earnings recovered significantly in 2021, reaching $1,423,400 thousand, and continued to rise to $1,756,500 thousand in 2022.

The adjusted net earnings followed a similar pattern with some distinctions in magnitude. Starting at $1,193,800 thousand in 2018, there was an increase to $1,427,700 thousand in 2019, followed by a decline to $877,100 thousand in 2020. Subsequently, adjusted earnings rose to $1,398,200 thousand in 2021 and further increased to $1,824,300 thousand in 2022. Notably, adjusted earnings in 2022 surpassed their 2019 level, indicating strong underlying financial performance after normalization adjustments.

Reported return on assets (ROA) showed variability consistent with the earnings trends. It decreased from 7.47% in 2018 to 6.89% in 2019, then dropped markedly to 4.71% in 2020. A recovery phase ensued with reported ROA increasing to 7.88% in 2021 and reaching a peak of 9.71% in 2022, reflecting improved asset utilization and profitability.

Adjusted ROA values presented a similar trajectory while maintaining slightly different percentages. Beginning at 6.66% in 2018, adjusted ROA increased marginally to 6.97% in 2019, then declined to 4.83% in 2020. The metric rebounded to 7.74% in 2021 and reached its highest value of 10.09% in 2022. The upward trend in adjusted ROA in the last two years suggests enhanced operational efficiency when excluding the impact of tax and other adjustments.

Summary of Trends

Both reported and adjusted net earnings experienced a significant dip in 2020, likely attributable to external challenges or extraordinary events, but showed strong recovery in the subsequent years, culminating in record-high figures in 2022.

The pattern in ROA measures mirrors that of earnings, with a decline in 2020 followed by progressive improvement through 2022.

Adjusted figures generally provide a somewhat smoother trend and higher absolute values in the later years, pointing to the positive effect of adjustments in portraying underlying profitability and asset efficiency.

The consistent improvement in adjusted ROA in 2021 and 2022, surpassing reported ROA, indicates a strengthening financial position on a normalized basis.