Resideo Technologies, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Resideo manufactures home comfort, safety, energy and security products and operates ADI Global Distribution, a wholesale distributor of low-voltage products. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparatives are the periods ended October 1, 2022.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.554 billion | $1.618 billion | $4.705 billion | $4.810 billion |
| Gross profit / margin | $417 million / 26.8% | $430 million / 26.6% | $1.273 billion / 27.1% | $1.335 billion / 27.8% |
| Operating income / margin | $109 million / 7.0% | $155 million / 9.6% | $400 million | $513 million |
| Net income | $21 million | $63 million | $128 million | $244 million |
| Diluted EPS | $0.14 | $0.42 | $0.86 | $1.64 |
- Q3 revenue declined 4.0%, primarily due to lower volume, partly offset by pricing, currency and acquisitions. Management cited customer destocking and weaker demand, particularly for air and energy products.
- Q3 gross margin improved 20 basis points year over year as lower material, freight and other manufacturing costs more than offset inventory normalization and unfavorable mix. Nine-month gross margin fell 70 basis points.
- Q3 restructuring and impairment expense was $38 million; nine-month expense was $42 million, primarily related to workforce reductions. Without these expenses, reported operating income would have been higher, but the filing does not provide an adjusted operating-income figure.
- Other expense was $56 million in Q3 and $138 million year to date, primarily reflecting Honeywell Reimbursement Agreement expense of $43 million and $128 million, respectively. Net interest expense was $16 million in Q3 and $50 million year to date.
Segments
- Products and Solutions: Q3 revenue was $654 million, down 7%; operating income was $107 million versus $124 million. Lower volume and $25 million of restructuring costs weighed on results, partly offset by lower manufacturing input costs. Nine-month revenue was $1.989 billion and operating income was $352 million.
- ADI Global Distribution: Q3 revenue was $900 million, down 1.2%; operating income was $60 million versus $78 million, including $10 million of restructuring costs. Nine-month revenue was $2.716 billion and operating income was $211 million.
Cash flow, debt and liquidity
- Cash from operating activities was $60 million in Q3, versus $37 million in Q3 2022. For the first nine months, operating cash flow was $177 million, versus $13 million; management attributed the increase mainly to improved working-capital movements, partly offset by lower net income.
- Nine-month capital expenditures were $74 million, compared with $34 million. Investing cash outflow was $90 million, versus $707 million, primarily because the prior-year period included the First Alert acquisition. Financing cash outflow was $47 million; the company repurchased $30 million of shares and made $9 million of debt repayments.
- Cash and cash equivalents were $368 million at September 30, 2023. Debt carrying value was approximately $1.409 billion, including $12 million current; gross principal debt was $1.423 billion. The $500 million revolving credit facility had no borrowings or letters of credit outstanding. The company said it was in covenant compliance and believed available cash and credit were sufficient for at least 12 months.
- The variable-rate Term B facility had a weighted-average rate of 7.69%, excluding swaps. Swaps with $560 million notional value hedge part of the variable-rate debt. Management estimated a 100-basis-point rate increase would raise annual interest expense by approximately $6 million.
Outlook, developments and risks
- Updated 2023 outlook: revenue of $6.200–$6.250 billion, gross margin of 26.6%–27.2%, operating income of $535–$555 million and GAAP EPS of $1.30–$1.41. Q4 outlook is revenue of $1.495–$1.545 billion, gross margin of 26.0%–27.0%, operating income of $135–$155 million and GAAP EPS of $0.43–$0.53. The outlook includes an estimated $24 million gain on the Genesis sale.
- Management cited continued demand moderation and limited visibility amid customer inventory rebalancing, elevated interest rates, inflation and labor-cost uncertainty, softer housing activity and consumer spending, foreign-exchange effects, and geopolitical conflicts. It expected supply-chain and logistics conditions to continue normalizing.
- The Genesis Wire & Cable sale to Southwire closed in October 2023. The agreed cash consideration was $87.5 million subject to customary adjustments; estimated pre-tax proceeds were approximately $85 million.
- Restructuring programs are expected to be implemented over the next 12–24 months; the company could not estimate costs for future phases or total program costs. The company also acquired cloud-services provider Sfty SA in August 2023.
- Honeywell-related indemnification liabilities totaled $739 million at quarter-end, including $637 million under the Reimbursement Agreement. The company paid Honeywell $105 million under that agreement during the first nine months. Payments could reach $140 million per year, excluding potential late fees, and ultimate costs and timing remain uncertain.
- Other matters include a putative product-related class action and a California employee class action; the company said it could not estimate potential exposure in either case. It also reported environmental liabilities of $22 million. Management said there were no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether demand, customer destocking and housing-market conditions track the assumptions underlying the updated full-year and Q4 outlook.
- How the $739 million Honeywell indemnification liability, future payments and related non-deductible expenses affect cash flow and earnings.
- Whether restructuring produces expected cost savings, and the eventual total costs and timing of the programs.
- Genesis sale proceeds and the estimated gain recognized after the October closing.
- Exposure to variable interest rates, debt covenants and the potential financial impact of pending legal matters.