Resideo Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended July 3, 2021; comparisons are to the periods ended June 27, 2020. Amounts are in millions except per-share data. Resideo makes and distributes residential comfort, thermal, security, and related technology products through Products & Solutions and ADI Global Distribution.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,477 | $1,029 | $2,896 | $2,208 |
| Gross profit | $381 | $236 | $749 | $520 |
| Gross margin | 26% | 23% | 26% | 24% |
| Operating profit (loss) | $121 | $(6) | $251 | $28 |
| Net income (loss) | $58 | $(76) | $107 | $(97) |
| Diluted EPS | $0.39 | $(0.62) | $0.72 | $(0.79) |
- Q2 revenue grew 44% and first-half revenue 31%, mainly from higher volume; prior-year comparisons were affected by COVID-19 disruption.
- Q2 SG&A was $238, up $15 year over year; first-half SG&A was $455, unchanged. Research and development was $22 in Q2 and $43 for the half.
- Operating cash flow was $99 for the first half, versus $71 a year earlier. Investing cash use was $42, including $35 of capital expenditures and $10 net acquisition payments. Cash increased $62 to $579.
- At July 3, cash was $579; current assets were $2,356 and current liabilities $1,511. Debt carrying amount was $1,194, including $10 current maturities and $1,184 long-term. The $500 revolving facility had no borrowings or letters of credit outstanding.
Material changes and segment results
- Products & Solutions external revenue increased 50% to $598 in Q2 and 38% to $1,204 for the first half. Segment operating profit rose to $129 from $42 in Q2 and to $259 from $100 for the half.
- ADI Global Distribution revenue increased 39% to $879 in Q2 and 27% to $1,692 for the half. Operating profit rose to $66 from $31 in Q2 and to $125 from $79 for the half. The segment completed acquisitions of Norfolk Wire & Electronics and Shoreview Distribution during 2021.
- Gross margin improvement reflected volume, sourcing productivity, sales mix, and lower obsolete-inventory charges; higher freight costs partly offset those benefits. Management also cited material and labor inflation.
- Q2 costs included a $16 net expense for the securities-litigation settlement, after expected insurance recoveries, contributing to higher SG&A. The filing reports the settlement agreement in principle was reached July 30, 2021, subject to court approval and customary conditions.
Debt, outlook, risks, and contingencies
- In February 2021, Resideo refinanced its credit facilities with a $950 term B loan and a $500 revolving facility, and redeemed $140 principal amount of 6.125% notes. Debt-extinguishment costs of $23 were recorded in the first quarter. The term loan balance was $948 at July 3, with a 2.75% interest rate. Interest-rate swaps covering $560 of variable-rate exposure convert that portion to a weighted-average fixed base rate of 0.9289% for three to five years.
- Management said cash, cash equivalents, and available credit were expected to meet capital requirements for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Management described continuing uncertainty from COVID-19 and its variants, global shortages of key materials and components, freight and input-cost inflation, and possible supplier or customer disruption. It said it would focus on expense control, production alignment, and productivity.
- Under the Reimbursement Agreement with Honeywell, Resideo recorded a $593 liability at July 3 and paid $70 in the first half. Annual payments are subject to a $140 cap; the agreement may require payments through 2043, depending on specified conditions. Related expense was $72 for the first half.
- Environmental liabilities were $22; the ultimate timing and amount remain uncertain and could be material. A $55 securities-litigation settlement, with approximately $39 of expected insurance recoveries, was accrued; approval remained outstanding. Related shareholder derivative cases were also pending. The company said other legal matters were not material to its interim financial statements.
- Other risks include dependence on the Honeywell trademark license, customer and supplier relationships, product quality and warranties, international and foreign-exchange exposure, and interest-rate risk. Management reported no material change to the risk factors in its 2020 Form 10-K.
Investor verification points
- Confirm court approval, final terms, payment, and insurance recovery for the securities-litigation settlement.
- Track cash conversion and working-capital needs as revenue grows, especially receivables and inventory.
- Monitor supply availability, freight costs, and inflation for their effect on margins and product delivery.
- Review debt balances, covenant headroom, variable-rate exposure, and ongoing Honeywell reimbursement obligations.
- Assess developments in environmental matters and shareholder derivative litigation, where ultimate outcomes may differ from recorded estimates.