Resideo Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 7, 2019. Resideo provides home comfort, security and energy-related products and software, and distributes low-voltage electronic and security products through ADI Global Distribution. It became independent from Honeywell in October 2018, so 2018 comparative results are pre-spin-off combined results and may not be directly comparable with post-spin-off results.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,242m | $1,196m | $2,458m | $2,361m |
| Gross profit / margin | $296m / 24% | $346m / 29% | $609m / 25% | $689m / 29% |
| Operating profit | $42m | $129m | $127m | $260m |
| Net income (loss) | $(11)m | $33m | $37m | $78m |
| Diluted EPS | $(0.09) | $0.27 | $0.30 | $0.64 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(37)m | $258m |
- Q2 revenue increased 4%; volume and price each contributed growth, partly offset by a 2% foreign-currency headwind. First-half revenue also rose 4%.
- Q2 gross margin declined five percentage points. Management cited unfavorable sales mix, material and labor inflation, fixed production costs, repositioning costs, and costs reclassified from corporate allocations.
- Q2 SG&A was $254m, up $37m year over year; first-half SG&A was $482m, up $53m. Drivers included spin-off costs, Honeywell trademark royalties, legal expenses, acquisitions, repositioning and labor inflation.
- Q2 other expense was $35m versus $124m; first-half other expense was $19m versus $176m. Lower environmental-related expense and an $81m reduction in the Honeywell obligation tied to property-sale proceeds contributed to the decline.
- At June 30, cash was $142m, down from $265m at year-end 2018. Current assets were $1,846m and current liabilities $1,559m. Inventory was $722m, up from $628m; receivables were $835m, with reported DSO of 60 days and inventory days of 69.
- Total debt was approximately $1,191m, including $22m due within one year; $814m carried variable rates. The $350m revolving facility had no borrowings or letters of credit outstanding. Obligations payable to Honeywell totaled $581m on the balance sheet.
- First-half investing cash outflow was $55m, including $38m for capital expenditures and software and $17m for acquisitions. Financing cash outflow was $31m. Cash declined by $123m during the first half.
Segments and material changes
- Products & Solutions: External revenue increased 4% to $537m in Q2, while Segment Adjusted EBITDA fell 36% to $70m. First-half revenue rose 5% to $1,088m, while adjusted EBITDA fell 33% to $151m. Management attributed the EBITDA decline chiefly to product mix, production costs, acquisition impacts and Honeywell trademark royalties.
- ADI Global Distribution: Q2 revenue increased 4% to $705m and adjusted EBITDA rose 12% to $46m. First-half revenue increased 4% to $1,370m and adjusted EBITDA rose 14% to $92m, supported by volume and productivity, partly offset by foreign exchange and inflation.
- The company recorded $25m of net repositioning charges in the first half, primarily severance. The plan is expected to generate $10m of incremental pretax savings in 2019 versus 2018; management expected a further $11m of repositioning expense in 2019.
- Three acquisitions—Buoy Labs, Whisker Labs and LifeWhere—were completed for a combined purchase price of approximately $17m. Their reported financial impact was immaterial.
Outlook, risks and contingencies
- Management said existing cash and available credit were expected to meet capital requirements for at least the next 12 months, while noting that additional funding could be required or elected. No revenue or earnings guidance was provided in the filing text.
- Full-year 2019 capital expenditures were expected to be $104m, including $45m for stand-alone infrastructure investments.
- Under the Honeywell Reimbursement Agreement, Resideo generally owes 90% of specified environmental payments, net of certain recoveries, subject to a $140m annual cap. It paid $70m in the first half. The recorded agreement liability was $568m at June 30; the company said ultimate costs and timing could not be reasonably determined and could be material.
- The company also indemnifies Honeywell for specified taxes; $153m was included in obligations payable to Honeywell at June 30. Trademark royalties are 1.5% of relevant net revenue; Q2 fees were $6m and first-half fees $13m.
- Other risks include product warranty and liability claims, litigation, environmental matters, raw-material and labor inflation, foreign exchange, interest-rate exposure, customer inventory and receivable risks, and the challenges and costs of operating as a recently independent company. Management reported no material changes to the risk factors in its 2018 Form 10-K.
- Disclosure controls were concluded effective at a reasonable assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether margin pressure and the sharp decline in Products & Solutions adjusted EBITDA persist, and whether planned cost savings offset inflation and stand-alone costs.
- Cash conversion and working-capital trends, particularly the inventory build and negative first-half operating cash flow.
- The future cash burden and estimation uncertainty of environmental reimbursements to Honeywell, including annual payments, recoveries and the $140m cap.
- Debt service and liquidity under variable interest rates, and whether the stated 12-month liquidity expectation remains supportable.
- Comparability of year-over-year results given the spin-off, prior Honeywell cost allocations, new royalties and post-separation expenses.