Resideo Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparable period ended March 28, 2020. Unaudited results are prepared under U.S. GAAP. Resideo manufactures comfort, residential thermal and security products and operates ADI Global Distribution, a low-voltage products distributor.
Financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $1.419 billion | $1.179 billion |
| Gross profit / margin | $368 million / 26% | $284 million / 24% |
| Operating profit / margin | $130 million / 9.2% | $34 million / 2.9% |
| Net income (loss) | $49 million | $(21) million |
| Diluted EPS | $0.33 | $(0.17) |
| Operating cash flow | $5 million | $(74) million |
Revenue rose 20%, primarily on higher volume. Products & Solutions external revenue increased 28% to $606 million and operating profit rose to $130 million from $58 million. ADI Global Distribution revenue grew 15% to $813 million and operating profit increased to $59 million from $48 million. ADI results benefited in part from three additional selling days.
Cash and cash equivalents were $508 million at quarter-end, versus $517 million at December 31, 2020. Total current assets were $2.220 billion and current liabilities $1.446 billion. Debt was $1.196 billion, including $10 million of current maturities and $1.186 billion long-term. No borrowings or letters of credit were outstanding under the $500 million revolving facility. The filing states that cash and available credit are expected to cover capital requirements for at least the next 12 months.
Investing cash outflow was $24 million, including $19 million of capital expenditures and other intangible spending and $5 million for acquisitions. Financing cash flow was $13 million. A simple operating-cash-flow-less-capital-expenditures measure was negative $14 million; the company does not present this as a reported free-cash-flow measure.
Changes, management commentary and outlook
- Gross margin improved 2 percentage points. Management attributed the improvement to higher volumes, sourcing productivity and lower Spin-Off and restructuring costs, partly offset by higher freight costs.
- SG&A declined $12 million to $238 million. Lower restructuring, transformation and other cost reductions were partly offset by commercial investment, foreign exchange, bonuses, and labor and other inflation.
- Operating cash flow improved by $79 million year over year, primarily due to higher profitability, but remained modest at $5 million. Accrued liabilities used $66 million of cash during the quarter.
- The company refinanced its credit facilities in February, issuing a $950 million seven-year Term B loan and establishing a $500 million five-year revolver. It redeemed $140 million of 6.125% notes at 106.125% of par plus accrued interest. These transactions generated $23 million of debt-extinguishment costs. The Term B interest rate was 2.75% at quarter-end; swaps covering $560 million of variable-rate debt provided partial rate protection.
- Management reported that demand improved from the pandemic-affected period, while noting continuing uncertainty, constrained supply, inflation and freight pressures. It described business conditions as challenging and said it would focus on cost control, matching production to demand, and productivity. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Under its Reimbursement Agreement with Honeywell, Resideo recorded a $36 million quarterly expense and paid $35 million. The related liability was $592 million at April 3, 2021; annual payments are generally capped at $140 million, subject to the agreement. The company states that ultimate timing and costs are uncertain and could be material.
- Tax Matters Agreement obligations to Honeywell for future tax payments were $131 million at quarter-end. Environmental liabilities were $22 million.
- A securities class action motion to dismiss was denied on March 30, 2021; defendants filed an answer in April. Related shareholder derivative litigation was also disclosed. The company intends to defend the actions; outcomes are uncertain.
- COVID-19 and variants, supply and component availability, freight and input-cost inflation, customer and end-market demand, foreign exchange, interest rates, competition, cybersecurity, product liability and environmental matters are among the disclosed risks. The filing said there were no material changes to risk factors in the 2020 Form 10-K.
Important facts for investors to verify
- Whether revenue growth and margin gains persist after considering the prior-year pandemic comparison, additional ADI selling days, freight costs and inflation.
- Cash conversion and working-capital trends, particularly given only $5 million of operating cash flow despite $49 million of net income.
- Debt terms, variable-rate exposure and available revolver capacity following the refinancing and note redemption.
- Future Honeywell reimbursement and tax-related payments, and any developments affecting the securities or derivative litigation.
- The pace of supply recovery, COVID-19 impacts, and whether management provides more specific forward guidance in subsequent filings.