Resideo Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended October 1, 2022. Unaudited results; amounts are in millions of dollars except per-share data.
Business context
Resideo manufactures home comfort, energy, safety and security products and operates ADI Global Distribution, a wholesale distributor of low-voltage security and related products. It reports Products & Solutions and ADI Global Distribution segments. First Alert, acquired March 31, 2022, is included in Products & Solutions; the company also completed acquisitions of Arrow Wire and Cable and Electronic Custom Distributors during 2022.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $1,618 | $1,496 | $4,810 | $4,392 |
| Gross profit | $430 | $421 | $1,335 | $1,182 |
| Gross margin | 27% | 28% | 28% | 27% |
| Operating income | $155 | $167 | $513 | $418 |
| Net income | $63 | $68 | $244 | $175 |
| Diluted EPS | $0.42 | $0.46 | $1.64 | $1.18 |
- Q3 revenue rose 8%; acquisitions contributed $135 and higher selling prices $99. Lower organic volume of $61 and unfavorable foreign exchange of about $51 partly offset growth. For the nine months, revenue rose 10%, with acquisition revenue of $288 and price increases of $305, partly offset by foreign exchange of $115 and lower volume of $60.
- Q3 gross margin declined about 100 basis points, reflecting inflation-related costs and weaker volume leverage, partly offset by price and mix. Nine-month gross margin improved 100 basis points, mainly from pricing and favorable mix, partly offset by material costs.
- Q3 operating income fell $12 and net income fell $5 year over year. Nine-month operating income rose $95 and net income rose $69.
- Segment revenue and operating income: Products & Solutions was $707 and $124 in Q3 (versus $631 and $157); ADI Global Distribution was $911 and $78 (versus $865 and $73). Products & Solutions’ Q3 operating margin fell to 18% from 25%; ADI’s rose to 9% from 8%. For nine months, segment revenue was $2,090 and $2,720, respectively, and operating income was $431 and $244.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $13, down from $203. Working-capital uses included $142 for receivables and $129 for inventory; management attributed the year-over-year decline primarily to increased cash use in receivables, inventory and accrued liabilities.
- Investing cash outflow was $707, including $660 for acquisitions; capital expenditures were $34. Financing cash inflow was $182, including $200 of term-loan proceeds. Cash, cash equivalents and restricted cash ended at $255, versus $779 at year-end 2021; balance-sheet cash and cash equivalents were $252.
- Debt totaled $1,419 before unamortized financing costs, including $300 of 4.00% senior notes due 2029 and $1,134 on the variable-rate Term B facility. The company reported $12 of current maturities and $1,407 of long-term debt, net. It had no borrowings or letters of credit under its $500 revolving facility and was in covenant compliance.
- Management reported approximately $752 of liquidity and believes cash and available credit are sufficient for capital needs through at least the next 12 months. Term B’s weighted-average interest rate was 5.12%; a 100-basis-point rate change was estimated to affect annual interest expense by approximately $6.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said visibility was more limited than usual amid macroeconomic uncertainty, supply-chain disruptions, inflation and foreign-exchange pressures. It cited lower sales volumes, rising labor, materials and freight costs, and a stronger U.S. dollar; price increases and supplier management were among its responses.
- Honeywell-related indemnification liabilities totaled $715 at October 1, 2022, including $608 under the Reimbursement Agreement and $107 under the Tax Matters Agreement. The company paid Honeywell $105 under the Reimbursement Agreement in the first nine months. Reimbursement payments are generally subject to a $140 annual cap, and future amounts and timing could be material but are not currently estimable.
- Other expense included $13 of costs related to settlement of pre-spin-off litigation. A proposed settlement reached in October 2022 includes governance reforms and $1.6 of plaintiffs’ legal fees, subject to final documentation and court approval. A separate putative product-related class action is at an early stage; Resideo said it cannot estimate potential liability.
- Foreign-currency translation contributed a $165 loss to nine-month other comprehensive income; Q3 comprehensive loss was $9 despite net income of $63. Interest-rate swaps had a $46 fair value asset at quarter-end.
- Management reported no material changes to the risk factors in its 2021 Form 10-K. Risks include demand cyclicality, competition, supply availability, acquisition integration, inflation, foreign exchange, cybersecurity, product and environmental liabilities, and obligations under Honeywell agreements.
Investor facts to verify
- Whether cash conversion improves as receivables and inventories normalize, given operating cash flow of only $13 year to date.
- How much revenue and profit growth is organic versus attributable to acquisitions and price increases, and whether lower volume persists.
- Whether Products & Solutions can recover Q3 margin pressure while inflation and foreign-exchange headwinds continue.
- The pace of debt growth, variable-rate exposure, and the future cash requirements of the Honeywell indemnification agreements.
- Final purchase accounting for acquisitions and outcomes of the pending settlements and product litigation.