Resideo Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023, compared with the three months ended April 2, 2022. Resideo manufactures home comfort, safety and security products and operates Products and Solutions and ADI Global Distribution segments. Results are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1.549 billion | $1.506 billion | Up 2.9% |
| Gross profit / margin | $420 million / 27.1% | $438 million / 29.1% | Profit down $18 million; margin down 200 bps |
| Operating income / margin | $138 million / 8.9% | $172 million / 11.4% | Down 19.8%; margin down 250 bps |
| Net income | $57 million | $87 million | Down 34.5% |
| Diluted EPS | $0.38 | $0.58 | Down $0.20 |
| Cash from operating activities | $(4) million | $(59) million | $55 million improvement |
| Capital expenditures | $20 million | $19 million | Up $1 million |
Revenue and segments: Products and Solutions revenue was $658 million, up 6%; operating income was $117 million, down $36 million. ADI Global Distribution revenue was $891 million, up 0.5%; operating income was $72 million, down $8 million. Revenue growth reflected $121 million from acquisitions and $54 million from higher selling prices, partly offset by $105 million lower volume and approximately $27 million of unfavorable foreign exchange. Products and Solutions growth included First Alert acquisition revenue; ADI included BTX acquisition revenue.
Cash, liquidity and debt: Cash and cash equivalents were $292 million at April 1, 2023, versus $326 million at year-end. Gross debt was $1.428 billion; the balance-sheet carrying amount, net of financing costs and current debt, was $1.402 billion of long-term debt plus $12 million current debt. The company reported $1.414 billion of total debt outstanding and $12 million due within 12 months. The $500 million revolving facility had no borrowings or letters of credit outstanding. Management said existing cash and credit availability were sufficient for at least the next 12 months. The Term B facility’s weighted-average interest rate was 7.13%; management estimated a 100-basis-point rate increase would add approximately $6 million to annual interest expense.
Material changes and management commentary
- Revenue rose modestly, but lower sales volume, customer destocking, weaker retail-channel sales and softer security and energy demand weighed on results. Management also cited moderating end demand and inventory rebalancing.
- Gross margin contracted as higher manufacturing costs reduced margin by 220 bps and lower volume leverage by 70 bps. Acquisitions added 70 bps, while pricing and mix added 20 bps.
- Interest expense increased $7 million to $18 million, reflecting higher rates and the additional $200 million borrowed under the credit agreement in 2022.
- Management said supply-chain and logistics conditions were expected to continue normalizing during 2023, but visibility was limited amid macroeconomic uncertainty. It cited interest rates, inflation, financing availability, consumer spending, housing conditions, labor costs, foreign exchange and the Ukraine conflict as uncertainties. The filing provides no quantified earnings or revenue guidance.
- BTX Technologies was acquired in January 2023 and is included in ADI Global Distribution. The acquisition expands the company’s professional audio-visual and private-brand offerings.
Contingencies, risks and unusual items
- Honeywell indemnification obligations: Recorded liabilities under the Reimbursement and Tax Matters Agreements totaled $724 million at April 1, 2023, including $620 million for the Reimbursement Agreement and $104 million for tax matters. The company paid Honeywell $35 million during the quarter and recorded $41 million of Reimbursement Agreement expense. Potential payments under the Reimbursement Agreement could reach $140 million annually, subject to its terms; timing and ultimate costs are uncertain and could be material.
- Environmental obligations: Recorded environmental liabilities were $22 million. The filing notes continuing potential environmental claims and costs.
- Litigation: A proposed settlement of derivative litigation remained subject to court approval and included governance reforms and up to $1.6 million in plaintiffs’ legal fees. A putative consumer class action alleges certain alarm-control products did not meet cited standards; the company disputes the claims and could not estimate potential liability or defense costs.
- Other items: The company recognized a $3 million non-cash pension settlement loss. It also recorded $2 million of restructuring expense and expects to continue restructuring initiatives, with future costs not yet estimable.
- The filing reported no material changes to the risk factors in the 2022 Form 10-K. Disclosure controls were assessed as effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether lower volumes and customer destocking persist, and whether pricing and acquisitions can offset them without further margin erosion.
- The extent of exposure to higher borrowing costs, including the status of the planned LIBOR-to-SOFR transition and interest-rate swaps.
- Cash-flow and liquidity needs, particularly scheduled debt payments, operating leases and the substantial Honeywell reimbursement obligations.
- Developments in environmental matters and the product-related class action, including any change in the company’s ability to estimate potential costs.
- Integration and contribution of BTX and other acquisitions, alongside expected restructuring costs and outcomes.