Resideo Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended April 2, 2022; comparisons are with the three months ended April 3, 2021. Amounts are in millions of dollars unless otherwise noted. Resideo makes and distributes home comfort, safety, security and related products through Products & Solutions and ADI Global Distribution.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1,506 | $1,419 | +6% |
| Gross profit / margin | $434 / 28.8% | $368 / 25.9% | Margin +2.9 percentage points |
| Operating profit | $172 | $130 | +32% |
| Net income | $87 | $49 | +78% |
| Diluted EPS | $0.58 | $0.33 | +$0.25 |
| Operating cash flow | $(59) | $5 | Down $64 |
| Capital expenditures | $19 | $19 | No change |
Revenue growth was attributed primarily to price increases. Management said gross margin benefited from price and favorable sales mix, as well as the timing of selling lower-cost inventory. Operating profit was about 11.4% of revenue, versus 9.2% a year earlier. Other expense was $40, including $41 of Reimbursement Agreement expense; interest expense was $11 and tax expense was $34.
Segments
- Products & Solutions: External revenue of $619, up 2%; operating profit of $153, up 18%. Price increases and cost reductions helped, partly offset by lower volume, mix, investment, freight and labor costs.
- ADI Global Distribution: Revenue of $887, up 9%; operating profit of $80, up 36%. Growth reflected price increases, higher volume, acquisitions and strong U.S. and Canada performance.
Balance sheet, liquidity and debt
At April 2, 2022, cash and equivalents were $244, down from $779 at year-end 2021. Current assets were $2,339 and current liabilities $1,546. Inventory rose to $922 from $740; accounts receivable rose to $1,008 from $876. Total debt was $1,424, comprising $300 of 4.0% notes due 2029 and a $1,140 variable-rate term loan, net of $16 in deferred financing costs; $12 was current. There were no borrowings or letters of credit under the $500 revolving facility. Cash less reported debt was approximately $(1,180).
Operating cash use of $59 primarily reflected a $68 working-capital increase. Investing cash use was $665, including $633 for acquisitions; financing provided $189, including $200 of new term-loan proceeds. The company said existing cash and credit availability were sufficient for requirements through at least the next 12 months and the longer term.
Material developments, outlook and risks
- Resideo acquired First Alert on March 31 for $620 cash, subject to post-closing adjustment, and Arrow Wire and Cable in February for $15. First Alert’s preliminary purchase accounting included $464 of goodwill; final allocation was pending. The acquisitions’ reported-quarter impact was described as not material.
- The term loan was increased by $200 in March, with part of the proceeds used to finance First Alert. The company reported compliance with debt covenants. Of $1,140 variable-rate debt, $560 was covered by interest-rate swaps; management estimated a 100-basis-point rate increase would add about $6 to annual interest expense.
- Management cited component shortages, labor constraints and inflation in materials and freight, alongside COVID-related and broader macroeconomic uncertainty. Mitigation efforts included supplier management, contingency planning, production alignment and productivity measures. No specific financial guidance was provided in the filing.
- Honeywell-related obligations remain significant and uncertain. The Reimbursement Agreement liability was $603, with a $140 annual payment cap; the company said future amounts and timing cannot be reliably determined and could be material. Tax Matters Agreement liability was $128. Balance-sheet obligations payable under indemnification agreements were $592, with another $140 in accrued liabilities.
- A securities class action settlement for $55 was approved by the court; approximately $39 of insurance recoveries had been received. Related derivative actions remained subject to settlement discussions. The filing said there were no material changes to previously disclosed risk factors.
Investor facts to verify
- Whether price increases and favorable mix can offset continuing input, freight and labor inflation without relying on lower-cost inventory timing.
- Cash conversion and working-capital trends, particularly the sharp inventory and receivables increases and negative operating cash flow.
- Final First Alert purchase-price allocation, acquired-business contribution and integration costs; the preliminary goodwill amount is subject to adjustment.
- Variable-rate debt exposure, refinancing or repayment plans, and the size and timing of Honeywell indemnification and reimbursement payments.
- Potential outcomes and costs of the pending derivative litigation and any changes in supply availability or macroeconomic conditions.