Resideo Technologies, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Reports the three and nine months ended September 30, 2018, compared with the same 2017 periods. Resideo supplies residential comfort, care and security products and distributes security and low-voltage products through its Products and Distribution segments. The results are carve-out financial statements derived from Honeywell’s records; Resideo was still part of Honeywell during the periods reported and became independent on October 29, 2018. The filing cautions that historical results may not represent the costs or performance of the standalone company.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $1,200 million | $1,152 million | $3,561 million | $3,310 million |
| Gross profit / margin | $347 million / 28.9% | $336 million / 29.2% | $1,036 million / 29.1% | $955 million / 28.9% |
| SG&A | $219 million | $214 million | $648 million | $647 million |
| Other expense | $146 million | $65 million | $322 million | $165 million |
| Income (loss) before taxes | $(18) million | $58 million | $66 million | $144 million |
| Tax expense (benefit) | $(329) million | $35 million | $(323) million | $89 million |
| Net income | $311 million | $23 million | $389 million | $55 million |
| Operating cash flow | Not presented quarterly | $375 million | $180 million |
Q3 sales rose 4.2%; nine-month sales rose 7.6%. Nine-month growth reflected volume, price and currency. Segment profit was $131 million in Q3 versus $128 million and $403 million for nine months versus $341 million. Products segment profit increased 21% year to date; Distribution increased 11%.
Q3 gross margin declined 0.3 percentage point, as inflation and mix more than offset pricing; nine-month margin improved 0.2 point. Cash from operations increased year over year, but included significant noncash deferred-tax benefits and working-capital movements. Inventory used $142 million of cash in the first nine months. Capital expenditures were $63 million, versus $38 million.
At September 30, cash was $184 million; current assets were $1,668 million and current liabilities $1,400 million. The filing’s historical balance sheet does not show third-party debt: Honeywell debt and related interest were not allocated to Resideo. Subsequent to quarter-end, Resideo issued $400 million of 6.125% senior notes due 2026, borrowed $475 million under a Term B facility and $350 million under a Term A facility, and drew $135 million on its revolving facility on November 13. These disclosed borrowings total $1.36 billion, excluding fees and other adjustments. The facilities have floating-rate exposure and financial covenants, including leverage and interest-coverage tests.
Material changes, outlook and risks
- Net income substantially exceeded the prior year despite a Q3 pretax loss, principally because of a $329 million tax benefit. The tax benefit included adjustments to provisional U.S. tax-reform amounts and tax benefits from pre-spin restructuring; the company said its tax accounting was not finalized. Nine-month tax benefit was $323 million.
- Other expense increased primarily because of environmental accruals for remediation plans and corrective measures. Recorded environmental liabilities rose to $735 million from $537 million at year-end 2017; nine-month environmental spending was $124 million. The company said it could not reasonably estimate additional future exposure and that ultimate costs could be material.
- Under a post-spin agreement, a Resideo subsidiary must reimburse Honeywell for 90% of specified environmental and related claims, net of specified recoveries, subject to a $140 million annual cap for liabilities arising in a given year. The filing identifies consequential damages and legal and defense costs among covered amounts.
- Management expected 2018 capital expenditures of approximately $60 million, excluding spin-related spending. It expected approximately $24 million of incremental pretax savings from repositioning actions in 2018 versus 2017, with full-year repositioning cash spending of approximately $11 million.
- Management cited construction, renovation, connected-device adoption and demand for distributor training and rapid fulfillment as supportive trends. It also noted a temporary supply-chain issue related to the spin-off affecting Products in Q3. Standalone costs, including new corporate functions, systems, transition services and public-company expenses, were expected after separation.
- Other risks include foreign-exchange and material-cost exposure, environmental and other litigation, and reliance on post-spin financing and cash generation. The filing reported disclosure controls effective at a reasonable-assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects one-time tax adjustments, and the eventual tax accounting and cash-tax consequences.
- The scope, timing and cash cost of environmental liabilities, including the reimbursement agreement’s application and annual cap.
- Post-spin debt balances, floating interest costs, covenant headroom, and cash available after settlement of Honeywell-related amounts and spin costs.
- Standalone operating costs, transition-service duration, supply-chain normalization and progress against management’s savings and capital-spending expectations.
- The spin distribution ratio is inconsistent within the filing text: the notes state one Resideo share for every six Honeywell shares, while the MD&A states one-for-one. Verify the ratio against the controlling spin-off documents.