Resideo Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2023; comparable periods ended July 2, 2022. Amounts are in millions of dollars, except per-share data. Resideo manufactures home comfort, safety and security products and distributes low-voltage products through its Products and Solutions and ADI Global Distribution segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,602 | $1,686 | $3,151 | $3,192 |
| Gross profit / margin | $436 / 27.2% | $467 / 27.7% | $856 / 27.2% | $905 / 28.4% |
| Operating income / margin | $153 / 9.6% | $186 / 11.0% | $291 / 9.2% | $358 / 11.2% |
| Net income | $50 | $94 | $107 | $181 |
| Diluted EPS | $0.34 | $0.63 | $0.72 | $1.22 |
| Operating cash flow | $121 per MD&A | $35 per MD&A | $117 | $(24) |
Second-quarter revenue declined 5.0%, mainly from lower sales volume ($144) and unfavorable currency ($5), partly offset by higher prices ($45) and acquisitions ($19). Gross margin fell 50 basis points as customer inventory normalization and product mix outweighed lower material, freight and other costs. For the first half, revenue declined 1.3%; gross margin decreased 120 basis points. Higher interest expense and income taxes also weighed on earnings. The MD&A reports second-quarter operating cash flow of $121, while the six-month cash flow statement reports $117; the filing does not provide a reconciliation of the quarterly figure.
Segments
- Products and Solutions: Q2 revenue $677, down 11%; operating income $128, down 17%. Lower volumes and unfavorable mix more than offset lower manufacturing input costs. First-half revenue was $1,335, down 3.5%, and operating income was $245, down 20.2%.
- ADI Global Distribution: Q2 revenue $925, slightly higher year over year; operating income $79, down 8%, reflecting mix, lingering inflation effects and lower volume. First-half revenue was $1,816, up 0.4%, while operating income was $151, down 9%.
Financial position and liquidity
- Cash and cash equivalents were $381 at July 1, 2023, versus $326 at year-end 2022; cash, cash equivalents and restricted cash totaled $383 at the end of the period.
- Gross debt was $1,426, including $1,126 under the variable-rate Term B facility and $300 of 4.000% notes due 2029. Balance-sheet debt, net of financing costs and current portion, was $1,400 long-term plus $12 current. The company had no revolver borrowings and reported covenant compliance.
- The Term B weighted-average rate, excluding swaps, was 7.57%, versus 6.78% at year-end 2022. $560 of interest-rate swaps hedge a portion of variable-rate debt; management estimated a 100-basis-point rate increase would affect annual interest expense by approximately $6.
- First-half operating cash flow was $117; capital expenditures were $49. Cash used in investing was $55, including $6 for acquisitions. Management stated existing cash and credit availability were sufficient for requirements through at least the next 12 months and longer term.
Material changes, outlook and risks
- Management cited customer destocking, softer retail and security/energy demand, inventory normalization and uncertain macroeconomic conditions. It expected supply chains and logistics to continue normalizing in 2023, with end demand moderating as inventories rebalance; it did not provide numerical earnings or revenue guidance.
- Acquisition activity included BTX Technologies, acquired in January 2023, with results included in ADI. First Alert and other prior acquisitions contributed to year-over-year comparisons.
- The company recorded $4 of restructuring charges in the first half under programs intended to lower costs and improve margins. The filing also says a further program with estimated costs of $25 was initiated in the third quarter; this is a subsequent-period item relative to the quarter ended July 1. Management could not estimate total future costs of the restructuring plans.
- Honeywell-related Reimbursement and Tax Matters Agreement liabilities totaled $731, including $629 under the Reimbursement Agreement. Resideo paid Honeywell $70 in the first half and could owe up to $140 annually, plus potential late-payment fees, subject to agreement terms. Related expense was $85 in the first half. The timing and ultimate cost remain uncertain and could be material.
- Contingencies include environmental obligations ($22 for company-owned sites), a consumer class action alleging certain alarm products did not conform to standards, and a California employee class action. The company could not estimate potential liability for the latter two matters. A derivative-litigation settlement remained subject to final court approval.
- Other risks include cyclical end markets, interest rates, inflation, foreign currency, supply-chain and supplier reliance, competition, product quality and litigation, cybersecurity, and dependence on Honeywell agreements. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the MD&A’s $121 second-quarter operating cash flow with the six-month statement’s $117 figure.
- Track volume, inventory normalization and margin trends, particularly in Products and Solutions, and the effect of pricing and input-cost relief.
- Assess variable-rate debt exposure, swap coverage, interest costs and compliance with credit-facility covenants.
- Monitor the Reimbursement Agreement’s future cash payments and any changes in estimated indemnification liabilities.
- Confirm the timing, costs and expected savings of the additional $25 restructuring program, and developments in disclosed litigation.