Resideo Technologies, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual filing, not a standalone fourth-quarter report. Resideo became an independent publicly traded company on October 29, 2018, following its spin-off from Honeywell. Results for periods before the spin-off are carve-out financials derived from Honeywell records and may not reflect Resideo’s costs or results as a standalone company.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $4.827 billion | $4.519 billion |
| Gross profit / margin | $1.366 billion / 28% | $1.316 billion / 29% |
| Income before taxes | $104 million | $166 million |
| Income tax benefit (expense) | $301 million benefit | $560 million expense |
| Net income (loss) | $405 million | ($394 million) |
| Operating cash flow | $462 million | $37 million |
| Investing cash flow | ($74 million) | ($51 million) |
| Cash and cash equivalents at year-end | $265 million | $56 million |
- Revenue grew 7% year over year, reflecting volume growth, 2% price contribution and 1% foreign-currency translation. Cost of goods sold increased 8%, including material and labor inflation and currency effects.
- SG&A was $873 million, broadly flat year over year. Reported net income was strongly affected by tax items: the 2018 tax benefit primarily reflected internal restructuring and adjustments to provisional U.S. tax reform estimates. The 2017 tax expense included substantial tax-reform charges.
- Products and Solutions external revenue rose 6% to $2.169 billion; segment profit increased 8% to $381 million. Global Distribution revenue rose 7% to $2.658 billion; segment profit increased 13% to $148 million. Segment profit is a non-GAAP-style measure defined by the company and excludes specified costs.
- Operating cash flow improved substantially from 2017, mainly because 2017 included approximately $233 million of higher income tax payments related to U.S. tax reform; working-capital timing also contributed. 2018 financing cash flow included a $1.415 billion distribution to Honeywell, partly offset by $1.225 billion of debt proceeds.
- Year-end debt was $1.225 billion principal amount ($1.201 billion carrying value after issuance costs): $825 million of variable-rate term loans and $400 million of 6.125% notes due 2026. The $350 million revolver had no borrowings and $19 million of letters of credit outstanding.
- Cash was $265 million, of which 62% was held by foreign subsidiaries. Management stated existing cash and credit availability were expected to cover requirements for at least 12 months. Current assets were $1.809 billion and current liabilities $1.489 billion.
Material changes and unusual items
- Net income swung from a $394 million loss in 2017 to $405 million income in 2018, despite pretax income declining from $166 million to $104 million; the swing was principally tax-driven, not a comparable improvement in pretax earnings.
- Gross margin declined to 28% from 29%, with material and labor inflation partly offset by higher pricing. Products and Solutions margin fell to 42% from 44%; Global Distribution margin remained 18%.
- Other expense, net rose to $369 million from $279 million, primarily reflecting environmental remediation costs and $49 million of expense under the Honeywell Reimbursement Agreement. The company recorded a $616 million liability under that agreement at year-end, related to specified legacy sites; annual payments are generally capped at $140 million, subject to agreement terms.
- Resideo incurred $20 million of interest expense in 2018 following its separation and new borrowing; prior-year statements had no allocated interest expense for Honeywell debt.
- The company recorded $153 million of tax indemnification for Honeywell under the Tax Matters Agreement. The filing also identifies restrictions on certain transactions for two years after the spin-off to preserve the intended tax treatment.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided in the supplied filing text. Management forecast 2019 capital expenditures of approximately $135 million, including $74 million for standalone-company infrastructure, and said liquidity was expected to be adequate for at least 12 months.
- Management’s strategy emphasizes connected-home products and services, investment in professional and OEM channels, expansion of ADI’s footprint and product range, and selective acquisitions. These plans depend on product adoption, competition, execution and market conditions.
- Key risks include the substantial Honeywell environmental reimbursement obligation and uncertainty over ultimate remediation costs; leverage, variable-rate debt and restrictive covenants; standalone transition and information-technology costs; competition and connected-home adoption; supply-chain and raw-material pressures; cybersecurity and data privacy; weather, housing and construction cycles; and foreign-exchange and regulatory risks.
- Environmental liabilities for company-owned sites were approximately $20 million at year-end, in addition to the Honeywell reimbursement liability. Management said ultimate environmental costs and timing cannot be reliably estimated and could be material. Other litigation matters were not believed material to results at filing.
- The financial statements received an unqualified audit opinion. The auditor did not audit or opine on internal control over financial reporting; Resideo’s disclosure controls were assessed by management as effective at a reasonable-assurance level.
Investor verification points
- Separate recurring operating performance from the large tax-related benefit in 2018 and the tax-related charge in 2017; review the tax footnote and cash-tax implications.
- Reconcile the $616 million Honeywell environmental reimbursement liability, the separate $153 million tax indemnification, expected annual cash payments, the $140 million annual cap and any deferred or true-up amounts.
- Assess debt service, floating-rate exposure, covenant headroom and the effect of Honeywell agreement restrictions on dividends, financing and strategic transactions.
- Review segment growth and margins, particularly the decline in Products and Solutions margin and the different profitability profiles of distribution versus products.
- Compare 2019 capital spending and standalone costs with management’s expectations, and monitor cash conversion, working capital and transition-service dependency.