Resideo Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020; filed November 5, 2020. Resideo supplies home comfort, security and energy-management products and software through Products & Solutions, and distributes low-voltage electronic and security products through ADI Global Distribution. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,362 | $1,226 | $3,570 | $3,684 |
| Gross profit / margin | $370 / 27% | $309 / 25% | $890 / 25% | $964 / 26% |
| Operating profit | $131 | $59 | $159 | $186 |
| Other expense, net | $35 | $35 | $106 | $54 |
| Interest expense | $14 | $16 | $49 | $51 |
| Net income (loss) | $75 | $8 | $(22) | $45 |
| Diluted EPS | $0.60 | $0.06 | $(0.18) | $0.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $92 | $(70) |
Q3 revenue rose 11% year over year, reflecting growth in both segments. For the first nine months, revenue declined 3%; volume was down 5%, partly offset by price and acquisitions. SG&A was $239 in Q3 versus $250 a year earlier and $731 for the nine months versus $778.
Q3 segment results: Products & Solutions external revenue was $572, up 12%, and Segment Adjusted EBITDA was $136 versus $66. ADI Global Distribution revenue was $790, up 11%, and Segment Adjusted EBITDA was $52 versus $48. For the nine months, Products & Solutions revenue fell 10% to $1,445 while Segment Adjusted EBITDA was nearly flat at $224; ADI revenue rose 2% to $2,125 while Segment Adjusted EBITDA fell 11% to $126.
Segment Adjusted EBITDA is a non-GAAP measure. The company reported total Segment Adjusted EBITDA of $188 for Q3 versus $114 in 2019, and $350 for the nine months versus $363.
Liquidity, debt and cash flow
- Cash and equivalents were $260 at September 26, 2020, up from $122 at December 31, 2019. Nine-month cash flow was $92 from operations, $(85) investing, and $135 financing, producing a $138 net increase in cash.
- Total debt was $1,322, including $150 drawn on the $350 revolving facility; $181 was classified as current and $1,141 as long-term. Cash less total debt was approximately $(1,062).
- Management said existing cash and credit availability were expected to meet capital requirements for at least 12 months, but also expected cash to decrease in Q4 2020. The filing attributes improved year-to-date operating cash flow partly to working-capital timing and deferred payments, including a $35 Honeywell payment.
- As of September 26, $942 of debt carried variable rates. The company estimated that a 100-basis-point rate change would affect annual interest expense by approximately $10.
Material changes, outlook and risks
- COVID-19: Supply constraints and weaker demand adversely affected Q2; management reported improved customer demand in Q3. Ongoing uncertainty, possible supplier disruption, facility restrictions, employee-safety costs and limited visibility remained risks.
- Margins and cost actions: Q3 gross margin improved to 27%, with higher volumes, transformation savings and sourcing productivity contributing; sales mix and COVID-related factory costs were offsets. The ongoing operational review was expected to generate $40–$45 of incremental pretax savings in 2020 versus 2019, net of implementation costs.
- Goodwill: The filing says management believed goodwill carrying value was likely above fair value at September 26, while noting that Products & Solutions goodwill had only 10% fair-value headroom in the 2019 annual test. A Q4 2020 annual assessment was planned; impairment could result from adverse developments.
- Honeywell obligations: The company recorded $622 of Reimbursement Agreement liabilities at September 26 and reported $107 of related expense for the nine months. Annual payments are subject to a $140 cap, subject to agreement terms. The deferred $35 quarterly payment was made on October 30, 2020, after quarter-end. Separately, future tax indemnity to Honeywell was $139.
- Other items: A $36 acquisition of Herman ProAV closed in February 2020. Nine-month tax expense included foreign valuation allowances and other specific items; the reported effective tax rate was 729%, reflecting low pretax income and those items. Environmental liabilities were $22, and the company cautioned ultimate costs could be material but were not reasonably estimable.
- Litigation and governance: Securities class-action and consolidated derivative litigation remained pending; the company intended to defend itself, with outcomes uncertain. The filing noted CEO and CFO appointments during 2020 and a Products & Solutions leadership change in October. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control during the quarter.
Comparability note: Effective January 1, 2020, research and development expense was reclassified from cost of goods sold to SG&A. The company recast 2019 comparative figures, increasing reported 2019 gross profit by $20 for Q3 and $66 for the nine months, with no impact on net income or cash flow.
Investor verification priorities
- Track subsequent revenue, segment margins and the durability of Q3 demand recovery, especially amid COVID-19 and supply-chain risks.
- Verify delivery and net cash impact of the announced $40–$45 savings, alongside restructuring and commercial investment costs.
- Review the Q4 goodwill impairment test and any updated valuation assumptions or impairment charge.
- Monitor cash conversion, the stated Q4 cash decrease, revolver usage, debt maturities and covenant headroom.
- Follow Honeywell reimbursement accruals, annual payment estimates and environmental exposure, as well as the securities and derivative litigation.