Resideo Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2022; comparisons are to the periods ended July 3, 2021. Resideo makes and distributes residential and commercial comfort, energy, safety, and security products through Products & Solutions and ADI Global Distribution. Figures are unaudited and in millions except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,686 | $1,477 | $3,192 | $2,896 |
| Gross profit / margin | $467 / 28% | $386 / 26% | $905 / 28% | $761 / 26% |
| Operating income | $186 | $121 | $358 | $251 |
| Net income | $94 | $58 | $181 | $107 |
| Diluted EPS | $0.63 | $0.39 | $1.22 | $0.72 |
| Operating cash flow | Not provided by quarter | $(24) | $99 |
Q2 operating margin was approximately 11.0%, versus 8.2% a year earlier; six-month operating margin was approximately 11.2%, versus 8.7%. Six-month capital expenditures were $24 million, making operating cash flow less capital expenditures approximately negative $48 million.
Balance sheet and liquidity
- At July 2, cash and cash equivalents were $251 million; management reported approximately $751 million of liquidity, including the undrawn $500 million revolving facility. Restricted cash was $4 million.
- Debt was $1.422 billion net of $15 million of deferred financing costs, including $12 million due within a year; long-term debt was $1.410 billion. Debt increased from $1.230 billion at year-end 2021. The company reported compliance with debt covenants.
- Inventory rose to $971 million from $740 million and accounts receivable to $1.073 billion from $876 million. Management attributed the working-capital use partly to supporting higher sales.
- Total liabilities included $613 million of Reimbursement Agreement obligations and $128 million related to the Tax Matters Agreement.
Changes, drivers, and unusual items
- Q2 revenue grew 14%; six-month revenue grew 10%. Management cited acquisition contributions and pricing, partly offset by foreign-exchange impacts (about $40 million in Q2) and supply constraints.
- Q2 gross margin expanded about 200 basis points: favorable pricing and sales mix contributed 400 basis points, partly offset by inflation-related costs of 200 basis points. For the first half, pricing and mix contributed 300 basis points, partly offset by material-cost inflation of 100 basis points.
- First Alert was acquired March 31 for $614 million in cash and contributed $113 million of Q2 revenue; its period net income was not material. Arrow Wire and Cable was acquired for $15 million. The acquisitions are included in the reported results from their respective acquisition dates.
- ADI Global Distribution Q2 revenue was $922 million and operating income $86 million, versus $879 million and $66 million. Products & Solutions reported $764 million of disaggregated revenue and $154 million of operating income, versus $598 million and $129 million. The filing’s MD&A separately presents Products & Solutions total revenue of $852 million; investors should note the differing segment revenue presentations.
- Six-month operating cash flow declined to negative $24 million, driven in part by $231 million of increased accounts receivable and inventory. Investing cash outflow was $670 million, including $633 million for acquisitions; financing provided $183 million, including proceeds from $200 million of additional term debt.
- Other expense included $45 million in Q2 and $86 million in the first half for the Honeywell Reimbursement Agreement. The company paid $70 million under that agreement in the first half; the liability can involve annual payments up to $140 million and may continue until specified termination conditions, potentially through 2043.
Outlook, risks, and contingencies
The filing gives no numerical revenue or earnings guidance. Management said future visibility was more limited than usual amid macroeconomic uncertainty, COVID-19 impacts, component shortages, inflation in materials, freight and labor, and foreign-exchange pressure. It reported actions to manage suppliers, align production with demand, and improve productivity, and believes cash and available credit are sufficient for capital needs through at least the next 12 months. Risks cited include economic and industry cyclicality, supply availability, acquisition integration, customer relationships, cybersecurity, currency and interest rates, product liability, Honeywell-related obligations, and environmental and litigation matters. No material changes to previously disclosed risk factors were reported.
The securities class action was dismissed with prejudice following settlement. Two derivative actions remained stayed while settlement discussions continued; the filing says a settlement was not assured. Environmental liabilities were $22 million, and management said other legal matters were not material to the financial statements. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether pricing continues to offset inflation, freight, labor, and foreign-exchange effects, and whether supply constraints ease.
- How the First Alert acquisition performs and how its purchase-price allocation and integration costs develop.
- Working-capital conversion, particularly elevated inventory and receivables, and the return to positive operating cash flow.
- Debt levels, variable-rate exposure, available revolver capacity, and interest-rate sensitivity; the filing estimates a 100-basis-point rate move would affect annual interest expense by about $6 million.
- Future cash payments and estimates under the Honeywell Reimbursement and Tax Matters Agreements, plus the status and potential resolution of derivative litigation.