Resideo Technologies, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Resideo manufactures comfort, residential thermal and security products and operates ADI Global Distribution, a wholesale distributor of low-voltage security and related products. This unaudited report covers the three and nine months ended October 2, 2021; comparisons are to the periods ended September 26, 2020.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.496bn | $1.362bn | $4.392bn | $3.570bn |
| Gross profit / margin | $416m / 28% | $370m / 27% | $1.165bn / 27% | $890m / 25% |
| Operating profit | $167m | $131m | $418m | $159m |
| Net income (loss) | $68m | $75m | $175m | $(22)m |
| Diluted EPS | $0.46 | $0.60 | $1.18 | $(0.18) |
| Operating cash flow | Not presented quarterly | $203m | $92m |
- Q3 revenue rose 10%, primarily on higher volume and pricing; nine-month revenue rose 23%, mainly on volume and comparison with 2020, which was affected by the emergence of COVID-19.
- Q3 gross margin improved one percentage point. Pricing and mix, rebate favorability, and lower obsolete-inventory charges helped; higher material and freight costs partly offset the gains. Nine-month gross margin rose two percentage points.
- Q3 net income declined despite higher revenue and operating profit. Other expense increased to $58m, including $18m of debt-extinguishment costs; tax expense was $29m versus $7m a year earlier.
- Segment results: Products & Solutions external revenue was $631m and operating profit $157m, up 10% and 11%, respectively. ADI Global Distribution revenue was $865m and operating profit $73m, up 9% and 30%. Nine-month revenue and operating profit rose in both segments.
Financial position, debt and liquidity
- At October 2, 2021, cash and cash equivalents were $686m; current assets were $2.507bn and current liabilities $1.532bn.
- Total debt was $1.232bn, including $1.222bn long-term debt and $10m current maturities. There were no borrowings or letters of credit under the $500m revolving facility.
- Operating cash flow for the first nine months was $203m; investing cash outflow was $56m, including $48m of capital expenditures; financing cash inflow was $28m. Cash increased $169m from year-end 2020.
- Management said cash, cash equivalents and available credit were expected to meet capital requirements for at least the next 12 months.
Material changes, outlook and risks
- Resideo refinanced its term facilities in February 2021. In August it redeemed the remaining $260m of 6.125% notes due 2026 and issued $300m of 4% notes due 2029. The refinancing and redemptions generated $41m of debt-extinguishment expense over the first nine months. The new term B facility carried a 2.75% interest rate at quarter-end; interest-rate swaps covered $560m of variable-rate exposure.
- Management reported improving customer demand and benefits from cost actions and transformation efforts, but continued supply constraints and global shortages of key materials and components. It cited limited visibility due to COVID-19 and variants, and planned to manage expenses, align production to demand and pursue productivity improvements. No numerical revenue or earnings guidance is provided in the filing text.
- The company owes Honeywell under the Spin-Off Reimbursement Agreement for certain environmental liabilities: payments are generally 90% of qualifying amounts, subject to a $140m annual cap. It paid $105m in the first nine months; the recorded liability was $597m. The filing warns ultimate amounts and timing may be material and uncertain. A separate Honeywell tax indemnity liability was $130m.
- A securities class-action settlement of $55m was agreed in principle; approximately $39m of insurance recoveries were expected, leaving a recorded net expense of $16m. The court granted preliminary approval after quarter-end, on October 21, 2021, with a hearing scheduled for January 27, 2022. Approval was not assured. Related derivative actions remained pending or stayed.
- Recorded environmental liabilities were $22m; the company said future environmental costs could be material but could not be reasonably estimated. Other reported litigation was not considered material to the interim financial statements. No material changes to previously reported risk factors were identified.
- Principal risks include supply availability and cost inflation, COVID-19 impacts, competition, customer relationships, product quality and liability, cybersecurity, foreign exchange, and litigation and environmental obligations.
Key facts for investors to verify
- Whether the securities settlement received final court approval and whether expected insurance recoveries were realized.
- Future cash payments and estimation changes under the Honeywell environmental reimbursement and tax indemnity agreements.
- Whether supply constraints, freight and material inflation, and pricing actions affected subsequent margins and product availability.
- Debt balances, covenant compliance, variable-rate exposure and the continuing availability of the revolving credit facility.
- Subsequent-period operating cash flow and working-capital needs, particularly accounts receivable and inventory growth.