Resideo Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; amounts in U.S. dollars, millions except per-share data. Resideo supplies home comfort, security and energy products and software through Products & Solutions and ADI Global Distribution.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,179 | $1,216 |
| Gross profit / margin | $284 / 24% | $332 / 27% |
| Operating profit | $34 | $85 |
| Other expense (income), net | $42 | $(16) |
| Net income (loss) | $(21) | $48 |
| Diluted EPS | $(0.17) | $0.39 |
| Operating cash flow | $(74) | $(10) |
| Capital expenditures | $16 | $15 |
Revenue fell 3% year over year. Lower volume (4 percentage points) and foreign exchange (1 point) were partly offset by price and acquisitions (1 point each). Gross margin declined 3 percentage points; management cited material and labor inflation and fixed production costs (200 basis points) and unfavorable sales mix (100 basis points). Operating profit fell to $34 million. Other expense included $34 million of Honeywell Reimbursement Agreement expense and a $10 million increase in unfavorable foreign-exchange effects; the prior-year period included a $14 million Honeywell-related gain.
Segments
- Products & Solutions: External revenue of $475 million, down 14%; Segment Adjusted EBITDA of $53 million, down 35% from $81 million. Lower volume and unfavorable mix, especially in Security and Comfort, weighed on results.
- ADI Global Distribution: Revenue of $704 million, up 6% (7% constant currency); Segment Adjusted EBITDA was flat at $46 million. Growth included higher volume and the Herman ProAV acquisition.
Q1 2019 comparative gross profit and cost of goods sold were reclassified by $19 million to move research and development expense from cost of goods sold to SG&A. The reclassification did not change net income or cash flows.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $338 million at March 31, 2020, versus $122 million at year-end 2019. The increase was principally funded by drawing the full $350 million revolving credit facility; it does not reflect positive operating cash flow.
- Total outstanding indebtedness was $1,531 million, including $350 million drawn on the revolver; $382 million was classified as due within one year and $1,149 million as long-term debt. Cash less reported debt was approximately $1,193 million, excluding Honeywell obligations.
- Variable-rate debt was $1,153 million. Management estimated a 100-basis-point rate increase on term loans would raise annual interest expense by approximately $9 million.
- Current assets were $1,993 million and current liabilities $1,755 million. Accounts receivable were $820 million and inventory $671 million.
- Honeywell-related obligations were $592 million at quarter-end, including $148 million of future tax payments. Environmental liabilities under the reimbursement agreement were $584 million in the note disclosure.
Operating cash outflow was $74 million, versus $10 million in the prior-year quarter. Investing cash outflow was $51 million, including $35 million paid for acquisitions; financing provided $349 million, largely from the revolver draw.
Outlook, commentary and material risks
The filing provides no specific revenue or earnings guidance. Management said visibility for the remainder of 2020 was limited, business conditions were expected to remain challenging, and sales declines seen in late March continued into April. COVID-19-related supply constraints, weaker demand, facility restrictions and remote-work disruption could materially affect later-period results. The company reported certain manufacturing and sales facilities temporarily closed or operating with restrictions, including manufacturing in Mexico.
Management said it believed existing cash and credit availability were sufficient for capital requirements for at least 12 months. Actions to protect liquidity included reducing or postponing nonessential capital spending, managing working capital, salary reductions, furloughs and hiring restrictions. The company drew the revolver as a precaution. On April 21, 2020, Resideo and Honeywell agreed to defer a $35 million quarterly payment otherwise due April 30 until no later than July 30, 2020.
- The ongoing operational and financial review targets product costs, gross margin and G&A simplification. Restructuring charges were $9 million in Q1; management expected $30–$40 million of incremental pretax savings in 2020 versus 2019 and approximately $35 million of additional 2020 restructuring spending.
- Products & Solutions goodwill was approximately $1,978 million, with estimated fair value only 10% above carrying value; further deterioration could trigger impairment.
- The Honeywell reimbursement arrangement covers 90% of specified environmental payments, subject to annual caps and other terms. Ultimate timing and costs are uncertain and could be material. Environmental liabilities at company-operated sites were $22 million.
- A consolidated putative securities class action alleges misleading statements about performance, product launches, engineering capacity, supply-chain efficiency and post-spin-off operational issues. The company said it intends to defend the case; the outcome and potential loss were not clear in the filing.
- Other risks include customer and supplier disruption, receivable collectability, access to liquidity and potential debt covenant pressure. Credit agreement leverage limits step down to 4.75x beginning Q4 2020, then 4.25x beginning Q4 2021 and 3.75x beginning Q4 2022.
Q1 comprehensive loss was $87 million, including a $66 million foreign-currency translation loss. The Herman ProAV acquisition closed February 10 for approximately $36 million. Management stated disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether post-quarter COVID-19 demand and supply effects, including the April sales declines, materially changed revenue, cash burn or liquidity.
- Revolver availability, debt classification and covenant compliance, including the effect of the deferred Honeywell payment.
- Progress and realized savings from restructuring compared with the stated $30–$40 million target and expected $35 million further spending.
- Developments in the Honeywell environmental and tax obligations, and any changes in estimates or payment timing.
- Products & Solutions goodwill headroom and any impairment indicators as business conditions evolve.
- Developments in the securities litigation, including any estimate of potential exposure.