Resideo Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Resideo provides home-comfort, security and connected-home products and software, and distributes low-voltage electronic and security products. It became an independent public company after its October 2018 spin-off from Honeywell. The 2018 comparison is a pre-spin carve-out; historical allocations and financing may not reflect stand-alone costs or results.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $1,216 million | $1,165 million |
| Gross profit / margin | $313 million / 26% | $343 million / 29% |
| SG&A | $228 million | $212 million |
| Income before taxes | $84 million | $79 million |
| Net income | $48 million | $45 million |
| Diluted EPS | $0.39 | $0.37 |
| Segment Adjusted EBITDA | $127 million | $158 million |
| Operating cash flow | $(10) million | $126 million |
Cash and cash equivalents were $212 million at March 31, down from $265 million at year-end. Operating cash use reflected working-capital needs, including higher inventory to rebuild safety stocks and support customer delivery, as well as timing of receivables and customer rebates. Investing cash use was $21 million, including $15 million of capital expenditure and $6 million for the Buoy Labs acquisition; financing cash use was $23 million. Management said existing cash and credit availability should meet capital needs for at least 12 months.
Total debt was approximately $1.196 billion, including $400 million of 6.125% senior notes and variable-rate term loans. Variable-rate debt was $819 million. The $350 million revolving facility had no borrowings and $18 million of letters of credit outstanding. Total debt less cash was approximately $984 million. Current assets were $1.862 billion and current liabilities were $1.559 billion.
Changes versus the prior comparable period
- Revenue rose 4%: volume contributed 5% and price 2%, partly offset by a 3% foreign-exchange headwind.
- Gross margin fell to 26% from 29%. Management cited material and labor inflation and fixed production costs, changed sales mix, and headquarters costs shifted into cost of goods sold from the prior carve-out presentation.
- SG&A increased $16 million. Spin-related costs, Honeywell trademark royalties and labor inflation added $37 million, partly offset by lower allocated costs, foreign exchange and other savings.
- Products & Solutions external revenue increased 5% to $551 million, while Segment Adjusted EBITDA declined 31% to $81 million. Management cited unfavorable product mix, inventory standard costing, production-cost increases and trademark royalties.
- Global Distribution revenue rose 4% to $665 million and Segment Adjusted EBITDA increased 12% to $46 million, driven by volume and productivity, partly offset by inflation and foreign exchange.
- Net income increased to $48 million, but the comparison includes a $14 million net gain related to the Honeywell reimbursement agreement in 2019; 2018 included $53 million of environmental expense and no allocated Honeywell third-party debt interest. These items limit comparability.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Full-year 2019 capital expenditures were expected to be $104 million, including $45 million for stand-alone infrastructure.
- Management highlighted residential and non-residential construction, renovation, connected-device adoption, and contractor demand for training and rapid fulfillment as business trends. It also noted the need to build stand-alone functions and systems after separation.
- The Honeywell Reimbursement Agreement requires Resideo to pay 90% of specified environmental-related payments, net of specified recoveries, subject to a $140 million annual cap. Q1 payments were $35 million; the recorded agreement liability was $567 million at quarter-end. Ultimate environmental costs and timing cannot be reliably estimated and could be material.
- Other obligations include $153 million due under the Tax Matters Agreement at March 31. Resideo also pays Honeywell a 1.5% royalty on licensed-product revenue; Q1 royalties were $8 million.
- Key risks include environmental and reimbursement obligations, product warranty or liability claims, competition, raw-material and labor costs, foreign exchange and interest rates, execution as a stand-alone company, and dependence on distribution growth. Management reported no material changes to the risk factors in its 2018 Form 10-K and said it did not believe other current litigation was material.
- Adoption of the lease standard on January 1, 2019 recognized a $115 million lease liability and $112 million right-of-use asset at adoption; management said adoption did not affect Q1 operating results or cash flows. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the gross-margin decline and Products & Solutions EBITDA weakness persist, and whether management can offset inflation, mix and stand-alone costs.
- Working-capital trajectory, inventory levels and cash conversion after Q1 operating cash outflow.
- Environmental reimbursement exposure, including future annual payments, recoveries, the $140 million cap and the potential for costs beyond current estimates.
- Debt-service capacity, variable-rate exposure and compliance with credit-agreement covenants.
- Actual 2019 capital spending and the extent and duration of spin-related and other recurring stand-alone costs.