Resideo(REZI) - 2019 Q2 - Quarterly Report

Part I. Financial Information Financial Statements The company's unaudited interim statements show a Q2 2019 net loss of $11 million and decreased cash reserves Consolidated and Combined Interim Statement of Operations The company reported a Q2 2019 net loss of $11 million, a reversal from a $33 million net income in Q2 2018 Statement of Operations Highlights (Three Months Ended June 30) | Metric | 2019 (in millions) | 2018 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $1,242 | $1,196 | +3.8% | | Gross Profit | $296 | $346 | -14.5% | | Operating Profit | $42 | $129 | -67.4% | | Net (Loss) Income | $(11) | $33 | N/A | | Diluted (Loss) Per Share | $(0.09) | $0.27 | N/A | Statement of Operations Highlights (Six Months Ended June 30) | Metric | 2019 (in millions) | 2018 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $2,458 | $2,361 | +4.1% | | Gross Profit | $609 | $689 | -11.6% | | Operating Profit | $127 | $260 | -51.2% | | Net Income | $37 | $78 | -52.6% | | Diluted Earnings Per Share | $0.30 | $0.64 | -53.1% | Consolidated Interim Balance Sheet Total assets grew to $5.16 billion while cash and cash equivalents decreased significantly to $142 million Balance Sheet Summary | Account | June 30, 2019 (in millions) | Dec 31, 2018 (in millions) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $142 | $265 | | Inventories | $722 | $628 | | Total current assets | $1,846 | $1,809 | | Goodwill | $2,650 | $2,634 | | Total Assets | $5,160 | $4,972 | | Liabilities & Equity | | | | Accounts payable | $1,009 | $964 | | Long-term debt | $1,169 | $1,179 | | Obligations payable to Honeywell | $581 | $629 | | Total Liabilities | $3,567 | $3,439 | | Total Equity | $1,593 | $1,533 | Consolidated and Combined Interim Statement of Cash Flows The company reported a net cash outflow from operations of $37 million for the first half of 2019 Cash Flow Summary (Six Months Ended June 30) | Activity | 2019 (in millions) | 2018 (in millions) | | :--- | :--- | :--- | | Net cash (used for) provided by operating activities | $(37) | $258 | | Net cash used for investing activities | $(55) | $(17) | | Net cash used for financing activities | $(31) | $(201) | | Net (decrease) increase in cash | $(123) | $37 | Notes to Financial Statements Notes detail the basis of presentation post-spin-off, acquisitions, and key agreements with Honeywell - The company became an independent public entity after separating from Honeywell on October 29, 2018[25][27] - In Q2 2019, the company acquired three technology firms for a total of $17M to enhance its Products & Solutions segment[48][49][50] - A repositioning plan initiated in Q2 2019 resulted in $25 million in charges, primarily for severance[58] - The company pays Honeywell a 1.5% royalty on licensed product revenue, totaling $13 million in H1 2019[101] - The Honeywell Reimbursement Agreement mandates payments for environmental liabilities, capped at $140 million annually, with a total liability of $568 million[93][98] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses a 4% revenue increase in Q2 2019 alongside a significant gross profit margin decline Results of Operations Q2 2019 revenue grew 4%, but gross profit margin contracted to 24% from 29% due to rising costs Net Revenue Change Drivers (Q2 2019 vs Q2 2018) | Driver | Contribution to Change | | :--- | :--- | | Volume | +4% | | Price | +2% | | Foreign currency translation | -2% | | Total % change | +4% | - Gross profit percentage decreased by 500 basis points in Q2 2019, driven by sales mix, inflation, and repositioning costs[123][147] - SG&A expenses increased by $37 million in Q2 2019 due to spin-related costs, license fees, and repositioning charges[124][152] - Other expense, net, decreased by $89 million due to the new Honeywell Reimbursement Agreement's payment cap[155] Review of Business Segments Segment performance shows revenue growth in both divisions, but a significant drop in Products & Solutions profitability Products & Solutions Performance (Q2 2019 vs Q2 2018) | Metric | Q2 2019 (in millions) | Q2 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | External Revenue | $537 | $518 | +4% | | Segment Adjusted EBITDA | $70 | $109 | -36% | ADI Global Distribution Performance (Q2 2019 vs Q2 2018) | Metric | Q2 2019 (in millions) | Q2 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | External Revenue | $705 | $678 | +4% | | Segment Adjusted EBITDA | $46 | $41 | +12% | Capital Resources and Liquidity Liquidity was impacted by a $37 million cash outflow from operations in H1 2019, a reversal from the prior year - Operating cash flow was an outflow of $37 million for H1 2019, compared to a $258 million inflow in H1 2018[177][178] - The company paid Honeywell $70 million in H1 2019 under the Reimbursement Agreement[177] - Full-year 2019 capital expenditures are projected at $104 million, including stand-alone infrastructure investments[181] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and interest rate changes on its variable-rate debt - The company holds $814 million in variable-rate debt as of June 30, 2019[188] - Primary foreign currency exposures are managed through natural offsets with no current hedging arrangements in place[189] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of Q2 2019 - The CEO and CFO concluded that disclosure controls and procedures are effective at a reasonable assurance level[193] - No material changes to internal control over financial reporting occurred during the quarter[194] Part II. Other Information Legal Proceedings The company's primary legal contingency involves payments to Honeywell for historical environmental claims - The company is obligated to make payments for certain environmental claims under the Honeywell Reimbursement Agreement[196] Risk Factors No material changes to the company's previously disclosed risk factors were reported during the period - No material changes to risk factors from the 2018 Annual Report on Form 10-K have been reported[197] Other Information The Board of Directors has adopted an annual advisory vote on executive compensation following shareholder approval - The Board of Directors will hold an annual advisory vote on executive compensation based on shareholder feedback[198] Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL data files