Resideo Releases Q3 2019 Results In-Line with Oct. 22 Preliminary Results
Third Quarter Highlights
- Net Revenue of $1.23 billion, up 2% year-over-year on a GAAP basis and 3% on a constant currency basis
- Adjusted EBITDA of $79 million, down $38 million year-over-year; adjusted EBITDA of $114 million excluding Honeywell reimbursement agreement cash payments
- GAAP Net Income of $8 million; adjusted Net Income of $23 million, or $58 million excluding Honeywell reimbursement agreement cash payments
- GAAP Basic EPS of $0.07; adjusted EPS of $0.19
- Reaffirming revised full-year guidance for revenue growth of 2% to 4% on a GAAP basis and adjusted EBITDA range of $330 million to $350 million
- Launched a comprehensive operational and financial review focused on product cost and gross margin improvement, and G&A simplification
AUSTIN, Texas, Nov. 6, 2019 – Resideo Technologies, Inc. (NYSE: REZI), a leading global provider of home comfort and security solutions, today reported third-quarter financial results for the quarter ended Sept. 30, 2019. The company’s revenue and adjusted EBITDA (non-GAAP) for the third quarter are consistent with the expected results announced on a preliminary basis in October.
“I am disappointed in our results for the third quarter. While ADI continued its strong performance, results in our Products & Solutions segment were adversely impacted by volume declines, product and channel mix, inventory write-downs, and high product rebates from a pre-spin contract,” said Mike Nefkens, president and CEO of Resideo. “We remain confident in the fundamentals of our business. We are taking the following actions to improve business performance:
- working with our channel partners to improve the positioning of the T-Series line of non-connected thermostats;
- rebuilding value engineering and sourcing capabilities to drive increased gross margins; and
- conducting a comprehensive operational and financial review of the company to simplify operations, increase gross margins, reduce cost structure, and drive sales growth.”
Net revenue for the third quarter was $1.23 billion, up 2% year-over-year on a GAAP basis and up 3% year-over-year on a constant currency basis (non-GAAP). Adjusted EBITDA (non-GAAP) was $79 million, or $114 million excluding the Honeywell reimbursement agreement cash payments (non-GAAP). Third-quarter Net Income was $8 million and adjusted Net Income (non-GAAP) was $23 million, or $58 million excluding the Honeywell reimbursement agreement cash payments. Basic and diluted earnings per share were $0.07 and $0.08, respectively, and adjusted basic and diluted earnings per share (non-GAAP) was $0.19.
ADI Global Distribution revenue revenue increased by 6%, and 7% on a constant currency basis year-over-year. Segment performance was driven by solid growth across all regions. Segment adjusted EBITDA increased year-over-year by 12%. Growth in the quarter was enhanced by an ongoing focus on digital transformation, designed to create a seamless experience for professionals online and in the 200 stocking locations around the world. ADI continued to expand its footprint in the third quarter, including opening and remodeling branches in Eastern Europe.
Products & Solutions revenue revenue decreased by 3% and 1% on a constant currency basis year-over-year, driven by declines in the Comfort and Residential Thermal Solutions (RTS) gas combustion businesses. Segment adjusted EBITDA for the third quarter decreased year-over-year by 38% due to revenue decline, negative product and channel mix, inventory write-downs, and higher customer rebates.
Water products grew double digits in North America and Resideo expects continued growth with the launch of the Buoy® Whole Home Water Controller in the fourth quarter. Registered connected customers have shown strong growth from 4.7 million in 2017 to more than 6.3 million at the end of the third quarter 2019.
The RTS business experienced a slowdown across large OEM customers, which included impacts by recent regulatory changes. The Comfort business revenue declines were primarily due to lower thermostat sales. Resideo believes a poor pre-spin transition from the prior generation of non-connected thermostats to the T-Series line impacted the adoption of mid-level T-Series thermostats and related profit margins. The revenue and margin effects became more pronounced in the third quarter after the prior generation of non-connected thermostats was discontinued. The company is working with its channel partners to enhance and better position the T-Series and expects improvement in 2020.
The company’s new generation of security products and connected thermostats have experienced solid growth. However, these products have yet to benefit from lifecycle value engineering, adversely impacting full-year 2019 Products & Solutions segment gross margins. The company is actively investing in its value engineering team and anticipates improvement to gross margins over the next 18 months.
Cash Flow Generation
The company reported a use of cash from operations of $70 million for the nine months ended Sept. 30, 2019, driven largely by increased inventory and cash payments related to the Honeywell reimbursement agreement.
Total debt increased $52 million to $1.25 billion. Liquidity remains strong and is supported by a $350 million revolving credit facility, under which $60 million was outstanding as of the quarter end.
The company expects the third-quarter headwinds to continue into the peak winter demand period, which is expected to reduce previously anticipated full-year 2019 Products & Solutions segment revenue by approximately $110 million. Approximately $66 million of this expected shortfall is from Comfort, $22 million is from RTS, and $22 million is from Security.
Full-year adjusted EBITDA guidance was reduced due to the lower revenues, higher-than-anticipated contractual customer rebates, inventory write-downs, and continued mix headwinds.
As noted in its October preliminary release, Resideo updated its full-year 2019 guidance for GAAP revenue growth of 2% to 4%, as compared to the previously expected range of 2% to 5%. The company also updated its full-year 2019 adjusted EBITDA guidance to be in the range of $330 million to $350 million, compared to the previously expected range of $410 million to $430 million.
Operational and Financial Review
Resideo has begun a comprehensive operational and financial review, to be overseen by the independent directors of Resideo’s board, and has retained industry-recognized experts in supply chain optimization and organizational excellence to assist in the review.
The review will build upon the previously announced cost optimization program, which is on track and expected to achieve approximately $15 million in realized savings in 2019 and $50 million in run-rate savings by the end of 2020.
“As a spinoff from a much larger business, we believe we have a significant opportunity to right-size our infrastructure and simplify our core processes,” said Bob Ryder, interim CFO of Resideo. “This is designed to reduce our direct and G&A costs, increase profit margins, and enable a path to higher sales growth.”
Resideo plans to discuss project savings, costs and expected timelines in conjunction with the announcement of its fourth-quarter and full-year 2019 financial results, expected in February 2020.
Resideo will hold a conference call with investors on Nov. 7, 2019, at 8:30 a.m. EST. To join the conference call, please dial 888-599-8688 (domestic) or +1 323-994-2135 (international) approximately 10 minutes before it starts. Please mention to the operator that you are dialing in for Resideo’s third quarter 2019 earnings call or provide the conference code 934775. A replay of the conference call will be available from 12:30 p.m. EST Nov. 7, until 12:30 p.m. EST Nov. 14, by dialing 888-203-1112 (domestic) or +1-719-457-0820 (international). The access code is 9530930.
A real-time audio webcast of the presentation can be accessed at https://investor.resideo.com, where related materials will be posted prior to the presentation, and a replay of the webcast will be available for 30 days following the presentation.
Resideo is a leading global provider of critical comfort and security solutions primarily in residential environments and distributor of low-voltage electronic and security products. Building on a 130-year heritage, Resideo has a presence in more than 150 million homes, with 15 million systems installed in homes each year. We continue to serve more than 110,000 contractors through leading distributors, including our ADI Global Distribution business, which exports to more than 100 countries from more than 200 stocking locations around the world. Resideo is a $4.8 billion company with approximately 13,000 global employees. For more information about Resideo, please visit resideo.com.
The Honeywell Home trademark is used under a long-term license from Honeywell International Inc.
This release contains “forward-looking statements.” All statements, other than statements of fact, that address activities, events or developments that we or our management intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Although we believe forward-looking statements are based upon reasonable assumptions, such statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results or performance of the company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, those described under the headings “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended Dec. 31, 2018 filed with the Securities and Exchange Commission (“SEC”). You are cautioned not to place undue reliance on these forward-looking statements, such as guidance regarding 2019 and 2023 and our planned $50 million cost program, which speak only as of the date of this release. Forward looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by our forward-looking statements.
Non-GAAP Financial Measures
This release includes EBITDA, Adjusted EBITDA, Adjusted EBITDA excluding Honeywell reimbursement agreement payments, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income excluding Honeywell reimbursement agreement payments, adjusted basic and diluted net income per share, constant currency growth, and other financial measures not compliant with generally accepted accounting principles in the United States (GAAP). The non-GAAP financial measures are adjusted for certain items above and may not be directly comparable to similar measures used by other companies in our industry, as other companies may define such measures differently. Management believes that, when considered together with reported amounts, these measures are useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends and provide useful additional information relating to our operations and financial condition. These metrics should be considered in addition to, and not as replacements for, the most comparable GAAP measure. Refer to the tables above in this release for reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures. We believe EBITDA, Adjusted EBITDA excluding Honeywell reimbursement agreement payments, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income excluding Honeywell reimbursement agreement payments, adjusted basic and diluted net income per share, and constant currency growth are important indicators of operating performance. For reconciliations of these measures to the most directly comparable GAAP financial measures to the extent that they are available without unreasonable effort, please refer to the tables above in this release. They should be read in connection with our financial statements presented in accordance with GAAP.
A reconciliation of Adjusted EBITDA to the corresponding GAAP measure is not available on a forward-looking basis without unreasonable efforts due to the impact and timing on future operating results arising from items excluded from these measures, particularly environmental expense, Honeywell reimbursement agreement expense or gain, stock compensation expense, and other non-operating expense (income).
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