The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to help you understand the results of
operations and financial condition of
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industries and our business and financial results. Forward-looking statements often include words such as "anticipates," "estimates," "expects," "projects," "forecasts," "intends," "plans," "continues," "believes," "may," "will," "goals" and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:
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industry cyclicality; • competition from other companies in our markets and segments, as well as in new markets and emerging markets; • our ability to successfully develop new technologies and products and develop and protect the intellectual property related to the same and to defend against IP threats of others; • inability to obtain necessary product components, production equipment or replacement parts; • the impact of pandemics, epidemics, natural disasters and other public health emergencies, such as COVID-19; • failure to achieve and maintain a high level of product and service quality; • inability to compete in the market for potential acquisitions; • inability to consummate acquisitions on satisfactory terms or to integrate such acquisitions effectively; • our ability to retain or expand relationships with significant customers; • dependence upon information technology infrastructure having adequate cyber-security functionality; • economic, political, regulatory, foreign exchange and other risks of international operations, including the impact of tariffs; • changes in prevailing global and regional economic conditions; • our failure to execute on key business transformation programs and activities; • the failure to increase productivity through sustainable operational improvements; • fluctuation in financial results due to the seasonal nature of portions of our business; • our ability to recruit and retain qualified personnel; • labor disputes, work stoppages, other disruptions, or the need to relocate any of our facilities? • changes in legislation or government regulations or policies? • the significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturers ("OEMs") customers; • the operational constraints and financial distress of third parties? • our ability to borrow funds and access capital markets? • the amount of our obligations and nature of our contractual restrictions pursuant to, and disputes that have or may hereafter arise under, the Reimbursement Agreement and the other agreements we entered into with Honeywell in connection with the Spin-Off; 22 --------------------------------------------------------------------------------
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our reliance on Honeywell for the Honeywell Home trademark; • potential material environmental liabilities? • our inability to maintain intellectual property agreements necessary to our business; • potential material costs as a result of warranty rights or claims, including product recalls, and product liability actions that may be brought against us? • potential material litigation matters; • unforeseenU.S. federal income tax and foreign tax liabilities? and • certain factors discussed elsewhere in this Form 10-Q. 23 --------------------------------------------------------------------------------
These and other factors are more fully discussed in our filings with the
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
Overview and Business Trends
We are a leading global manufacturer and distributor of technology-driven products and solutions that help homeowners and businesses stay connected and in control of their comfort, security, and energy use. We are a leader in the home heating, ventilation and air conditioning controls markets, smoke and carbon monoxide detection home safety and fire suppression products, and security markets. We have a global footprint serving commercial and residential end-markets. We manage our business operations through two operating segments, Products & Solutions and ADI Global Distribution. Our Products & Solutions segment offerings include temperature and humidity control, energy products and solutions, water and air solutions, smoke and carbon monoxide detection home safety products, security panels, sensors, peripherals, wire and cable, communications devices, video cameras, awareness solutions, cloud infrastructure, installation and maintenance tools, and related software. Our ADI Global Distribution business is the leading wholesale distributor of low-voltage security products including access control, fire detection, intrusion, and video products and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. The Products & Solutions segment, consistent with our industry, has a higher gross and operating profit margin profile in comparison to the ADI Global Distribution segment.
In
Our financial performance is influenced by macroeconomic factors such as repair
and remodeling activity, residential and non-residential construction,
employment rates, interest rates, and the overall macroeconomic environment. We
are experiencing global shortages in key materials and components in certain
instances impacting our ability to supply certain products. Additionally, the
current inflationary environment has resulted in higher raw materials, freight,
and other costs, and unfavorable foreign currency impacts from a stronger
Second Quarter Highlights
Net revenue increased
Gross profit as a percent of net revenues was 28% for the three months ended
Research and development expenses for the three months ended
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Selling, general and administrative expenses for the three months ended
Net income for the three months ended
Unrestricted cash on hand was approximately
COVID-19 and Recent Macroeconomic Environment
Our visibility toward future performance is more limited than is typical due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and its variants, and the overall prevailing macroeconomic environment, including due to COVID-19. For example, recent business conditions have been impacted by shortages in key materials and components which have impacted our ability to supply certain products. We have also experienced various inflationary impacts, such as increased labor rates, materials price inflation, and increased freight costs. In response to these challenges, we have, among other measures, aggressively managed supplier relationships to mitigate some of these shortages, developed contingency plans for future supply, aligned our production schedules with demand in a proactive manner; and pursued further improvements in the productivity and effectiveness of our manufacturing, selling, and administrative activities.
Results of Operations
We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280, Segment Reporting. We have determined that we have two reportable segments, organized and managed principally by the different services provided. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. We report all other business activities in Corporate and unallocated costs. Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment. These items are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition costs, gain on legal settlements, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategy, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, and other income (expense).
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