Resideo (REZI) Q3 2026 earnings review
Resideo grows core sales and cuts debt, but Q4 shrinks
Resideo's core home-controls business is growing across every channel even as one shrinking private-label security contract drags down the total. In its first quarter after spinning off its ADI distribution arm, the maker of Honeywell Home thermostats and First Alert smoke detectors grew total revenue 3%, or 6% outside that security customer, and repaid $1.1 billion of debt. Chief executive Tom Surran nudged the full-year outlook higher, but by our math the fourth-quarter plan points to a 4% revenue decline from a year ago.
| Sales excluding OEM Security | $694M +6.3% from a year ago |
|---|---|
| Total continuing revenue | $727M +3.4% from a year ago |
| Standalone profit per share, excluding one-offs | $0.52 +8.3% from a year ago |
| Full-year revenue outlook | Raised $12M Q4 outlook implies a 4% drop from a year ago |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because the quarter landed right on the post-spin plan while leaving the same margin and growth hurdles in place. The good news is that Resideo completed the $1.1 billion debt paydown and reinstated its profit per share and cash-flow outlooks. The caution is that the 14th straight quarter of gross margin expansion rested on bare 0.04-point growth aided by undisclosed tariff refunds, while rising inventory and customer bills held nine-month operating cash flow to $111 million.
The question now is whether price increases can cover component inflation once one-time tariff refunds and extra selling days run out. If pricing catches up and new products hold 6% underlying growth, margins and revenue will recover once the security customer loss levels off; if component costs stay ahead of pricing, gross margin will fall. The fourth-quarter gross margin and the size of third-quarter tariff refunds in the 10-Q filing will tell.
🐂 Bull Case
Demand Holds Up Outside One Shrinking Customer
Resideo makes home heating controls, smoke detectors and security sensors under the Honeywell Home, First Alert and BRK brands. In its first quarter after spinning off ADI, its wholesale distribution business, total revenue rose 3.4% from a year ago to $727 million, including a 0.5-percentage-point drag from currency.
Outside OEM Security — a business that makes private-label equipment for large security companies — sales grew 6.3% to $694 million. Chief executive Tom Surran said that gain came across every sales channel and product category, "driven by customer demand for our differentiated, non-discretionary products" and higher prices. Surran also rolled out "new AI-powered capabilities on our next-generation FORTIQ software platform", which helps installers manage customer equipment.
What to watch: revenue growth excluding OEM Security in the fourth quarter. If that underlying rate stays near 6% while total revenue shrinks, it will show that new thermostats and detectors are winning business despite fewer home sales.
Spin-Off Dividend Cut Debt by One-Third
When Resideo spun off ADI on August 3, the home-controls maker collected a $900 million cash dividend from the separated business. Management combined that payout with $200 million of its own cash — fulfilling last quarter's commitment — to pay down $1.1 billion of debt during the third quarter, while paying ADI $20 million to settle post-closing cash balances.
Total gross debt ended the quarter at $2.1 billion, down from $3.2 billion at year-end, with $229 million of cash left on the balance sheet. The separation also cut Resideo's convertible preferred stock by 150,000 shares to 350,000 shares, which lowers its quarterly preferred dividend.
What to watch: quarterly net interest expense in the fourth quarter and early 2027. Because the $1.1 billion repayment happened part-way through the third quarter, the fourth quarter will show the full interest savings from the smaller debt load.
🐻 Bear Case
Gross Margin Streak Rests on Unquantified Refunds
Resideo highlighted a gross margin of 40.4%, calling it the 14th straight quarter of expansion from a year ago. In the restated continuing-operations tables, however, gross margin rose just 0.04 percentage points by our math — 40.44% ($294 million of gross profit on $727 million of revenue) against 40.40% ($284 million on $703 million) a year earlier — and stepped down from 41.1% in the second quarter.
The company said "Gains from price increases, operational efficiencies, and tariff refunds were partially offset by unfavorable product sales mix and inflationary input costs". Last quarter, $7 million of one-time tariff refunds added 1 percentage point to the manufacturing unit's gross margin, and management had not anticipated more refunds in the second half. This release did not disclose the dollar size of the third-quarter refunds, so underlying gross margin after component inflation likely shrank.
What to watch: the exact dollar amount of third-quarter tariff refunds in the upcoming quarterly 10-Q filing. Any refund over $1 million means gross margin excluding one-offs fell from a year ago, ending the expansion streak on an underlying basis.
Security Customer Loss Pushes Q4 Into Decline
A large private-label security customer is making more of its own equipment instead of buying from Resideo. OEM Security revenue fell 34% from a year ago to $33 million in the third quarter, down from $50 million a year earlier, which the company said "declined as expected due to reduced volumes from a large OEM Security customer".
- Q3 OEM Security revenue: $33 million, down $17 million from a year ago
- Top-line drag in Q3: cut total revenue growth from 6.3% to 3.4% by our math
- Q4 revenue outlook: $710–730 million, down 4.0% at the middle of the range from $750 million a year ago by our math
Management previously sized the second-half revenue loss from this customer at $40 million to $50 million. With $17 million of that drop recorded in the third quarter, the remaining $23 million to $33 million hits the fourth quarter, combining with four fewer selling days to push total sales below last year.
What to watch: fourth-quarter OEM Security revenue and the initial 2027 revenue outlook next quarter. Because this customer only started cutting orders in mid-2026, the drag will weigh on year-over-year comparisons through the first half of 2027.
Working Capital Drained Cash and Slowed Deleveraging
Even after the $1.1 billion debt paydown, Resideo carries $2.1 billion of gross debt — 3.4 times this year's planned profit before interest, taxes, depreciation and amortization (Standalone Adjusted EBITDA) by our math, or 3.0 times net of cash. Paying that down further towards its target of under 2.0 times within two years requires steady cash generation.
So far this year, inventory and unpaid customer bills have absorbed most of the company's cash. Accounts receivable rose 22.5% from year-end to $507 million and inventory climbed 23.6% to $393 million, creating a $182 million cash outflow across the first nine months and holding third-quarter continuing operating cash flow to $33 million.
What to watch: fourth-quarter inventory and receivables balances on the year-end balance sheet. Management's new cash-flow plan implies at least $54 million of operating cash flow in the fourth quarter by our math, which requires working capital to stop absorbing cash.
Risks this quarter didn't answer
Three standing risks from before the separation remain open after the third-quarter release.
- Soft US housing demand: Surran noted the business is operating in "a soft housing market and a dynamic macro environment", which continues to cap repair and new-build volume.
- Standalone overhead and new leadership: with ADI gone, Resideo no longer breaks out corporate overhead separately from product segment profit, leaving its standalone cost run-rate under the new finance chief untested.
- Preferred stock overhang: 350,000 preferred shares with a $350 million liquidation preference remain outstanding after the spin-off adjustment, claiming $9 million of third-quarter continuing net income.
👓 Other Themes
Separation and Factory Charges Cut Reported Profit
Reported net income from continuing operations fell 66% from a year ago to $31 million because of spin-off bills and factory closures. Selling, general and administrative expenses rose 2.7 percentage points of revenue to 21.9% on $30 million of one-off ADI separation costs — without them, overhead fell 1.5 points by our math — while restructuring and debt charges rose 2.3 points to $20 million on "continued manufacturing operations optimization and higher debt extinguishment charges".
💲 Other KPIs
Free cash flow from continuing operations — operating cash flow of $33 million minus $22 million of capital spending — equalled 1.5% of revenue by our math. For the first nine months, continuing operations generated $49 million of free cash flow as capital spending rose 44% from a year ago to $62 million.
Spending on product development rose 12.1% from a year ago and reached 5.1% of revenue, up from 4.7% a year earlier by our math. The home-controls maker is spending more ahead of new security, smoke detector and software releases.
Weighted average diluted common shares stayed at 154 million, unchanged from a year ago and last quarter. The US manufacturer has not repurchased shares for the past two years, directing cash toward debt reduction instead.
🔮 Guidance
Raised. Resideo lifted the middle of its full-year revenue range by $12 million to $2,937 million, which represents 2.8% growth over 2025 continuing operations by our math. The narrower band passes through the third-quarter beat while keeping fourth-quarter expectations unchanged.
New. The fourth-quarter plan sits inside the $705–730 million range that last quarter's full-year outlook implied, but at the $720 million middle of the range it points to a 4.0% decline from last year's $750 million continuing revenue by our math. Four fewer selling days and the OEM Security drop drive the contraction.
Raised. Management lifted the middle of the full-year profit range by $4 million to $619 million, or 6.5% growth from 2025 by our math, matching the $4 million third-quarter beat against the middle of its prior range.
New. The fourth-quarter range averages $150 million, down 2.6% from the third quarter and up 1.4% from $148 million a year ago by our math. At the middle of the range, the implied profit margin is 20.8% of revenue against 21.2% in the third quarter.
New. Fulfilling its commitment from last quarter, the company reinstated a full-year per-share profit outlook following the ADI separation. The $1.95 middle of the range is up 4.3% from $1.87 in 2025 by our math.
New. The $0.45 middle of the range matches the $0.45 earned in the fourth quarter of 2025 and steps down from $0.52 in the third quarter.
New. Reinstated alongside per-share profit, the floor of $165 million compares with $111 million generated by continuing operations in the first nine months, leaving at least $54 million for the fourth quarter by our math.
❓ Key Questions
How large were the third-quarter tariff refunds in gross profit?
Continuing gross margin expanded by only 0.04 percentage points from a year ago by our math, and the release cited tariff refunds as a tailwind after management previously anticipated none in the second half. Without the dollar figure, investors cannot see if underlying margin shrank.
Why did receivables and inventory absorb $182 million over nine months?
Continuing accounts receivable and inventory each jumped more than 22% from year-end on 3% revenue growth. Management has not explained whether the build reflects post-spin billing terms with ADI or slower-moving stock.
When will the large OEM Security customer stop cutting orders?
OEM Security revenue dropped 34% to $33 million in the third quarter and pushes fourth-quarter total revenue toward a 4% decline by our math. Investors need to know the quarterly revenue floor for this account in 2027.
What is the standalone corporate expense run-rate after the spin-off?
With ADI moved to discontinued operations, Resideo stopped reporting corporate overhead separately from segment operating profit. Disclosing the ongoing corporate cost base would show whether the $30 million of separation charges truly ended.