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Resideo Technologies, Inc. (REZI) Q1 2020 Earnings Call Transcript

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REZI earnings call for the period ending March 31, 2020.

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Resideo Technologies, Inc. (REZI 1.01%)
Q1 2020 Earnings Call
May 07, 2020, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


At this time, I'd like to welcome everyone to the Resideo Technologies first-quarter 2020 earnings conference call. Today's call is being recorded. [Operator instructions] I would now like to introduce Mr. Matt Giordano, vice president and treasurer.

Mr. Giordano, you may now begin.

Matt Giordano -- Vice President and Treasurer

Good morning. Thank you for joining us for Resideo's earnings conference call covering the first quarter of 2020. On today's call, we have Mike Nefkens and Bob Ryder joined by Andy Teich, our lead independent director. You can find a copy of our earnings release and presentation materials on the Investor Relations page of

We'd like to remind you that this morning's presentation contains forward-looking statements. Statements other than historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Resideo's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company's earnings press release and accompanying presentation, both of which can be found on the Investor Relations section of our website. I'll now turn the call over to Mike.

Mike Nefkens -- President and Chief Executive Officer

Thanks, Matt, and good morning, everyone. Thank you for joining us for our first-quarter 2020 earnings call. I hope that you and your families are well and safe. Today, I'll begin with some brief comments on recent events and how Resideo is responding to the COVID-19 pandemic.

Andy will then go into greater detail on our efforts to support our employees and manage our business during COVID-19. He will also provide an update on the execution and results of our financial and operating review initiatives. Bob will then review our financial performance and liquidity before Andy offer some final remarks. We will then open up the call to your questions.

Since the beginning of the COVID-19 pandemic in March, the primary focus of the entire Resideo management team and Board has been safety. We move swiftly in response to the COVID-19 pandemic with the goal of best safeguarding our employees, professional installers and customers. Protecting their health and well-being will remain a priority for us, combined with business continuity. At the same time, like many others, we are rightsizing our cost structure to reflect today's uncertain times and taking steps to strengthening our liquidity and balance sheet.

Much of this work began end of last year, resulting from our financial and operations review, so we were able to mobilize quickly. COVID-19 has undoubtedly created economic and business disruption around the globe. However, we remain confident in the actions resulting from our finance and operations review, and we have adjusted them to sustain our business through the COVID crisis and come out the other end strong. This foundation is supported by established global market leadership, recognized and trusted brands and unmatched pro-channel loyalty.

With that, I'll now turn it over to Andy.

Andy Teich -- Lead Independent Director

Thanks, Mike, and thanks to everyone for joining us today. I'd like to echo Mike's sentiment and hope all of you and your families are doing well. Let's move to Slide No. 3 and a review of the various actions we've taken in response to the COVID-19 pandemic.

Resideo's products and services were deemed essential by the United States, Canada and certain other international governments. This further underscores the criticality of our products and services to everyday life, and we are proud to be able to support the increased duty cycles on our equipment as a result of the stay-at-home directives around the world today. As a result, we were able to maintain the majority of our production and sales activities. To ensure the health and safety of our employees and customers, we move quickly to deploy enhanced safety protocols while also focusing on ensuring the continuity of our operations.

First, with regard to employee and customer safety, we moved quickly to form a COVID-19 task force. This group is composed of a dedicated team of employees who are actively monitoring the situation through daily assessments and driving the appropriate business and safety response measures. These assessments include monitoring governmental directives and state orders and making any subsequent modifications as deemed necessary to ensure the safety of our employees and safe operation of our sites on a daily basis. One primary area of focus has been establishing direct and constant communication with our employees around the world.

Companywide advisories, regional and country-specific communications and a dedicated internet site are among the many initiatives we've put in place. We have also modified our manufacturing locations by applying various social distancing measures, factory layout modifications and installing remote elevated temperature monitoring systems. Many employees have been enabled to work from home with full IT support. In addition, we made a number of modifications at our ADI stores and warehouses to provide for additional social distancing and other recommended health protocols in an effort to further protect our employees, suppliers and customers.

These steps are being taken with the goal of ensuring business continuity through keeping our manufacturing sites operational, where safe to do so. All of this said the COVID-19 crisis has had a negative impact on our sales. Most of our manufacturing locations remain open, although, we are experiencing some challenges related to our P&S locations in Mexico. As of now, we do not anticipate significant negative disruptions to our inventories or supply chain.

Today, the vast majority of our ADI branches remain open or under modified operations and all distribution centers remain open. As you would expect, we are in constant contact with our supply chain partners and working together to adapt to a rapidly changing environment. We are also using this time to focus on building our digital capabilities including our e-commerce platform as well as our web-based training and digital business. This is a fast-growing channel of distribution for us, and we want to take full advantage of the technology available to reach even more customers as they transition to new ways of doing business.

Lastly, the search for a permanent CEO and CFO remain a high priority, and we are moving forward expeditiously in our search for the right candidates to lead Resideo in the days and the years ahead. In addition to our focus on safety and continuity, we've taken a number of proactive steps to execute targeted cost reduction initiatives and strengthen our liquidity in response to COVID-19. On the cost side, we implemented a salary reduction plan for certain employees, a furlough program, and we are greatly restricting business travel. These decisions were not easy as they impact our employees and our customers during a difficult time.

However, these actions were deemed necessary given the unprecedented challenges facing the global economy and our industry as a whole. We've restricted new hiring activity given the current uncertainty, postponed or reduced nonessential capital expenditures and have eliminated director service fees for the entire Board of Directors for the first quarter. We are also leveraging our financial and operational review to accelerate cost takeout initiatives wherever possible. Moving forward, we will remain focused on cost and productivity as we look to manage our cost structure and best align our operations with changing market conditions.

Bob will address our liquidity in more detail, but I'd like to touch on a few highlights. First, we fully drew down our $350 million revolver solely as a conservative measure and to ensure we have ample liquidity as the COVID-19 situation further develops. In addition, actions are under way to reduce our net working capital through key process refinements and inventory reductions. We also intend to continue our dialogue with Honeywell regarding the overall relationship and have initially agreed to the deferment until the end of July of $42 million of certain second quarter payments as we announced in April.

Now let's move to Slide No. 4 for an update on our financial and operational review. As we outlined on our last call, Phase 1 of the financial and operational review has three primary areas of focus: revenue and gross margin growth; SG&A optimization and working capital management. Today, I'm pleased to share that we have made good progress against each of these targeted areas.

We are also reiterating our goal of driving $30 million to $40 million of adjusted EBITDA improvements in 2020 from the F&O initiative despite the impact of the COVID-19 pandemic. In terms of a progress update, let's start with revenue and gross margin growth, where we began implementing product and pricing rationalization actions in the first quarter. To date, we have eliminated a number of lower volume and lower margin SKUs, many of which were EBITDA dilutive with a disproportionately higher cost to serve. In addition, we have successfully renegotiated approximately 50% of our targeted direct material contracts with a focus on value engineering and logistics.

Last quarter, we discussed our strategy to standardize common components and better align our offerings with customer and market demand patterns. We made progress on these fronts during the quarter and are seeing a design culture starting to permeate the organization that is more customer-focused and manufacturing efficiency aware. The true fruits of this labor will take time to become fully apparent in our financials, but we see the tide moving in the right direction. In terms of SG&A optimization, to date, we have executed approximately 35% of our organization reduction initiatives, and our remaining reductions are nearing finalization.

We have also executed approximately 25% of our indirect cost reduction plan with outside services, marketing and IT being the primary drivers. Lastly, we have taken action to improve our overall working capital management. This includes improving our inventory management processes for 2020 as well as improving receivable collections and credit term extension processes. Since our Q4 call, we have made a good progress in analyzing our Phase 2 initiatives.

We have continued the assessment of our operational footprint and develop potential alternatives that will improve our financial position, our product quality and speed to market. We expect to continue this process and announce major changes as they are implemented. Now I'll turn it over to Bob for a review of our financial performance and capital structure.

Bob Ryder -- Chief Financial Officer

Thanks, Andy. Let's begin with the review of our Q1 performance on Slide No. 5. During the quarter, consolidated revenue decreased 3% on a GAAP basis and was down 2% in constant currency.

Revenue performance was driven by 6% growth at ADI, which was more than offset by revenue decreasing 14% at products and solutions. The COVID-19 pandemic began to negatively impact sales performance at both our segments toward the end of the quarter. Consolidated adjusted EBITDA was down 22% in the quarter, primarily because of lower sales volume and weaker mix of products and solutions, due in part to COVID-19. As disclosed in the earnings release footnote, we have modified our definition of adjusted EBITDA.

Current and prior quarters adjusted EBITDA now excludes both expense and cash payments associated with the Honeywell reimbursement agreement. These items are not related to the underlying Resideo operating performance and future cash payments will not be as consistent as they were in 2019. In our original guidance for 2020, we assumed $35 million cash payment per quarter for a total of $140 million cash payments for the year, which was deducted in arriving at the previous definition of adjusted EBITDA. We also reclassified research and development costs from cost of goods sold to SG&A in the income statement.

This change will be reflected in all years presented. We believe this line item reclassification better reflects the underlying cost and industry practice. During our Q4 earnings call, we provided some context of expected Q1 2020 revenue growth and adjusted EBITDA growth performance. As we expected, Q1 financial results as compared to the previous year to be anomalous to our full year 2020 guidance.

Our Q1 2020 performance was trending slightly better than those Q1 expectations prior to the impact of COVID-19. Our actual Q1 revenue finished down low single digits consistent with what we conveyed on the Q4 earnings call, while adjusted EBITDA finished slightly better than those expectations due primarily to better sales mix at P&S. The COVID-19 pandemic has had a negative impact on our revenues, which started toward the end of the quarter and continues through today. For April, total Resideo sales were down 25%, with ADI down 21% and P&S down 30%.

These results include the impact of COVID-19 and other current and prior year revenue components. As the economy opens up, we expect revenue to improve, but we cannot anticipate how the crisis will evolve. We have conducted surveys of homeowners, and preliminary results were flacked as the majority of our customers anticipate completing their planned home projects. We think the majority of our recently lost revenue has not disappeared, but just moved further into the latter part of this year.

It's worth noting, we are able to partially mitigate the COVID-19 impact through targeted cost reduction actions taken across all of our business segments. These measures include salary reductions, travel restrictions and the implementation of a furlough program. We also restricted new hiring activity and eliminated the service fees for our Board of Directors for the first quarter. Due to timing, these actions only had a partial impact on Q1 results.

Moving forward, we will continue to actively manage our business and we'll evaluate additional measures we can take to align our cost structure with the impact of COVID-19. Now moving to the segment discussion. At ADI, GAAP revenue increased 6% in the quarter. On a constant currency basis, revenue finished up 7%.

The revenue performance at ADI in the period was solid, especially considering we began to see the negative impact of COVID-19 in March. The Herman AV acquisition added about 1% to revenue growth for the quarter. ADI EBITDA was flat to prior year. As the revenue increase was offset by weaker product line and customer mix, ongoing investments in our e-commerce platform and commercial headcount and branch expansions to support future revenue.

On the e-commerce side, we see big opportunities to expand this channel at ADI, with increased telesales staff and improved website and additional e-commerce software investment, we believe this channel provides a great opportunity to reach customers. Turning now to Products and Solutions, where revenues were down 14% on a GAAP basis and 13% in constant currency. The revenue decline in Q1 was driven by lower volumes across security, comfort and RTS. The overall volume decline at P&S was driven in part by the overlap of a particularly strong first quarter of 2019.

Products and solutions adjusted EBITDA finished down 35% compared to Q1 of last year. The decline was driven by lower volumes this quarter as well as unfavorable product and channel mix. Mix shift to lower margin connected thermostats, a lower margin GRIP security product and lower trade channel sales in our RTS business, all impacted this mix. Turning now to Slide No.

6. It shows the key variance drivers of our total revenue and adjusted EBITDA performance in Q1. Total company revenue was down 3% as reported and 2% on a constant currency basis. On a GAAP basis, ADI revenues were up $44 million, while revenue P&S were down $72 million compared to Q1 of last year.

Overall, currency impact in Q1 was a negative $9 million. Adjusted EBITDA in Q1 was $99 million compared to $127 million in Q1 of last year. Both years exclude any expense or cash payment pursuant to the Honeywell reimbursement agreement. By far, the biggest negative driver of the year-over-year decline was the combination of volume down $32 million due to P&S revenue reduction and price/mix down $17 million.

As previously discussed, we experienced negative mix shift with each business segment. In addition, as ADI grows faster than products and solutions, total Resideo experiences lower profit margins as the ADI business segment is a lower-margin business. We had a $16 million adjusted EBITDA benefit from our transformation programs and another $8 million related to the cost reduction initiatives implemented due to COVID-19. These transformational cost reductions reflect savings from previous year's headcount reduction initiative and initial savings from our financial and operational review.

The COVID-19 cost actions were driven by reduced headcount costs from salary reductions, furloughs and other corporate cost reduction efforts. We expect the COVID-19 reductions to be temporary as we return to normal compensation methodologies when the impact of the crisis on our business subside. Lastly, there was about $3 million of incremental costs reflected on this slide as other due primarily to engineering and sales headcount investments made in 2019. Regarding our full year outlook.

We stated in our COVID-19 update release, given the rapidly evolving operating conditions and market uncertainty caused by COVID-19, we withdrew our full year 2020 outlook, like many others, we are unable to accurately estimate the impact of COVID-19 on our performance and financial results at this time. We will continue to closely monitor the impacts of COVID-19 on our business end markets and provide an update as appropriate. Now I'll take a few minutes to discuss our liquidity and capital structure on Slide No. 7.

In terms of cash and liquidity, our cash balance at March 31 was $338 million. This includes the drawdown funds available under our $350 million revolving credit facility, which we did as a conservative measure to enhance our liquidity position. We continue to focus on reducing our net working capital investment and reduced planned capital spending. On the working capital front, we are improving processes across receivables, payables and inventory, which should benefit the company after the COVID-19 crisis passes.

In April, we announced that Resideo and Honeywell had agreed to defer approximately $42 million in payments due to Honeywell in Q2 until July 30. This includes $35 million in payments under the Honeywell reimbursement agreement and $7 million in payments in connection with our trademark license agreement. We agreed to this arrangement with Honeywell as part of the ongoing dialogue regarding our relationship, which we expect to continue in Q2. Turning to capital structure.

Our next significant debt maturity is due in 2023. As of March 31, we are in compliance with our debt covenants. In addition to the deferred payments to Honeywell, we also reached an agreement to incorporate the leverage ratio included in our credit agreement amendment from December 2019 into the Honeywell reimbursement agreement. Moving forward, we will continue to focus on strengthening our liquidity and cash position as we navigate the challenging operating environment caused by the COVID-19 pandemic.

I will now turn the call back over to Andy for his summary remarks. Andy?

Andy Teich -- Lead Independent Director

In summary, we delivered Q1 results that were in line with the expectations we laid out on our 2019 year-end call. We accomplished this despite the negative impact of COVID-19, which began impacting our business in March. Today, we have focused our communications on the measures and actions we took to safeguard our employees and our customers. That has been and will remain our No.

1 priority. I want to reiterate how proud we are of our employees and how they've responded to this unprecedented situation. They have been there for us with 100% commitment and dedication, and I want to underscore our deep level of gratitude for that. We've made some hard decisions to better align our cost structure with the conditions that we are seeing across our business.

Near-term visibility into our markets remains limited, given the rapidly changing COVID-19 situation. Moving forward, we will continue to actively manage our business with a focus on our cost reduction initiatives and liquidity in the near term. We've made great progress thus far, implementing our financial and operating review initiatives and remain on track for our full year goal. We have seen some opportunities to accelerate certain costs and liquidity actions, and we will continue to capitalize on these as they arise.

While it's important and difficult times to manage for the short term, it's also important to not lose sight of the longer term. And to that end, we have made great progress on several new product fronts. We look forward to providing more detail in this area in the near future. Resideo remains a company with established global scale, strong brand recognition and an extensive and loyal pro channel.

Our products are trusted across the globe in homes on the wall and behind the wall. We believe the actions we have taken to date, as well as the ongoing execution of our financial and operating review, will best position Resideo to capitalize on the growth opportunities as business conditions begin to normalize. Thanks for your time today, and let's open up the call to questions. Operator?

Questions & Answers:


Yes, sir. [Operator Instructions] We can now pass to our first question from John Lovallo, Bank of America. Please go ahead.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thank you for taking my questions today. First one is on liquidity. I'm just curious if you guys have had discussions with the banks on increasing the revolver capacity and perhaps in renegotiating the planned step down in the max leverage ratio, which I believe ticks down to 4.75 at the end of the year?

Andy Teich -- Lead Independent Director

John, this is Andy. Bob, you want to handle this one?

Bob Ryder -- Chief Financial Officer

Yes, sure. John, yes, I mean, look, we're always talking to banks on a lot of different things. We have a very good relationship there. As you know, we passed our covenants for Q1.

We haven't specifically talked to them about increasing any kind of revolver capacity or anything like that. It's more just in the normal course of business that we're having conversations with them.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

OK. And then understanding that you guys are not providing guidance, just curious how we should think about capex this year and maybe your ability to flex it down, and maybe it would be helpful if you could provide kind of a maintenance capex level?

Bob Ryder -- Chief Financial Officer

Yes. Good question. So look, when this happened and we started paying attention to — a lot more attention to liquidity. Obviously, capital spending was part of that.

And the business units were great in participating. So until we see, I'd say, a bit more clarity around when COVID will pass, we're kind of just on operating — like operating necessity capex. So I would probably say, I think last year, we spent capital somewhere around $85 million, something like that. I think we could probably reduce that down to until the crisis passes, we could probably cut 25% to 35% off that for this year.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Got it. And then finally...

Bob Ryder -- Chief Financial Officer

Some of the facts we're looking at — go ahead, sorry.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

No, no. Please, please, go ahead.

Bob Ryder -- Chief Financial Officer

No. Look, when we're spending capital, we want high IRR projects, right? So we don't want to defray high IRR project. So once we see the crisis clearing up, we'll be back to, hey, what are good ideas here? And what do we invest in, so more business as usual.John LovalloMakes sense. And then finally, on the search for a new CEO and CFO, curious if you guys have narrowed it down to a small number of candidates.

And then if Bob, if your hats in the ring for the potential CEO role?

Andy Teich -- Lead Independent Director

So this is Andy. Yes, we are progressing in that process, and I'm pleased with the way that it's going. Obviously, we can't talk about exactly where we are in the process until we have an agreement in place. But it is moving forward well.

Our partners in this RRA are doing a great job. So we'll certainly be back to you as soon as we have a candidate selected.


We can now take our next question from Jeff Kessler, Imperial Capital.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you. Could you discuss a little bit about incorporating your leverage in covenant discussions into the Honeywell reimbursement agreement? Don't need the — obviously, you're not going to give us direct, complete details, but I'd like to hear a little bit more about how you're getting perhaps some leeway on those agreements with regard to your position with Honeywell?

Andy Teich -- Lead Independent Director

Jeff, it's Andy. Yes, Bob, why don't you go ahead and provide an update on the discussions to date?

Bob Ryder -- Chief Financial Officer

Yes, sure. I mean, look, Jeff, the discussions to date have been more on the short term, right, when the crisis started, we were in conversations with Honeywell. And I would say a pretty good partnership mentality. We were able to defray the second quarter payments because as everyone knows, where the pandemic is going to hit everyone's financials is in the second quarter.

And so Honeywell allowed us to defray the licensing fee payment and the indemnity payment for the second quarter. And in addition, they agreed that the adjusted EBITDA leverage covenant ratios that we agreed with the banks last year in the fall, will also be adopted by Honeywell. So we're all working off the same EBITDA leverage covenants are on the same page. I think so that was good news from a partnership mentality.

And I think we just decided — we have a lot of interconnectivity between the two companies. So what we're hoping is that we can just continue these productive conversations going forward and make sure we're on the same page. So not anything definitive, the only thing that's agreed were those specific things that were in the press release. And then we just will continue ongoing discussions.

Jeff Kessler -- Imperial Capital -- Analyst

All right. Is it because there's so much interconnectivity between the two companies that they're allowing you to deal with the leverage agreements above the reimbursement line to Honeywell?

Bob Ryder -- Chief Financial Officer

I'm not sure if I understand that. But I mean, obviously, we know there's a lot of interconnectivity, right? We buy some of their products. We're still making things for them. There's a reasonable amount of TSA agreements still ongoing.

We do make these payments to them. And as you know, the agreement lasts for 25 years or so, right? So they have a vested interest in making sure we're a thriving business. So I think that's probably why we came to those resolutions in the second quarter.

Jeff Kessler -- Imperial Capital -- Analyst

OK. And actually, the question around it is that your banks have agreed to, let's call it, define your EBITDA as pre-reimbursement to Honeywell EBITDA?

Bob Ryder -- Chief Financial Officer

Matt, do you want to take that one?

Matt Giordano -- Vice President and Treasurer

Yes. Nothing we agreed to change the definition, the bank definition of EBITDA leverage. Right. But the fact that we defrayed this payment, the $35 million does help that calculation quite a bit because that will impact the EBITDA portion of the calculation, positively impact.

Jeff Kessler -- Imperial Capital -- Analyst

All right. And one question on operations. Can you — clearly, in the first quarter, while you were down — you were not down 40% or 50%. What areas are you actually seeing continued ongoing — where are you actually continuing to let — be let in to do large or ongoing projects or even small projects? What areas are continuing to do relatively well for you in the business? And is any of that in the residential area? Or is most of that in the commercial area?

Bob Ryder -- Chief Financial Officer

Yes, great question. I'll take it. Go ahead, Andrew, sorry.

Andy Teich -- Lead Independent Director

Yes. So I'll grab that one, Jeff. So generally, most of our ADI locations are open. And as you know, that's one of the main portals to our customers.

And in that area, I would say, even during the periods of the greatest reduction in sales, we still found that the larger commercial projects such that the projects are typically longer term. It's work that is bid under contract and so forth at those were ongoing, and obviously, based on the particular state that the project was going on in terms of what the governors of those states were allowing. And then we also, on the P&S side, many of our OEMs have businesses that are deemed essential and their demand continues as well. And we continue to monitor.

We've already seen some improvement in the daily sales, but also still a fair degree of variability day to day. So I think it's hard to call it beyond the data that we provided for the month of April at this point.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you.


We can now pass to our next question from Craig Irwin, ROTH Capital Partners. Please go ahead.

Craig Irwin -- ROTH Capital Partners -- Analyst

Good morning and thanks for taking my questions. I hope you're all well in this environment. First thing I wanted to ask about is the accrued liabilities in your cash flow, $80 million was a very large chunk of your cash use in the quarter. Accrued liabilities can be a little black box for investors.

Can you maybe describe what the changes were there that drove the $80 million in cash use? And is this something that has potential to reverse? Or are there potential cash puts into this accrual over the next couple of quarters?

Andy Teich -- Lead Independent Director

Craig, this is Andy. Bob, why don't you go ahead and cover that to the extent that we can?

Bob Ryder -- Chief Financial Officer

Yes, sure. Yes. So you're looking at the operating cash flow statement, and it's a use of cash on any other accrues. And I agree with your other accrues can be a bit of a catch-all account.

But essentially, the big change to prior year, the biggest thing was a tax payment that we made in Q1. And the other big thing would have been the funding of our 401(k). Where in the previous years, tax payments move around throughout the year depending on the jurisdiction. So that was different than the previous year.

And in the previous year, I believe Honeywell funded our 401(k). So they were the two biggest things that accounts for like 70% to 80% of that use of cash.

Craig Irwin -- ROTH Capital Partners -- Analyst

OK. So then this $80 million accrual should be dramatically reduced now quarter, so that's fair to expect?

Bob Ryder -- Chief Financial Officer

Yes. So the accrual is gone, right, because we paid the taxes, right? So that's what you're seeing on the cash flow statement.

Craig Irwin -- ROTH Capital Partners -- Analyst

Excellent, excellent. So then the environment, right, you made specific comments on April and then some comments on trends since then. As we look at our models and try and figure out, is this a swoosh, is this a V or U? What the potential rebound is at both ADI and products? Can you maybe point us to what you're looking at for indicators of business activity that you use to manage the business? And can you maybe describe for us any changes to short-term trends in there on a weekly basis or daily basis that you feel might be indicative of a broader activity for your business?

Andy Teich -- Lead Independent Director

Craig, I'll handle the first piece. This is Andy, and then I'll ask Bob. I mean, I'm sorry, I'm going to handle the second part of your question, I'll ask Bob to talk about how we're looking at this from a modeling standpoint. But the issue that we've seen is more variability in the data.

So it's too hard to call what the recovery is going to look like at this point. There's just kind of a bigger beta around the number. But I would say the average — the April numbers at this point, we don't have data better than that in terms of trying to peg an average for the quarter. I think we've just got to let these various states open up and get more operating locations, specifically for ADI with functioning.

Bob, you want to talk a little bit about the full year planning at this point?

Bob Ryder -- Chief Financial Officer

Yes. And just to follow-up on Andy, look, we're all tracking daily sales. And we always have, but we're paying more attention to it. I'd say we've — both at ADI and P&S the business leaders there and the commercial folks are really staying in contact with the customers, even more than before.

I'd also say we did this survey that indicates when the states open up to Andy's point, that these projects should return and look surveys or surveys, it's extrapolations, right? But it was good news for us when this came back that people don't intend on just canceling these projects that they had planned. The wide majority of them will probably happen in the foreseeable future. I would also say that May sales trends aren't much different than what we saw in April. And back to Andy's point, right, we pulled guidance, most companies pulled guidance because the future is just so opaque as to when the states will open up.

And then in general, how will consumers respond, how much money will they have? And when do they feel safe going out into society like normal. But the good news is we think our industry is in a little bit better shape than most on that end, which is what the survey confirm for us.

Craig Irwin -- ROTH Capital Partners -- Analyst

That's really good to hear. One of the things clients have been asking me for over the last number of weeks is your sales mix on the commercial side at ADI. I mean Resi is actually pretty easy to follow. But two-thirds of the business at ADI really is into commercial markets.

Are you predominantly into selling into things like strip malls and small office buildings? Or is this a more universal broad coverage across the commercial construction base?

Andy Teich -- Lead Independent Director

Yes, Craig, I don't think we're in a position to provide that level of detail at this point. And like I said, there's been more variability. The one thing that we have seen, as I had mentioned, Jeff's question, is more stay in power with regard to the larger commercial products — projects.

Craig Irwin -- ROTH Capital Partners -- Analyst

Understood. Understood. Thanks again for taking my questions and stay well.


We can now move to our next question from Ian Zaffino, Oppenheimer. Please go ahead.

Ian Zaffino -- Oppenheimer and Company -- Analyst

Hi. Great. Thank you very much. I just wanted to focus in on some of the year-over-year numbers on the revenue side.

Can you give us maybe a sense of really the best performers, the worst performers? Also, maybe you could parse out, if you could, best you could, I know there's some weather movements going on on the RTS side, maybe if you could help us quantify that? Or what happened as far as products being end-of-life and now lapping those, if you could give us any more granularity on that or maybe even the categories, that would be helpful? Thanks.

Andy Teich -- Lead Independent Director

Thanks. Ian. I think we can cover some of that data within P&S. Bob, do you want to do that?

Bob Ryder -- Chief Financial Officer

Yes, sure. I mean when you see the queue, we call it, I think, intersegment revenue, right? But all three lines of business were down to prior year. I would say, security held up the best and then probably the worst was RTS. And I'd say there's a lot of stuff going on.

RTS is more, I guess, impulse oriented. And I'd say the RTS sales that happened were more along the OEM, which is a lower margin channel. And as you know, we have had much warmer weather this year than prior year, and that tends to be a reasonable indicator for RTS. On Comfort, we had some of the continuing product transition issues away from the traditional nonconnected thermostats to the more connected thermostats, which are also kind of lower margin.

But we saw a reasonable sales tail off there. And on Security, I think we had saw the least sales tail off, but maybe that people take that more seriously, if there's an issue there or if they really want to enhance the security in their homes or their offices, they take that more seriously than Comfort and RTS. And maybe that's why those sales held up a little bit more. But we also saw a negative mix shift there with the last year's launch of GRIP had a pretty high sales amount.

And this year was a little less and that GRIP product, as we've spoken to before, is probably on the lower margin side. So it's kind of negative profit mix.

Ian Zaffino -- Oppenheimer and Company -- Analyst

OK. Great. And I have a follow up, just on the P&S — sorry, go ahead.

Andy Teich -- Lead Independent Director

Yes. So this is Andy again. I'll just add one other comment to that. And this is more of a thesis rather than a forecast, but Ian, we touched upon it briefly in the prepared remarks.

But fundamentally, we do know there's a pretty strong correlation between demand for our products and duty cycle on the overall systems that we serve. And the stay at home orders certainly are going to increase duty cycles on the equipment within homes. And fundamentally, that should drive demand longer-term for us.

Ian Zaffino -- Oppenheimer and Company -- Analyst

OK. Great. And then just a follow-up on the Honeywell negotiations. It's great that you guys are actually having this discussion and broadening the relationship.

Have you touched upon the amount of indemnification payments with Honeywell? Has that subject been broached? Just given that the earnings profile of the company is different than it was during the spin. And just given that Honeywell has been somewhat cooperative with you guys, is there room to get even more cooperation?

Andy Teich -- Lead Independent Director

Yes. Ian, we'd love to see that, but we haven't had in-depth conversations about that at this point. But it's certainly on our radar. We have no feeling in terms of what kind of yards we would get there.

Ian Zaffino -- Oppenheimer and Company -- Analyst

OK. Great. Thank you very much.


We may now pass to our next question from Jeff Kessler. Imperial Capital. Please go ahead.

Jeff Kessler -- Imperial Capital -- Analyst

Just one quick follow-up. Given what you've seen so far in terms of what is selling and what is not selling for your channels and what is selling and what's not selling through ADI, assuming we come out of this at some point in time over the next 12 months, are there areas of your business that have margin and have IRRs that you think are going to be more in your — were on your dashboard to be sold and more emphasize going forward as opposed to what types of products are you looking at that have now in the past, had lower margins, ultimately lower IRRs as you invent — when you invested in them, and you've probably been looking at what has sold, what has not sold, how much you invested in, how much you did invest in? The bottom line is going forward a year, taking a look at what you've got in your portfolio, where are you going to be putting your sales and marketing investments both to the channel, and hopefully, the channel to the end users going forward that we can kind of take a look at?

Andy Teich -- Lead Independent Director

Jeff, this is Andy. And that's a great question. And it really goes to the heart of the No. 1 issue in the F&O Review that we're doing, which is improving revenue and gross margin.

And as part of that review, we touched upon it a little bit in the prepared remarks that we have eliminated some SKUs of underperforming products or products that had poor gross margin. And some of that manifested itself in the inventory writedowns for Q1, which were higher than they will be for the rest of the year. But to that end, a couple of things on there. No.

1 is we are investing, Bob mentioned on the capex front that we're investing on things that have quick and high IRRs. And one of those is tools on the e-commerce front because our e-commerce sales through ADI have a higher margin, and we want to drive that business. We want to grow that part of the business. And also it's consistent with today's sort of ways of doing business in today's world.

The other thing is, is our investment in new products, the new products that we have in the pipeline now generate gross margins at or above total gross margins for the company or products that they're replacing within a product line. So we're really focused on that aspect. And I would say the last thing is the point that I made at the tail end of Craig's comment there that we do think that what's going on here is going to drive higher duty cycles on equipment that we serve within homes, and that's going to drive more replacements. And our aftermarket parts business, in general, has higher gross margins than our OEM business does.

So to the extent that there's a correlation there, we feel that would be positive to the business.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you very much.


I would now like to hand the call back over to Matt Giordano for concluding remarks. Thank you.

Matt Giordano -- Vice President and Treasurer

Thanks, operator, and thanks to our participants for joining us today. This concludes our call. The materials covered today can be found on our website and feel free to reach out to me, if any one of you have any further questions. Stay safe, and we look forward to seeing you next quarter.


[Operator signoff]

Duration: 49 minutes

Call participants:

Matt Giordano -- Vice President and Treasurer

Mike Nefkens -- President and Chief Executive Officer

Andy Teich -- Lead Independent Director

Bob Ryder -- Chief Financial Officer

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Jeff Kessler -- Imperial Capital -- Analyst

Craig Irwin -- ROTH Capital Partners -- Analyst

Ian Zaffino -- Oppenheimer and Company -- Analyst

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