| ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2023
| ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 82-5318796 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
16100 N. 71st Street, Suite 550, Scottsdale, Arizona | 85254 | |||||||
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(Address of principal executive offices) | (Zip Code) |
(480) 573-5340
Title of each class: | Trading Symbol: | Name of each exchange on which registered: | ||||||
Common Stock, par value $0.001 per share | REZI | New York Stock Exchange |
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||
Emerging growth company | ☐ |
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Part I. | 1. | 3 | |
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| 1A. | 8 | |
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| 1B. | 20 | |
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| 2. | 21 | |
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| 3. | 21 | |
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Part II. | 5. | 22 | |
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| 6. | 23 | |
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| 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 |
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| 7A. | 42 | |
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| 8. | 42 | |
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| 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 87 |
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| 9A. | 87 | |
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| 9B. | 88 | |
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Part III. | 10. | 88 | |
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| 11. | 88 | |
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| 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 88 |
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| 13. | Certain Relationships and Related Transactions, and Director Independence | 88 |
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| 14. | 88 | |
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Part IV. | 15. | 89 | |
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| 16. | 93 | |
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2
RESIDEO TECHNOLOGIES, INC.
PART I.
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In this Annual Report on Form 10-K,
This Annual Report includes industry and market data that we obtained from various third-party industry and market data sources. While we believe the projections of the industry sources referenced in this Annual Report are reasonable, forecasts based upon such data involve inherent uncertainties, and actual results are subject to change based upon various factors beyond our control. All such industry data is available publicly or for purchase and was not commissioned specifically for us. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, forecasts based upon such data involve inherent uncertainties, and actual results regarding the subject matter of such forecasts are subject to change based upon various factors, including those beyond our control and those discussed under the headings “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in this Annual Report.
On October 29, 2018, we
Our meaningful presence in the home derived from our broad portfoliotypes of products and our focus on the professional installer, combined with our service-focused global distribution footprint, positions us well to take advantage of this significant market opportunity. We deliver value to our professional customers via two business
3
RESIDEO TECHNOLOGIES, INC.
segments, Products & Solutions and ADI Global Distribution, which respectively contributed 41.8% and 58.2% of our net revenue for the year ended December 31, 2020.
solutions we provide.
the connected home.
space and smaller market entrants that offer control capabilities among their products, applications and services and have ongoing development efforts to address the broader connected home market.
Our management team has significant experience and a track record of leading tech-enabled businesses, developing best-in-class products, and executing organizational change. This team is focused on ingraining a culture of continuous improvement into our organization with the goal of lowering costs, increasing margins and positioning the Company for growth. Leveraging the Company’s presence in the home and its relationship with professional installers, management has reorganized the Products & Solutions business to enhance focus and collaboration across business lines and segments.
With this ongoing transformation underway, we believe we are well-positioned to execute on our growth strategy across both of our segments. Our strategy in Products & Solutions is focused on accelerating our product innovation, expanding our presence in the home and buildings, and over time, enabling connected ecosystems grounded in relationships with professional installers. Our ADI Global Distribution growth strategy is focused on increasing our omni-channel presence to grow our customer base, expanding into adjacent growth markets, and continuing to enhance our value-add services to support our professional installers’ efficiency and profitability.
4
RESIDEO TECHNOLOGIES, INC.
The Company’sFactors
Statements.
5
RESIDEO TECHNOLOGIES, INC.
daily symptom self-assessments, curbside and contactless pickup in many locations, enhanced employee benefits, COVID-19 testing, and policies requiring face coverings and physical distancing.
ISO 50001:2018. At the end of 2020,2023 our global Total Case Incident Rate (“TCIR”)or “TCIR” (the number of occupational injuries and illnesses per 100 employees) was 0.28, significantly lower than the North American Industry Classification System injury rate for Automatic Environmental Controls of 1.7 (as reported by the U.S. Bureau of Labor Statistics).0.37. We monitor our safety through a balanced scorecard of key performance indicators. In addition to reactive incident management investigation and root cause analysis indicators, we measure and analyze the data generated from our hazard observation, designated Health, Safety,health and Environment Internal Department (“HSE”)safety inspections by line managers and internal audit programs by accredited HSEhealth and safety lead auditors to provide insights and intelligence that help us proactively mitigate issues before they result in incidents.
In April 2020, we took the necessary steps to weather the COVID-19 crisis with several cost saving programs including temporary payroll savings, furloughs, and reduced work schedules. Where employee agreement was necessary, an overwhelming majority of employees joined their worldwide colleagues in supporting this effort to help the Company preserve business continuity. In December 2020, we announced a special year-end bonus payable to current employees who had been directly impacted by COVID-19 cost saving actions, in an amount generally comparable to the financial impact of the cost savings actions.
We strongly value feedback from
6
RESIDEO TECHNOLOGIES, INC.
organization. Managers and their team members continued to participate in quarterlytri-annual “Pulse” conversations to set performance expectations and monitor and evaluate performance. People managers at Resideo are strongly encouraged to give frequent, informal feedback so that employees are always clear on their performance level.
company in the future.
The effects of climate change, such as extreme weather conditions and events and water scarcity, may exacerbate fluctuations in typical weather patterns, creating financial risks to our business. In addition, the dynamic global and macro-economic conditions may further disrupt these seasonal patterns.
Factors
.www.Resideo.com.
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RESIDEO TECHNOLOGIES, INC.
exclusionarynon-exclusionary distribution of information to the public. We use these channels to communicate with our stockholders and the public about our Company,us, our products, solutions and other issues. It is possible that the information we post on social media could be deemed to be material information. We encourage investors, the media and others interested in our Company to review the information we post on our website and the social media channels listed below. The list of social media channels we use may be updated from time to time on our investor relations website.
Resideo)
Resideo)
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affected, which could adversely affect our business, financial condition, results of operations and cash flows.
8
RESIDEO TECHNOLOGIES, INC.
fact that our competitors and potential competitors may have greater brand recognition, resources, access to capital, including greater research and development or sales and marketing funds, more customers, lower costs and more advanced technology platforms, particularly with our connected products and services and in connectedenergy management services, andas well as in new geographic regions. It is possible that competitive pressures resulting from consolidation, including customers taking manufacturing or distribution in house, purchasing directly from a manufacturer instead of from ADI Global Distribution, moving to a competitor, partnering with third parties and consolidation amongst our customers, could affect our growth and profit margins. Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price for, and reducing the number of, suitable acquisition targets. We may not be successful in effectively identifying all risks of an acquired business, integrating the acquired business, product or technology into our existing business and operations or realizing the benefits expected at acquisition. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues.
services to consumers.
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RESIDEO TECHNOLOGIES, INC.
Market and economic conditions may adversely affect the economic conditions
As a global provider of Comfort, RTS and Security products, services and technologies for the home, as well as a worldwide wholesale distributor of low-voltage electronics products, as well as smart home, fire, power, audio and ProAV, networking, communications, wire and cable, enterprise connectivity, and structured wiring products, our business is affected by the performance of the global new and repair and remodel construction industry. Our markets are sensitive to changes in the regions in which we operate and are also influenced by cyclical factors such as interest rates, inflation, availability of financing, consumer spending habits and confidence, housing market changes, employment rates and other macroeconomic factors over which we have no control, and which could adversely affect our business, financial condition, results of operations and cash flows. Our sales are also affected by fluctuations in demand for Internet-connected devices. If the market for connected home solutions grows more slowly than anticipated, we may not be able to increase our revenue and earnings.
We may not be able to retain or expand relationships with certain significant customers.
A number of our customers contribute significantly to our net revenue and operating income. Consolidation or change of control, particularly among our OEM customers (and in certain instances, their authorized dealers), or a decision by any one or more of our customers to outsource all or most manufacturing work to a single equipment manufacturer, or partner with third parties may continue to concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on a smaller number of customers. We generally have to qualify, and are required to maintain our status, as a supplier for each of our OEM customers. A significant failure or inability to comply with customer specifications and manufacturing requirements or delays or other problems with existing or new products or inability to meet price requirements could result in financial penalties, cancelled orders, increased costs, loss of sales, market share shift, loss of customers or potential breaches of customer contracts, which have had and could in the future have an adverse effect on our profitability and results of
10
RESIDEO TECHNOLOGIES, INC.
operations. By virtue of certain customers’ size and the significant portion of revenue that we derive from them, they are able to exert significant influence in the negotiation of our commercial agreements and the conduct of our business with them. If we are unable to retain and expand our business with these customers on favorable terms, our business, financial condition, results of operations and cash flows will be adversely affected.
Both
Manufacturers who currently distribute their products through our ADI Global Distribution business mayhave in the past and could in the future decide to shift to or substantially increase their existing distribution with other distributors, their own dealer networks, or directly to resellers or end-users. This could result in more intense competition as distributors strive to secure distribution rights with these manufacturers, which could have an adverse impact on our ADI Global Distribution business, financial condition, results of operations and cash flows. In addition, our ADI Global Distribution business may not be able to acquire from manufacturers or additional supply chains certain product lines that we are interested in adding to our distribution business, and if even we are able to add products, they may not result in sales as expected and may not be profitable to the overall business.
RESIDEO TECHNOLOGIES, INC.
Our business, results of operations, financial condition, cash flows, and stock price mayconditions could be adversely affected by pandemics, epidemicsaffected.
To the extent the COVID-19 outbreak adversely affects our business and financial results, it may also have the effect of heightening manyterms of the Maquiladora program and other risks describedlocal regulations, which have
recent years. In addition, if the Mexican government adopts additional adverse changes to the program, including nationalization, our manufacturing costs in Mexico would increase.
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RESIDEO TECHNOLOGIES, INC.
Our international revenues represented approximately 30% of our net revenue forrequirements. There have been, and continue to be, uncertainties with respect to the year ended December 31, 2020. Our international geographic footprint subjects us to many risks including: exchange control regulations; wageglobal economy and price controls; antitrust/competition and environmental regulations; employment regulations; foreign investment laws; monetary and fiscal policies and protectionist measures that may prohibit acquisitions or joint ventures, establish local content requirements, or impact trade volumes; import, exportrelations between the U.S. and other trade restrictions (such as embargoes); violations by our employees of anti-corruption laws (despite our efforts to mitigate these risks); changes in regulations regarding transactions with state-owned enterprises; nationalization of private enterprises; natural and man-made disasters, hazards and losses; backlash from foreign labor organizations related to our restructuring actions; violence, civil and labor unrest; acts of terrorism; health epidemics; and our ability to hire and maintain qualified staff and maintain the safety of our employees in these regions. Additionally, certain of the markets in which we operate have adopted increasingly strict data privacy and data protection requirements or may require local storage and processing of data or similar requirements
Instabilities and uncertainties arising from the global geopolitical environment can negatively impact our business. The implementationcountries globally. Implementation of more restrictive trade policies or the renegotiation of existing U.S. trade agreements in the U.S. or trade agreements of other countries where we sell, procure or manufacture large quantities of products and services or procure supplies and other materials incorporated into our products could negatively impact our business results of operations, cash flows and financial condition. For example, a government’s adoption of “buy national” policies or retaliation by another government against such policies, such as tariffs or quotas, could have a negative impact on our results of operations.
Tariffs, sanctions and other barriers to trade could adversely affect the business of our customers and suppliers, which could in turn negatively impact our net revenue and results of operations. Instabilities
As a resultwhere certain of our global presence, a portiondistribution business suppliers are located, and any counter-measures taken in response to such new restrictions, may harm our business and results of our net revenue are denominated in currencies other than the U.S. Dollar, whereas a significant amount of our payment obligations, including pursuant to the Reimbursement Agreement and Tax Matters Agreement are denominated in U.S. Dollars, which exposes us to foreign exchange risk. We monitor and may seek to reduce such risk through hedging activities; however, foreign exchange hedging activities bear a financial cost and may not always be available to us or be successful in eliminating such volatility.
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RESIDEO TECHNOLOGIES, INC.
Finally, we generate significant amounts of cash outside of the United States that is invested with financial and non-financial counterparties. While we employ comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure our ability to fund our operations and commitments, a material disruption to the counterparties with whom we transact business could expose us to financial loss.
We operate in many high-growth regions that require modifications to our products based on local building codes, regulations, standards, certifications and other factors, which may impact our cost to serve and profitability as we continue our penetration into these regions.
Failure to increase productivity through sustainable operational improvements, as well as an inability to successfully execute transformation programs or to effectively manage our workforce, may reduce our profitability or adversely impact our businesses.
Our profitability and margin growth are dependent upon our ability to drive sustainable improvements. In addition, we seek productivity and cost savings benefits through transformation and other programs, such as consolidation and outsourcing of manufacturing operations or facilities, transitions to cost-competitive regions, workforce reductions, product line rationalizations and other cost-saving initiatives. Risks associated with these actions include delays in execution of the planned initiatives, additional unexpected costs, asset impairments, realization of fewer than estimated productivity improvements, and adverse effects on employee morale leading to reduced production and unanticipated departures. We may not realize the full operational or financial benefits we expect and the recognition of these benefits may be delayed and these actions may potentially disrupt our operations. In addition, organizational changes, attrition, labor relations difficulties,the U.S. federal government has imposed certain restrictions on the licensing, use and import of certain surveillance, telecommunications and other equipment manufactured by certain of our suppliers based in China for our ADI Global Distribution business, which may require us to find additional sources of end-user products and result in higher costs. We have in the past had inquiries from the U.S. federal government regarding these sales of certain Chinese made products in the U.S., which inquiries could impact our business reputation.
Regulations and societal actions to respond to global climate change could negatively affect our business.
Responses to climate change may cause a shift away from fossil fuels to alternative power sources such as electricity or alternative fuels such as natural gas/hydrogen mixtures. Many of our thermal solutions are designed for application with oil and gas systems. A shift away from fossil fuels could affect our OEM customers’ business and result in a loss of business for them and for us. If we fail to adapt our solutions to alternative power sources, it could have an adverse effect on our business, financial condition, results of operations, and cash flows. Similarly, regulations to drive higher fuel efficiency and requirements to support varying fuel mix could shift business away from us if we fail to adapt our solutions to address these needs in a timely manner.
condition.
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RESIDEO TECHNOLOGIES, INC.
transactions. The Reimbursement Agreement may have material adverse effects on our liquidity and cash flows and on our results of operations, regardless of whether we experience a decline in net revenue. The Reimbursement Agreement may also require us to accrue significant long-term liabilities on our consolidated balance sheet,Consolidated Balance Sheets, the amounts of which will be dependent on factors outside our control, including Honeywell’s responsibility to manage and determine the outcomes of claims underlying the liabilities. This may have a significant negative impact on the calculation of key financial ratios and other metrics that are important to investors, rating agencies and securities analysts in evaluating our creditworthiness, and the value of our securities. Although we will have access to information regarding these liabilities as we may reasonably request for certain purposes,
We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2. Summary of Significant Accounting Policies of Notes to the Consolidated and Combined Financial Statements included in this Annual Report. We review other intangible assets and long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testingalternative power sources, it could differ from future actualhave an adverse effect on our business, financial condition, results of operations, and cash flows. IfSimilarly, regulations to drive higher fuel efficiency and requirements to support varying fuel mix could shift business away from us if we fail to adapt our solutions to address these needs in a timely manner.
reputation.
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RESIDEO TECHNOLOGIES, INC.
such claims or may be excluded from coverage. In the event of unexpected future developments, it is possible that the ultimate resolutions of such matters could be unfavorable.
Our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may become subject to or be required to pay damage awards or settlements that could have an adverse effect on our business, financial condition, results of operations and cash flows. If we were required to make payments, such payments could be significant and could exceed the amounts we have accrued with respect thereto, adversely affecting our business, financial condition, results of operations, and cash flows. court approved.
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RESIDEO TECHNOLOGIES, INC.
incurrence of significant liabilities for which there is no or insufficient insurance coverage (or where there is available insurance but high retention levels) could adversely affect our liquidity and financial condition, results of operations and cash flows.
Completion of the Spin-Off was conditioned on Honeywell’s receipt of separate written opinions from Cleary Gottlieb Steen & Hamilton and KPMG to the effect that the Spin-Off should qualify for non-recognition of gain and loss under Section 355 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”). The opinions assume that the Spin-Off was completed according to the terms of the Separation and Distribution Agreement.
If the distribution made in connection with the Spin-Off were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, then a U.S. Holder who received our common stock in the Spin-Off generally would be treated as receiving a distribution in an amount equal to the fair market value of our common stock received. In connection with the Spin-Off, we entered into the Tax Matters Agreement with Honeywell described in Note 19. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements.
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•tax, employee benefit, indemnification and other matters arising from our separation from Honeywell; |
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•intellectual property matters; |
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• | interpretations of contractual arrangements; and |
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RESIDEO TECHNOLOGIES, INC.
• | business combinations involving our Company. |
Notwithstanding that we recently completed a follow-on equity offering and a refinance of certain of our debt obligations, we
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RESIDEO TECHNOLOGIES, INC.
Our stock price may be volatile.
operations and future acquisitions.
We may be required to make significant cash contributions to our defined benefit pension plans.
We sponsor defined benefit pension plans under which certain eligible Company employees will earn pension benefits. We have plans in several countries including the U.S., the terms of which require that such qualified defined benefit pension plans maintain certain capitalization levels. Changes in discount rates and actual asset returns different than our anticipated asset returns can result in significant non-cash actuarial gains or losses. With regard to cash pension contributions, funding requirements for our pension plans are largely dependent upon interest rates, actual investment returns on pension assets and the impact of legislative or regulatory changes related to pension funding obligations. Our pension plan contributions may be material and could adversely impact our
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RESIDEO TECHNOLOGIES, INC.
financial condition, cash flow, and results of operations. We may need to make pension plan contributions in future periods sufficient to satisfy funding requirements.
For example, the Organization for Economic Co-operation and Development has enacted model rules for a new global minimum tax (“Pillar Two”), and many governments around the world have enacted, or are in the process of enacting, legislation on these rules, which may adversely impact our effective tax rate.
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RESIDEO TECHNOLOGIES, INC.
Scottsdale, Arizona.
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| Americas |
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| Asia Pacific |
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| EMEA |
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| India |
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Sites |
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| 145 |
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| 6 |
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| 104 |
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| 16 |
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Americas | Asia Pacific | EMEA | |||||||||||||||
Sites | 166 | 9 | 81 |
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For further information on our legal proceedings see
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RESIDEO TECHNOLOGIES, INC.
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As described in Item 1. Business of this Form 10-K, on October 29, 2018, Honeywell completed the separation of Resideo Technologies, Inc. Following the Spin-Off, our authorized capital stock consisted of 700,000,000 shares of common stock, par value $0.001 per share, and 100,000,000 shares of preferred stock, par value $0.001 per share. The Spin-Off is further described in Note 1. Organization, Operations and Basis of Presentation of Notes to the Consolidated and Combined Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Stock Performance
Information relating
Share Repurchases (1) | ||||||||||||||||||||||||||||||||||||||
Period | Total Number of Shares Purchased (thousands) (2) | Average Price Paid per Share Excluding Commissions | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (thousands) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (millions) | ||||||||||||||||||||||||||||||||||
October 1, 2023 to October 28, 2023 | 12 | $ | 15.72 | 12 | $ | 120 | ||||||||||||||||||||||||||||||||
October 29, 2023 to November 25, 2023 | 550 | $ | 16.03 | 550 | $ | 111 | ||||||||||||||||||||||||||||||||
November 26, 2023 to December 31, 2023 | 157 | $ | 16.36 | 157 | $ | 109 | ||||||||||||||||||||||||||||||||
Total | 719 | $ | 16.15 | 719 | ||||||||||||||||||||||||||||||||||
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RESIDEO TECHNOLOGIES, INC.
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Selected Historical Consolidated and Combined Financial Data
reinvestment of all dividends. This graph covers the period from December 31, 2018 through December 31, 2023. The following tables present certain selected historical consolidated and combined financial information as of and for each of the yearsreturns in the five-year period ended December 31, 2020. For periods priorgraph are not intended to October 29, 2018, the Company’s historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting recordsforecast or be indicative of Honeywell. Accordingly, for periods prior to October 29, 2018, these financial statements are presented on a combined basis and for periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial data for all periods presented are referred to as “Consolidated and Combined Financial Data”).
The selected historical Consolidated and Combined Financial Data presented below should be read in conjunction with possible future performance of our common stock.
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| Years Ended December 31, |
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| 2020 |
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| 2019 |
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| 2018 |
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| 2017 |
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| 2016 |
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| (In millions except share and per share data) |
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Selected Statements of Operations Information: |
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Net revenue |
| $ | 5,071 |
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| $ | 4,988 |
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| $ | 4,827 |
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| $ | 4,519 |
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| $ | 4,455 |
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Operating profit |
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| 311 |
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| 258 |
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|
| 493 |
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|
| 445 |
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|
| 495 |
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Net income (loss) (1) |
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| 37 |
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|
| 36 |
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| 405 |
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| (394 | ) |
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| 177 |
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Selected Balance Sheets Information at Year-End: |
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Total assets |
| $ | 5,610 |
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| $ | 5,128 |
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| $ | 4,972 |
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| $ | 4,473 |
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| $ | 4,294 |
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Long-term obligations |
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| 2,079 |
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| 2,032 |
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| 1,950 |
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| 723 |
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| 338 |
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Total liabilities |
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| 3,617 |
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| 3,526 |
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| 3,439 |
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| 1,870 |
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| 1,420 |
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Total equity |
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| 1,993 |
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| 1,602 |
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| 1,533 |
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| 2,603 |
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| 2,874 |
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Earnings (Loss) Per Common Share: (1) |
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Basic |
| $ | 0.30 |
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| $ | 0.29 |
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| $ | 3.31 |
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| $ | (3.22 | ) |
| $ | 1.44 |
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Diluted |
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| 0.29 |
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| 0.29 |
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| 3.30 |
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| (3.22 | ) |
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| 1.44 |
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Weighted Average Common Shares (in thousands): (2) |
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Basic |
|
| 125,348 |
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|
| 122,722 |
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|
| 122,499 |
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|
| 122,499 |
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|
| 122,499 |
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Diluted |
|
| 126,324 |
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| 122,238 |
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|
| 122,624 |
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| 122,499 |
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| 122,499 |
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RESIDEO TECHNOLOGIES, INC.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except per share amounts)
During the fourth quarter of 2020, we made a changestrategy is focused on growth in our omni-channel presence, expansion into adjacent markets, and continued enhancements to our reportable segments. Previously we allocated corporate costsvalue-add services to the Products & Solutions segment as well as the ADI Global Distribution segment. We now report corporate costs separately, as Corporate, from the two operating segments. In addition, during the fourth quarter of 2020,support our Chief Operating Decision Maker moved towards making financial decisionsprofessional installers’ efficiency and allocating resources based on Operating profit, rather than Segment Adjusted EBITDA. These changes were designed to better align accountability and authority, give a clearer view into the operational performance of the two segments and increase accountability for management of corporate spending.
profitability.
Years Ended December 31, | |||||||||||||||||
(in millions, except per share data and percentages) | 2023 | 2022 | $ change | % change | |||||||||||||
Net revenue | $ | 6,242 | $ | 6,370 | $ | (128) | (2.0) | % | |||||||||
Cost of goods sold | 4,546 | 4,604 | (58) | (1.3) | % | ||||||||||||
Gross profit | 1,696 | 1,766 | (70) | (4.0) | % | ||||||||||||
Gross Profit % | 27.2 | % | 27.7 | % | (50) bps | ||||||||||||
Operating expenses: | |||||||||||||||||
Research and development expenses | 109 | 111 | (2) | (1.8) | % | ||||||||||||
Selling, general and administrative expenses | 960 | 974 | (14) | (1.4) | % | ||||||||||||
Intangible asset amortization | 38 | 35 | 3 | 8.6 | % | ||||||||||||
Restructuring and impairment expenses | 42 | 35 | 7 | 20.0 | % | ||||||||||||
Total operating expenses | 1,149 | 1,155 | (6) | (0.5) | % | ||||||||||||
Income from operations | 547 | 611 | (64) | (10.5) | % | ||||||||||||
Other expenses, net | 169 | 139 | 30 | 21.6 | % | ||||||||||||
Interest expense, net | 65 | 54 | 11 | 20.4 | % | ||||||||||||
Income before taxes | 313 | 418 | (105) | (25.1) | % | ||||||||||||
Provision for income taxes | 103 | 135 | (32) | (23.7) | % | ||||||||||||
Net income | 210 | 283 | (73) | (25.8) | % | ||||||||||||
Earnings per share: | |||||||||||||||||
Basic | $ | 1.43 | $ | 1.94 | $ | (0.52) | (26.5) | % | |||||||||
Diluted | $ | 1.42 | $ | 1.90 | $ | (0.49) | (25.5) | % | |||||||||
During 2020, the Products & Solutions segment revenue declined 2%chart above. Gross margin of 27.2% was 50 bps lower when compared to 2019, driven by softness in Comfort and RTS product lines offset by strength27.7% in the Security business. Operating profit was positively impacted by cost savings from transformation programs, sourcing productivity, lower charges related to obsolete and surplus inventory, and other cost reduction efforts, offset by lower revenue volumes, unfavorable sales mix, investments to support new product launches, and labor and material inflation.
Our ADI Global Distribution business revenue increased 5% compared to 2019. Throughout 2020, the business continued its strong performance, achieving solid growth in US, including the impact from the 2020 Herman ProAV acquisition, as well as EMEA, and expansion in top product lines. ADI Global Distribution accelerated the adoption of digital tools, which is reflected in strong e-commerce growth. Operating profit was negatively impacted by unfavorable sales mix, commercial investments, acquisition related costs, and other cost inflation of $34 million, partially offset by transformation program cost savings, other expense productivity and cost reduction programs totaling $18 million.
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RESIDEO TECHNOLOGIES, INC.
Current Period Highlights
Net revenues increased $83 million in 2020 compared to 2019,prior year primarily due to increased pricing on certain productslower unit volume and acquisitions, partiallyunfavorable product mix.
We ended 2020 with $517$18 million in cashcosts related to the inclusion of First Alert, Inc. and cash equivalents. Net cash provided by operating activities was $244$10 million for the year. At December 31, 2020, accounts receivable were $863 million and inventories were $672 million.
Recent Developments
COVID-19 Pandemic
The World Health Organization (“WHO”) declared COVID-19 a pandemicof transaction costs incurred in March 2020. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. Starting at the end of the first quarter of 20202022.
December 31, | |||||||||||||||||||||||
(in millions) | 2023 | 2022 | |||||||||||||||||||||
Products and Solutions | $ | 27 | $ | 29 | |||||||||||||||||||
ADI Global Distribution | 12 | 2 | |||||||||||||||||||||
Corporate | 3 | 4 | |||||||||||||||||||||
Restructuring and impairment expenses | $ | 42 | $ | 35 |
U.S. and international government responses to the COVID-19 outbreak have included “shelter in place,” “stay at home” and similar types of orders. These orders exempt certain products and services needed to maintain continuity of operations of critical infrastructure sectors as determined by the U.S. federal government and certain other countries globally. Although certain of the Company’s operations are currently considered essential and exempt in the United States, Canada and certain other countries globally, there remain certain jurisdictions where there have been and may continue to be restrictions on manufacturing or operations or other government lockdown mandates or recommendations, under which we have temporarily closed certain manufacturing and sales facilities, and restricted operations in others, including manufacturing in Mexico and restricted operations in certain ADI sales branches, although these facilities have since reopened or remained opened with restricted sales activities. If any of the applicable exemptions are curtailed or revoked in the future, that could adversely impact our business, operating results and financial condition. Furthermore, to the extent these exemptions do not extend to our key suppliers and customers, this could also adversely impact our business, operating results and financial condition. We have also implemented work-from-home policies for a significant percentage of our employees, which could negatively impact productivity, disrupt conduct of our business in the ordinary course and delay our production timelines. Due to the significant remote workforce populations, we may also face informational technology infrastructure and connectivity issues from the vendors that we rely on for certain information technologies to administer, store and support the Company’s multiple business activities. Finally, we are incurring increased costs associated with cleaning and other employee safety measures.
Our visibility toward future performance is more limited than is typical2022. The decrease was primarily due to the uncertainty surroundingcost savings actions offsetting incremental selling, general and administrative costs from the durationacquisition of First Alert, Inc, which totaled $11 million.
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RESIDEO TECHNOLOGIES, INC.
five
2020 Public Offering of Common Stock
On November 17, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) which provided for the offer and sale of 17,000,000 shares of common stock at the public offering price of $15.00 per share (the “Offering”). The Offering closed on November 20, 2020. On December 14, 2020 the closing of the exercise of the underwriters’ option to purchase an additional 2,550,000 shares of common stock of the Offering price of $15.00 per share as allowed in the Underwriting Agreement. Net proceeds received were approximately $279 million.
Amended and Restated CreditFacilities
On February 12, 2021, we entered into an amended and restated credit agreement (the “A&R Credit Agreement”). The A&R Credit Agreement provides for (i) a seven-year senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii) a five-yearyear senior secured revolving credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the Term Loan Facilities, the “A&R Senior Credit Facilities”).
Basis of Presentation
Prior to becoming an independent publicly traded company (the “Spin-Off”) on October 29, 2018, our historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell International Inc. (“Honeywell”). Accordingly, for periods prior to October 29, 2018, our financial statements are presented on a combined basis and for the periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Financial Statements”). The Consolidated and Combined Financial Statements have been prepared in accordance with U.S. GAAP. The historical combined financial information prior to the Spin-Off may not be indicative of our future performance and does not necessarily reflect what our consolidated and combined results of operations, financial condition and cash flows would have been had we operated as a separate, publicly traded company during the periods presented, particularly because of changes that we experienced as a result of our separation from Honeywell, including changes in the financing, cash management, operations, cost structure, and personnel needs of our Company.
The combined financial statements prior to the Spin-Off include certain assets and liabilities that were held at the Honeywell corporate level but were specifically identifiable or otherwise attributable to us. Additionally, Honeywell historically provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on our behalf. The costs of these services were allocated to us on the basis of the proportion of net revenue. Actual costs that would have been incurred if we had been a stand-alone company for the entire period being presented would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both we and Honeywell consider the basis on which the expenses were allocated during the period before the Spin-Off to be a reasonable reflection of the utilization of services provided to or the benefits received by us during the periods presented.
Since the completion of the Spin-Off, we have incurred expenditures consisting of employee-related costs, costs to start up certain stand-alone functions and information technology systems and other one-time transaction related costs. Recurring stand-alone costs include establishing the internal audit, treasury, investor relations, tax and corporate secretary functions as well as the annual expenses associated with running an independent publicly traded company including listing fees, compensation of non-employee directors, related board of director fees and other fees and expenses related to insurance, legal and external audit.
Prior to Spin-Off, our environmental expenses for specified Honeywell properties contaminated through historical business operations (“Honeywell Sites”), now subject to the Reimbursement Agreement, were reported within other expense, net in our Consolidated and Combined Statements of Operations, which reflect an estimated liability for resolution of pending and future environmental-related liabilities. Prior to the Spin-Off, this estimated
26
RESIDEO TECHNOLOGIES, INC.
liability was calculated as if we were responsible for 100% of the environmental-liability payments associated with certain sites. See Environmental Matters and Reimbursement Agreement sections of Note 19. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements for additional information.
Reclassification
On January 1, 2020, we changed our classification of research and development expenses from Cost of goods sold to Selling, general and administrative expenses, such that research and development expenses are excluded from the calculation of Gross profit. This change had no impact on Net income (loss) and earnings (loss) per share or the Consolidated Balance Sheet, Consolidated and Combined Statements of Cash Flow or Equity. The Company determined the impact on previously issued consolidated and combined annual and interim financial statements was not material. The impact for the years ended December 31, 2019 and 2018, was a decrease in Cost of goods sold and an increase in Gross profit and in Selling, general and administrative expenses of $87 million and $59 million, respectively. The impact of the reclassification for the year ended December 31, 2019 is also reflected in Note 7. Restructuring Charges of Notes to Consolidated and Combined Financial Statements.
In addition, the prior year segment information was recast to present Corporate separately as well as present Operating profit which replaces Segment Adjusted EBITDA. See Note 21. Segment Financial Data of Notes to Consolidated and Combined Financial Statements for additional information. Certain reclassifications have been made to prior period financial statements to conform to the classification adopted in the current period.
Components of Operating Results
Net Revenue
We manage our global business operations through two reportable segments, Products & Solutions and ADI Global Distribution:
Products & Solutions: We generate the majority of our Products & Solutions net revenue primarily from residential end-markets. Our Products & Solutions segment includes traditional products, as well as connected products, which we define as any device with the capability to be monitored or controlled from a remote location by an end-user or service provider. Our products are sold through a network of HVAC, plumbing, security, and electrical distributors including our ADI Global Distribution business, OEMs, and service providers such as HVAC contractors, security dealers and plumbers. We also sell some products via retail and online channels.
ADI Global Distribution: We generate revenue through the distribution of low-voltage electronic and security products, as well as smart home, fire, power, audio and ProAV, networking, communications, wire and cable, enterprise connectivity, and structured wiring products that are delivered through a comprehensive network of professional contractors, distributors and OEMs, as well as major retailers and online merchants. In addition to our own security products, ADI Global Distribution distributes products from industry-leading manufacturers, and also carries a line of private label products. We sell these products to contractors that service non-residential and residential end-users. 14% of ADI Global Distribution’s net revenue is supplied by our Products & Solutions Segment. Management estimates that in 2020 approximately two-thirds of ADI Global Distribution’s net revenue was attributed to non-residential end markets and one-third to residential end markets.
Cost of Goods Sold
Products & Solutions:Cost of goods sold includes costs associated with raw materials, assembly, shipping and handling of those products, costs of personnel-related expenses, including pension benefits, and equipment associated with manufacturing support, logistics and quality assurance, non-research and development engineering costs, and costs of certain intangible assets.
ADI GlobalDistribution: Cost of goods sold consists primarily of inventory-related costs and includes labor and personnel-related expenses.
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RESIDEO TECHNOLOGIES, INC.
Selling, General and Administrative Expense
Selling, general and administrative expense includes trademark royalty expenses, sales incentives and commissions, professional fees, legal fees, promotional and advertising expenses, personnel-related expenses, including stock compensation expense and pension benefits, and research and development expenses. In addition, prior to the Spin-Off, our selling, general and administrative expense included an allocated portion of general corporate expenses.
Other Expense, Net
Other expense, net consists primarily of Reimbursement Agreement expenses (gains) for certain environmental claims related to approximately 230 sites or groups of sites that are undergoing environmental remediation under U.S. federal or state law and agency oversight for contamination associated with Honeywell historical business operations. Prior to the Spin-Off, other expense, net included the environmental expenses related to these same sites. For further information see Note 19. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements for discussion of environmental and the Reimbursement Agreement. Other expense, net also includes foreign exchange gains and losses.
Interest Expense
Interest expense consists of interest on our short and long-term obligations, including our senior notes, term credit facility, and revolving credit facility. Interest expense on our obligations includes contractual interest, amortization of the debt discount and amortization of deferred financing costs.
Tax Expense (Benefit)
Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory tax rates adjusted for U.S. taxation of foreign earnings, non-deductible expenses and other permanent differences.
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RESIDEO TECHNOLOGIES, INC.
Results of Operations for the Years Ended December 31, 2020, 2019 and 2018
The following table sets forth our Consolidated and Combined Statements of Operations for the periods presented:
Consolidated and Combined Statements of Operations
(In millions except share and per share data)
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Net revenue |
| $ | 5,071 |
|
| $ | 4,988 |
|
| $ | 4,827 |
|
Cost of goods sold |
|
| 3,758 |
|
|
| 3,711 |
|
|
| 3,402 |
|
Gross profit |
|
| 1,313 |
|
|
| 1,277 |
|
|
| 1,425 |
|
Selling, general and administrative expenses |
|
| 1,002 |
|
|
| 1,019 |
|
|
| 932 |
|
Operating profit |
|
| 311 |
|
|
| 258 |
|
|
| 493 |
|
Other expense, net |
|
| 147 |
|
|
| 118 |
|
|
| 369 |
|
Interest expense |
|
| 63 |
|
|
| 69 |
|
|
| 20 |
|
Income before taxes |
|
| 101 |
|
|
| 71 |
|
|
| 104 |
|
Tax expense (benefit) |
|
| 64 |
|
|
| 35 |
|
|
| (301 | ) |
Net income |
| $ | 37 |
|
| $ | 36 |
|
| $ | 405 |
|
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 125,348 |
|
|
| 122,722 |
|
|
| 122,499 |
|
Diluted |
|
| 126,324 |
|
|
| 123,238 |
|
|
| 122,624 |
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.30 |
|
| $ | 0.29 |
|
| $ | 3.31 |
|
Diluted |
| $ | 0.29 |
|
| $ | 0.29 |
|
| $ | 3.30 |
|
Net Revenue
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Net revenue |
| $ | 5,071 |
|
| $ | 4,988 |
|
| $ | 4,827 |
|
% change compared with prior period |
|
| 2 | % |
|
| 3 | % |
|
|
|
|
Net revenue increased 2% in 2020 compared to 2019, primarily due to increase in pricing on certain products and acquisitions, partially offset by reduced volume. Net revenue increased 3% in 2019 compared to 2018, primarily due to an increase in volume and pricing on certain products, partially offset by foreign exchange translation.
Further discussion of net revenue by segment can be found in the Review of Business Segments section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cost of Goods Sold
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Cost of goods sold |
| $ | 3,758 |
|
| $ | 3,711 |
|
| $ | 3,402 |
|
% change compared with prior period |
|
| 1 | % |
|
| 9 | % |
|
|
|
|
Gross profit percentage |
|
| 26 | % |
|
| 26 | % |
|
| 30 | % |
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RESIDEO TECHNOLOGIES, INC.
2020 compared with 2019
Cost of goods sold for 2020 was $3,758 million, an increase of $47 million, or 1%, from $3,711 million in 2019. This $47 million increase in cost of goods sold was primarily driven by impact of product expenses related to revenue that was attributable to the operations of the 2020 Herman ProAV acquisition, unfavorable changes in sales mix, and material and labor inflation totaling $137 million. The increased costs were partially offset by the favorable impact of sourcing productivity, transformation programs cost savings, lower charges related to obsolete and surplus inventory, lower spin-related costs, and other cost reductions totaling $90 million.
The primary drivers of flat gross profit percentage were a 100 bps negative impact from changes in sales mix, offset by 100 bps favorable impact of transformation programs cost savings.
2019 compared with 2018
Cost of goods sold for 2019 was $3,711 million, an increase of $309 million, or 9%, from $3,402 million in 2018. This $309 million increase in cost of goods sold was primarily driven by higher revenue in the ADI Global Distribution segment, material and labor inflation and increased production costs including charges related to obsolete and surplus inventory, changes in sales mix, increased headquarter allocations in the period prior to the Spin-Off, expenses related to transformation programs and related restructuring costs, and Spin-Off related costs totaling $435 million. The increased costs were partially offset by sourcing productivity, foreign currency translation, lower environmental expense, and savings in other miscellaneous costs of goods sold totaling $126 million.
The primary drivers to the decrease in gross profit percentage were a 200 bps impact from changes in sales mix, 100 bps impact from material and labor inflation and fixed production costs, and 100 bps impact from headquarter allocations previously classified in selling, general and administrative expense in the period prior to the Spin-Off.
Selling, General and Administrative Expense
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Selling, general and administrative expense |
| $ | 1,002 |
|
| $ | 1,019 |
|
| $ | 932 |
|
% of revenue |
|
| 20 | % |
|
| 20 | % |
|
| 19 | % |
2020 compared with 2019
Selling, general and administrative expense for 2020 was $1,002 million, a decrease of $17 million, from $1,019 million in 2019. The decrease was driven by transformation programs cost savings, decrease in Spin-Off related expenses, and other cost reductions totaling $150 million. These decreases were partially offset by transformation program expenses and related restructuring costs, commercial investments, investments to support new product launches, and the expense impact of acquisitions totaling $133 million.
2019 compared with 2018
Selling, general and administrative expense for 2019 was $1,019 million, an increase of $87 million from $932 million in 2018. The increase was driven by greater Spin-Off related costs, increased research and development spend, increased royalty fees associated with the Trademark License Agreement, transformation program expenses and related restructuring costs, higher legal expenses, the expense impact of acquisitions, and labor and other expense inflation totaling $175 million. These increases were partially offset by reduced headquarter cost allocations, transformation programs cost savings, foreign currency translation, and miscellaneous cost reductions totaling $88 million.
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RESIDEO TECHNOLOGIES, INC.
Other Expense, Net
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Other expense, net |
| $ | 147 |
|
| $ | 118 |
|
| $ | 369 |
|
2020 compared with 2019
Other expense, net for 2020 was $147 million, an increase of $29 million from $118 million in 2019. The increase is mainly due to a $38 million increase in expense from the Reimbursement Agreement, and $4 million of increased expense relating to foreign exchange. These increases were offset by $13 million decrease in non-operating pension related expense.
2019 compared with 2018
Other expense, net for 2019 was $118 million, a decrease of $251 million from $369 million in 2018. The decrease is mainly due to lower environmental remediation expense, now subject to and presented as Reimbursement Agreement expense subsequent to the Spin-Off.
Tax Expense (Benefit)
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Tax expense (benefit) |
| $ | 64 |
|
| $ | 35 |
|
| $ | (301 | ) |
Effective tax rate |
|
| 64 | % |
|
| 49 | % |
| (289)% |
|
2020 compared with 2019
The effective tax rate increase in 2020 compared to 2019 was primarily attributable to the mix of earnings across the jurisdictions in which we operate, changes in estimates related to prior years, and non-deductible expenses. A significant driver of the high tax rate in both 2020 and 2019 is that the Reimbursement Agreement is generally non-deductible for U.S. federal income tax purposes.
2019 compared with 2018
The effective tax rate increase in 2019 compared to 2018 was primarily attributable to tax benefits generated in 2018 related to the internal restructuring of Resideo’s business in advance of the Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings, and adjustments to the provisional tax amount related to U.S. Tax Reform, partially offset by decreases in tax expense related to Global Intangible Low Taxed Income (“GILTI”) and non-deductible expenses. A significant driver of the high tax rate in 2019 is that the Reimbursement Agreement is generally non-deductible for U.S. federal income tax purposes.
Review of Business Segments
Products & Solutions
|
| 2020 |
|
| 2019 |
|
| % Change |
|
| 2018 |
|
| % Change |
| |||||
Total revenue |
| $ | 2,488 |
|
| $ | 2,487 |
|
|
|
|
|
| $ | 2,474 |
|
|
|
|
|
Less: Intersegment revenue |
|
| 367 |
|
|
| 312 |
|
|
|
|
|
|
| 305 |
|
|
|
|
|
External revenue |
|
| 2,121 |
|
|
| 2,175 |
|
|
| (2 | )% |
|
| 2,169 |
|
|
| 0 | % |
Operating profit |
| $ | 407 |
|
| $ | 327 |
|
|
| 24 | % |
| $ | 591 |
|
|
| (45 | )% |
31
RESIDEO TECHNOLOGIES, INC.
2020 compared with 2019
Products & Solutions revenue declined 2% in 2020 compared to 2019, driven by softness in Comfort and RTS product lines offset by strength in the Security business. Operating profit increased from $327 million in 2019 to $407 million in 2020, or 24%. Operating profit was positively impacted by cost savings from transformation programs, sourcing productivity, lower charges related to obsolete and surplus inventory and other cost reduction efforts totaling $210 million. These cost reductions offset lower revenue volumes, unfavorable sales mix, investments to support new product launches, and labor and material inflation totaling $130 million.
2019 compared with 2018
Products & Solutions revenue remained flat in 2019 compared to 2018, driven primarily by strength in the Security business, offset by softness in Comfort and RTS product lines. Operating profit declined from $591 million in 2018 to $327 million in 2019, or 45%. Operating profit was negatively impacted by unfavorable sales mix, increased costs related to transformation program expenses and related restructuring expenses and Spin-Off, increased functional expenses previously captured in corporate costs prior to Spin-Off, increased charges related to obsolete and surplus inventory, increased royalty fee paid to Honeywell associated with the Trademark License Agreement, investments to support new product launches, and labor and material inflation totaling $356 million. Negative impacts were partially offset by increased selling prices, sourcing productivity, lower environmental expense, savings from transformation programs, and miscellaneous cost reductions totaling $92 million.
ADI Global Distribution
|
| 2020 |
|
| 2019 |
|
| % Change |
|
| 2018 |
|
| % Change |
| |||||
External revenue |
| $ | 2,950 |
|
| $ | 2,813 |
|
|
| 5 | % |
| $ | 2,658 |
|
|
| 6 | % |
Operating profit |
| $ | 194 |
|
| $ | 210 |
|
|
| (8 | )% |
| $ | 205 |
|
|
| 2 | % |
2020 compared with 2019
ADI Global Distribution revenue increased 5% in 2020 compared to 2019, highlighted by strong growth in the U.S., including the impact from the 2020 Herman ProAV acquisition, as well as EMEA. Operating profit decreased from $210 million in 2019 to $194 million in 2020, or 8%. Operating profit was negatively impacted by commercial investments, unfavorable sales mix, acquisition related costs, and other cost inflation totaling $34 million. Negative impacts were partially offset by transformation program cost savings, other expense productivity and cost reduction programs totaling $18 million.
2019 compared with 2018
ADI Global Distribution revenue increased 6% in 2019 compared to 2018, driven by increased sales volume growth across all regions. Operating profit increased from $205 million in 2018 to $210 million in 2019, or 2%. Operating profit was positively impacted by increased volume, transformation program cost savings, and other expense productivity and cost reduction programs totaling $38 million. Positive impacts were partially offset by increased functional expenses previously captured in corporate costs prior to Spin-Off, commercial investments, increased expenses related to transformation programs, unfavorable changes in foreign exchange rates, and other cost inflation totaling $33 million.
Corporate
|
| 2020 |
|
| 2019 |
|
| % Change |
|
| 2018 |
|
| % Change |
| |||||
Corporate costs |
| $ | (290 | ) |
| $ | (279 | ) |
|
| 4 | % |
| $ | (303 | ) |
|
| (8 | )% |
2020 compared with 2019
Corporate costs for 2020 were $290 million, an increase of $11 million, from $279 million in 2019, or 4%, and were negatively impacted by costs related to transformation programs and related restructuring expenses,
32
RESIDEO TECHNOLOGIES, INC.
increased bonus payouts from improved performance of the business, increase in service cost related to pension, and labor and other inflation totaling $59 million. Negative impacts were partially offset by transformation program cost savings, reduced Spin-Off related costs, other expense productivity and cost reduction programs totaling $48 million.
2019 compared with 2018
Corporate costs for 2019 were $279 million, a decrease of $24 million, from $303 million in 2018, or 8%, and were positively impacted by reduced functional expenses previously captured in corporate costs prior to Spin-Off, transformation program cost savings, decreased bonus payouts related to business performance, and other expense productivity and cost reduction programs totaling $74 million. Positive impacts were partially offset by increased Spin-Off related costs, higher legal expenses, increased costs related to transformation programs and related restructuring expenses, increase in service cost related to pension, and labor and other inflation totaling $50 million.
Restructuring Charges
During 2019, we retained industry-recognized experts in supply chain optimization and organizational excellence to assist in a comprehensive financial and operational review which was focused on product cost and gross margin improvement, and general and administrative expenses simplification. Certain restructuring actions have been implemented under this program as well as previous programs. These restructuring actions generated incremental (net) pre-tax savings of $53 million in 2020. Cash spending related to our restructuring actions was $35 million for the year ended December 31, 2020 and was funded through operating cash flows.
Net restructuring and related expenses were $40 million, $37 million and $5 million for December 31, 2020, 2019 and 2018, respectively, primarily related to severance.
For further discussion of restructuring activities, refer to Note 7. Restructuring Charges of Notes to Consolidated and Combined Financial Statements.
Capital Resources and Liquidity
Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations. Additional liquidity may also be provided through access to the financial capital markets and a committed global credit facility. The following is a summary of our liquidity position:
|
|
|
|
Credit Agreement
On October 25, 2018, we entered into a credit agreement (the “Credit Agreement”), which was subsequently amended on November 26, 2019 (the “Credit Agreement First Amendment”) and on November 16, 2020 (the “Credit Agreement Second Amendment”).divesting certain assets. The Credit Agreement provides for (i) a seven-year senior
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RESIDEO TECHNOLOGIES, INC.
secured first-lien term B loan facility in an aggregate principal amount of $475 million (the “Term B Facility”); (ii) a five-year senior secured first-lien term A loan facility in an aggregate principalprepayments or the amount of $350 million (the “Term A Facility”debt that may be refinanced, repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and togetherother considerations. Our affiliates may also purchase our debt from time to time through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the Term B Facility, the “Term Loans or “Term Loan Facilities”); and (iii) a five-year senior secured first-lien revolving credit facility in an aggregate principal amount of $350 million (the “Revolving Credit Facility” and, together with the Term Loan Facilities, the “Senior Credit Facilities”). As of December 31, 2020, there were no borrowings and no Letters of Credit outstanding under the Revolving Credit Facility.
The Senior Credit Facilities were subject to an interest rate and interest period which we will elect. As amended, the margin was 2.25% per annum (for LIBOR loans) and 1.25% per annum (for alternate base rate “ABR” loans) in respectterms of the Term B Loan Facility,debt, and basedwe would continue to reflect the debt as outstanding on our leverage ratio, from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for ABR loans) for the Term A Loan Facility and the Revolving Credit FacilityConsolidated Balance Sheets.
The
All obligations under the Senior Credit Facilities are or will be unconditionally guaranteed jointly and severally, by: (a) our Company and (b) substantially all of the direct and indirect wholly owned subsidiaries of our Company that are organized under the laws of the United States, any state thereof or the District of Columbia (collectively, the “Guarantors”). Subject to certain limitations, the Senior Credit Facilities are or will be secured on a first priority basis by: (x) a perfected security interest in the equity interests of each direct subsidiary of the Company and each Guarantor under the Senior Credit Facilities (subject to certain customary exceptions) and (y) perfected, security interests in, and mortgages on, substantially all tangible and intangible personal property and material real property of the Company and each of the Guarantors under the Senior Credit Facilities, subject, in each case, to certain exceptions.
Amended and Restated CreditRestatement Agreement
On February 12, 2021, we entered into an amended and restated credit agreement with JP Morgan Chase Bank N.A. as administrative agent (the “A&R Credit Agreement”). The A&R Credit Agreement provides for (i) a seven-yearThis agreement effectively replaced our previous senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii)credit facilities.
We are obligated to make quarterly principal payments of approximately $2.4 million throughout the term of the A&R Term B Facility according to the amortization provisions in the A&R Credit Agreement. In addition to paying interest on outstanding borrowings under the A&R Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the A&R Revolving Credit Facility. Borrowings underFirst Amendment, which amended the A&R Credit Agreement can be prepaid at our option without premium or penalty other thanto include an additional aggregate principal amount of $200 million in loans.
34
RESIDEO TECHNOLOGIES, INC.
The A&R Senior Credit Facilities are subject to an interest rate and interest period which we will elect. If we choose to make a base rate borrowing on an overnight basis,replace the interest rate will be based on the highest of (1) thereference rate of interest last quoted by The Wall Street Journal asLIBOR with the “prime rate” insecured overnight financing rate (“SOFR”).
The A&R Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our and our subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends, to make other distributions or redemptions/repurchases, in respect of our and our subsidiaries’ equity interests, to engage in transactions with affiliates or amend certain material documents. In addition, the A&R Revolving Credit Facility also contains certain financial maintenance covenants. The A&R Credit Agreement contains customary events of default, including with respect to a failure to make payments under the A&R Senior Credit Facilities, cross-default, certain bankruptcy and insolvency events and customary change of control events.
All obligations under the A&R Senior Credit Facilities are or will be unconditionally guaranteed jointly and severally, by: (a) our Company and (b) substantially all of the direct and indirect wholly owned subsidiaries of our Company that are organized under the laws of the United States, any state thereof or the District of Columbia (collectively, the “Guarantors”). The Guarantors entered into a guarantee under the A&R Credit Agreement concurrently with the effectiveness of the A&R Credit Agreement. Subject to certain limitations, the A&R Senior Credit Facilities are or will be secured on a first priority basis by: (x) a perfected security interest in the equity interests of each direct subsidiary of the Company and each Guarantor under the A&R Senior Credit Facilities (subject to certain customary exceptions) and (y) perfected, security interests in, and mortgages on, substantially all tangible and intangible personal property and material real property of the Company and each of the Guarantors under the A&R Senior Credit Facilities, subject, in each case, to certain exceptions. The Company and the Guarantors entered into security documents concurrently with effectiveness of the A&R Credit Agreement.
In October of 2018, due 2029
Interest expense presentedwhich $12 million is due in the Statements of Operations is from the Senior Notes and Senior Credit Facilities, which includes the amortization of debt issuance cost and debt discounts.
next 12 months. Refer to
Reimbursement Agreement
In connection with the Spin-Off, we entered into the Reimbursement Agreement, pursuant to which we have an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable by us in respect of such liabilities arising in any given year is subject to a
35
RESIDEO TECHNOLOGIES, INC.
cap of $140 million. During 2020, we entered into three amendments with Honeywell. See Note 19. Commitments and Contingencies of Notes11. Long-Term Debt to Consolidated and Combined Financial StatementsStatements.
On February 12, 2021, As of December 31, 2023, we entered into a fourth amendment with Honeywell. See Note 24. Subsequent eventshad approximately $109 million of Notes to Consolidated and Combined Financial Statements of this Form 10-K for a further discussion of this amendment.
In addition to the sitesauthorized repurchases remaining under the Reimbursement Agreement, we have environmental expense related to sites owned and operated by Resideo (“Resideo Sites”). Prior to the Spin-Off, both of these expenses were combined and were presented as environmental expense. Expenses for environmental matters deemed probable and reasonably estimable were $323 million for the period from January 1, 2018 through October 29, 2018.
Subsequent to the Spin-Off, environmental expense was $1 million for 2020, $2 million for 2019, and $17 million for the period October 30, 2018 through December 31, 2018 and Reimbursement Agreement expense was $108 million for 2019 and $49 million for the period October 30, 2018 through December 31, 2018.
See Note 19. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements for further discussion.
share repurchase program.
2022
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Cash provided by (used for): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 244 |
|
| $ | 23 |
|
| $ | 462 |
|
Investing activities |
|
| (103 | ) |
|
| (112 | ) |
|
| (74 | ) |
Financing activities |
|
| 253 |
|
|
| (53 | ) |
|
| (167 | ) |
Effect of exchange rate changes on cash |
|
| 1 |
|
|
| (1 | ) |
|
| (12 | ) |
Net increase (decrease) in cash and cash equivalents |
| $ | 395 |
|
| $ | (143 | ) |
| $ | 209 |
|
2020
Years Ended December 31, | |||||||||||||||||
2023 | 2022 | $ change | |||||||||||||||
Cash provided by (used for) operating activities: | |||||||||||||||||
Operating activities | $ | 440 | $ | 152 | $ | 288 | |||||||||||
Investing activities | (44) | (764) | 720 | ||||||||||||||
Financing activities | (64) | 170 | (234) | ||||||||||||||
Effect of exchange rate changes on cash | (24) | (8) | (16) | ||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 308 | $ | (450) | $ | 758 |
Cash2022
Cashflows related to accounts payable and accrued liabilities of $48 million and an increase in other, net of $76 million primarily due to an increase in long-term liabilities. Those amounts were partially offset by a decrease in net income of $73 million.
Cash provided by financing activities for 2020 increased by $306 million. The increase was primarily due to $279 million of net proceeds from the issuance of common stock a decrease in cash used of $22 million from non-operating obligations with Honeywell and other miscellaneous items.
repurchases under our share repurchase program during 2023.
36
RESIDEO TECHNOLOGIES, INC.
Following
|
| Payments by Period |
| |||||||||||||||||
|
| Total (1) |
|
| 2021 |
|
| 2022- 2023 |
|
| 2024- 2025 |
|
| Thereafter |
| |||||
|
| (In millions) |
| |||||||||||||||||
Long-term debt (2) |
| $ | 1,180 |
|
| $ | 40 |
|
| $ | 289 |
|
| $ | 451 |
|
| $ | 400 |
|
Interest payments on long-term debt (3) |
|
| 221 |
|
|
| 44 |
|
|
| 83 |
|
|
| 70 |
|
|
| 24 |
|
Reimbursement Agreement payments (4) |
|
| 591 |
|
|
| 140 |
|
|
| 280 |
|
|
| 171 |
|
|
| - |
|
Estimated environmental liability payments (5) |
|
| 22 |
|
|
| 2 |
|
|
| 3 |
|
|
| 3 |
|
|
| 14 |
|
Minimum operating lease payments |
|
| 165 |
|
|
| 40 |
|
|
| 65 |
|
|
| 30 |
|
|
| 30 |
|
Purchase obligations (6) |
|
| 254 |
|
|
| 225 |
|
|
| 26 |
|
|
| 3 |
|
|
| - |
|
|
| $ | 2,433 |
|
| $ | 491 |
|
| $ | 746 |
|
| $ | 728 |
|
| $ | 468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
37
RESIDEO TECHNOLOGIES, INC.
The preparation of our
Revenue carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Refer to
In
Consolidated Financial Statements.
Through the Reimbursement Agreement, we are subjectamounts equal to a number90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims. We continually assess the likelihood of any adverse judgments or outcomes relatedclaims, in each case, including consequential damages (the liabilities) in respect to specified Honeywell properties contaminated through historical business operations prior to the Spin-Off (Honeywell Sites), including the legal and other costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable in respect of such liabilities arising in any given year is subject to a cap of $140 million. Reimbursement Agreement as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a thorough analysis of each matter with the assistance of outside legal counsel and Honeywell, and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future claims related to the sites covered by the Reimbursement Agreement, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, we do not currently possess sufficient information to reasonably estimate the amounts of the Reimbursement Agreement liabilities to be recorded upon future completion of studies, litigations or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined. Expenses related to the indemnificationexpenses are presented within Otherother expense, net in the Consolidated and Combined Statements of Operations. See Operations and within other accrued liabilities payable under Indemnification Agreements in the Consolidated Balance Sheets. Refer to Note 19.15. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our environmental liabilities.
Goodwill Statements.
For the 2020 annual impairment test, we determined the fair value of each reporting unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of operating results, taking into consideration industry and market conditions. The
38
RESIDEO TECHNOLOGIES, INC.
discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business’s ability to execute on the projected cash flows. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and management’s expectations. Under the market approach, we estimate the fair value based on market multiples of cash flow and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit and considering a reasonable control premium. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.
We believe the estimates and assumptions used in the calculations are reasonable. In addition, the extent to which COVID-19 may adversely impact our business depends on future developments, which are uncertain and unpredictable, depending upon the severity and duration of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be reasonably estimated at this time but may adversely affect our business and financial results. It is likely that into 2021, macroeconomic conditions may have unexpected impacts on our business. If there was an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. Should the fair value of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. The Company monitors its reporting units to determine if there is an indicator of potential impairment.
Deferred tax assets and liabilities relate to temporary differences between the financial reporting and income tax bases of our assets and liabilities, as well as the impact of tax loss carryforwards or carrybacks. Deferred income tax expense or benefit represents the expected increase or decrease to future tax payments as these temporary differences reverse over time. Deferred tax assets are specific to the jurisdiction in which they arise and are recognized subject to management’s judgment that realization of those assets is “more likely than not.” In making decisions regarding our ability to realize tax assets, we evaluate all positive and negative evidence, including projected future taxable income, taxable income in carryback periods, expected reversal of deferred tax liabilities, and the implementation of available tax planning strategies.
Significant judgment is required in evaluating tax positions. We establishestablished additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance which determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, we, along with our subsidiaries, are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a change in estimate become known.
39
RESIDEO TECHNOLOGIES, INC.
Pension Refer to — We have defined benefit plans covering certain employees. The benefits are accrued over the employees’ service periods. We use actuarial methods and assumptions in the valuationNote 17. Income Taxes to Consolidated Financial Statements.
A 25 basis point increase in the discount rate would result in a decrease of approximately $5.8 million to the net periodic benefit cost for 2020, while a 25 basis point decrease in the discount rate would result in an increase of approximately $12.7 million. The resulting impact on the pension benefit obligation would be a decrease of $21.6 million and an increase of $23.9 million, respectively.
See
Statements.
See
Statements.
|
|
|
|
•competition from other companies in our markets and segments, as well as in new markets and emerging markets; |
|
•our ability to identify consumer preferences and industry standards, develop and protect intellectual property related thereto, and successfully market new technologies, products, and services to consumers; |
|
•our reliance on certain suppliers; |
|
•the impact of disruptions in our supply chain from third-party suppliers and manufacturers, including our inability to obtain necessary raw materials and product components, production equipment or replacement parts; |
|
•inability to consummate acquisitions on satisfactory terms or to integrate such acquisitions effectively; |
|
•the impact of earthquakes, hurricanes, fires, power outages, floods, pandemics, epidemics, natural disasters and other catastrophic events or other public health emergencies; |
|
•the impact of potentially volatile global market and economic conditions and industry and end market cyclicality, including factors such as interest rates, inflation, availability of financing, consumer spending habits and preferences, housing market changes, and employment rates; |
|
•failure to achieve and maintain a high level of product and service quality, including the impact of warranty claims, product recalls, and product liability actions that may be brought against us; |
|
•our ability to retain or expand relationships with significant customers; |
|
•the significant failure or inability to comply with specifications and manufacturing requirements or delays or other problems with existing or new products or inability to meet price requirements; |
|
40
RESIDEO TECHNOLOGIES, INC.
|
|
•inability to successfully execute transformation programs or to effectively manage our workforce; |
|
•the failure to increase productivity through sustainable operational improvements; |
|
•economic, political, regulatory, foreign exchange and other risks of international operations; |
|
•our dependence upon IT infrastructure and network operations having adequate cyber-security functionality; |
|
•the potential adverse impacts of enhanced tariff, import/export restrictions, or other trade barriers on global economic conditions, financial markets and our business; |
|
•regulations and societal actions to respond to global climate change; |
|
•failure to comply with the broad range of current and future standards, laws and regulations in the jurisdictions in which we operate; |
|
•risks associated with the Reimbursement Agreement, the other agreements we entered into with Honeywell in connection with the Spin-Off, and our relationships with Honeywell, including our reliance on Honeywell for the Honeywell Home trademark and potential material environmental liabilities; |
|
•the impact of potential material litigation matters, government proceedings, and other contingencies and uncertainties; |
|
|
|
|
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•our ability to borrow funds and access capital markets in light of the terms of our debt documents or otherwise; |
|
41
RESIDEO TECHNOLOGIES, INC.
|
|
December 31, | |||||||||||
(in millions, except par value) | 2023 | 2022 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 636 | $ | 326 | |||||||
Accounts receivable, net | 973 | 1,002 | |||||||||
Inventories, net | 941 | 975 | |||||||||
Other current assets | 193 | 199 | |||||||||
Total current assets | 2,743 | 2,502 | |||||||||
Property, plant and equipment, net | 390 | 366 | |||||||||
Goodwill | 2,705 | 2,724 | |||||||||
Intangible assets, net | 461 | 475 | |||||||||
Other assets | 346 | 320 | |||||||||
Total assets | $ | 6,645 | $ | 6,387 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 905 | $ | 894 | |||||||
Current portion of long-term debt | 12 | 12 | |||||||||
Accrued liabilities | 608 | 640 | |||||||||
Total current liabilities | 1,525 | 1,546 | |||||||||
Long-term debt | 1,396 | 1,404 | |||||||||
Obligations payable under Indemnification Agreements | 609 | 580 | |||||||||
Other liabilities | 366 | 328 | |||||||||
Total liabilities | 3,896 | 3,858 | |||||||||
COMMITMENTS AND CONTINGENCIES | |||||||||||
Stockholders’ equity | |||||||||||
Common stock, $0.001 par value: 700 shares authorized, 151 and 145 shares issued and outstanding at December 31, 2023, respectively, and 148 and 146 shares issued and outstanding at December 31, 2022, respectively | — | — | |||||||||
Additional paid-in capital | 2,226 | 2,176 | |||||||||
Retained earnings | 810 | 600 | |||||||||
Accumulated other comprehensive loss, net | (194) | (212) | |||||||||
Treasury stock at cost | (93) | (35) | |||||||||
Total stockholders’ equity | 2,749 | 2,529 | |||||||||
Total liabilities and stockholders’ equity | $ | 6,645 | $ | 6,387 |
Years Ended December 31, | |||||||||||||||||
(in millions, except per share data) | 2023 | 2022 | 2021 | ||||||||||||||
Net revenue | $ | 6,242 | $ | 6,370 | $ | 5,846 | |||||||||||
Cost of goods sold | 4,546 | 4,604 | 4,262 | ||||||||||||||
Gross profit | 1,696 | 1,766 | 1,584 | ||||||||||||||
Operating expenses: | |||||||||||||||||
Research and development expenses | 109 | 111 | 86 | ||||||||||||||
Selling, general and administrative expenses | 960 | 974 | 909 | ||||||||||||||
Intangible asset amortization | 38 | 35 | 30 | ||||||||||||||
Restructuring and impairment expenses | 42 | 35 | — | ||||||||||||||
Total operating expenses | 1,149 | 1,155 | 1,025 | ||||||||||||||
Income from operations | 547 | 611 | 559 | ||||||||||||||
Other expenses, net | 169 | 139 | 159 | ||||||||||||||
Interest expense, net | 65 | 54 | 47 | ||||||||||||||
Income before taxes | 313 | 418 | 353 | ||||||||||||||
Provision for income taxes | 103 | 135 | 111 | ||||||||||||||
Net income | $ | 210 | $ | 283 | $ | 242 | |||||||||||
Earnings per share: | |||||||||||||||||
Basic | $ | 1.43 | $ | 1.94 | $ | 1.68 | |||||||||||
Diluted | $ | 1.42 | $ | 1.90 | $ | 1.63 | |||||||||||
Weighted average number of shares outstanding: | |||||||||||||||||
Basic | 147 | 146 | 144 | ||||||||||||||
Diluted | 148 | 149 | 148 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Comprehensive income: | |||||||||||||||||
Net income | $ | 210 | $ | 283 | $ | 242 | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||
Foreign exchange translation gain (loss) | 47 | (74) | (57) | ||||||||||||||
Pension liability adjustments | (12) | (9) | 32 | ||||||||||||||
Changes in fair value of effective cash flow hedges | (17) | 36 | 6 | ||||||||||||||
Total other comprehensive income (loss), net of tax | 18 | (47) | (19) | ||||||||||||||
Comprehensive income | $ | 228 | $ | 236 | $ | 223 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Cash Flows From Operating Activities: | |||||||||||||||||
Net income | $ | 210 | $ | 283 | $ | 242 | |||||||||||
Adjustments to reconcile net income to net cash in operating activities: | |||||||||||||||||
Depreciation and amortization | 98 | 94 | 88 | ||||||||||||||
Restructuring and impairment expenses | 42 | 35 | — | ||||||||||||||
Stock-based compensation expense | 44 | 50 | 39 | ||||||||||||||
Deferred income taxes | (28) | (3) | 6 | ||||||||||||||
Other, net | (14) | 6 | 44 | ||||||||||||||
Changes in assets and liabilities, net of acquired companies: | |||||||||||||||||
Accounts receivable, net | 19 | (72) | (30) | ||||||||||||||
Inventories, net | 32 | (122) | (73) | ||||||||||||||
Other current assets | 6 | (26) | 27 | ||||||||||||||
Accounts payable | 18 | (43) | (42) | ||||||||||||||
Accrued liabilities | (34) | (21) | 14 | ||||||||||||||
Other, net | 47 | (29) | — | ||||||||||||||
Net cash provided by operating activities | 440 | 152 | 315 | ||||||||||||||
Cash Flows From Investing Activities: | |||||||||||||||||
Capital expenditures | (105) | (85) | (63) | ||||||||||||||
Proceeds from sale of business | 86 | — | — | ||||||||||||||
Acquisitions, net of cash acquired | (16) | (665) | (11) | ||||||||||||||
Other investing activities, net | (9) | (14) | 9 | ||||||||||||||
Net cash used in investing activities | (44) | (764) | (65) | ||||||||||||||
Cash Flows From Financing Activities: | |||||||||||||||||
Common stock repurchases | (41) | — | — | ||||||||||||||
Proceeds from issuance of A&R Term B Facility | — | 200 | 1,250 | ||||||||||||||
Repayments of long-term debt | (12) | (12) | (1,188) | ||||||||||||||
Other financing activities, net | (11) | (18) | (42) | ||||||||||||||
Net cash (used in) provided by financing activities | (64) | 170 | 20 | ||||||||||||||
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (24) | (8) | (8) | ||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 308 | (450) | 262 | ||||||||||||||
Cash, cash equivalents and restricted cash at beginning of year | 329 | 779 | 517 | ||||||||||||||
Cash, cash equivalents and restricted cash at end of year | $ | 637 | $ | 329 | $ | 779 | |||||||||||
Supplemental Cash Flow Information: | |||||||||||||||||
Interest paid | $ | 80 | $ | 54 | $ | 39 | |||||||||||
Taxes paid, net of refunds | $ | 123 | $ | 159 | $ | 107 | |||||||||||
Capital expenditures in accounts payable | $ | 14 | $ | 21 | $ | 14 | |||||||||||
Common Stock | Accumulated | Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||
(in millions, except shares in thousands) | Shares | Amount | Additional Paid-In Capital | Retained Earnings | Other Comprehensive Loss | Shares | Amount | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||
January 1, 2021 | 143,059 | $ | — | $ | 2,070 | $ | 75 | $ | (146) | 900 | $ | (6) | $ | 1,993 | |||||||||||||||||||||||||||||||||
Net income | — | — | — | 242 | — | — | 242 | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | (19) | — | — | (19) | |||||||||||||||||||||||||||||||||||||||
Common stock issuance, net of shares withheld for taxes | 1,749 | — | 12 | — | — | 540 | (15) | (3) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 39 | — | — | — | — | 39 | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 144,808 | $ | — | $ | 2,121 | $ | 317 | $ | (165) | 1,440 | $ | (21) | $ | 2,252 | |||||||||||||||||||||||||||||||||
Net income | — | — | — | 283 | — | — | — | 283 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (47) | — | — | (47) | |||||||||||||||||||||||||||||||||||||||
Common stock issuance, net of shares withheld for taxes | 1,414 | — | 5 | — | — | 610 | (14) | (9) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 50 | — | — | — | — | 50 | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 146,222 | $ | — | $ | 2,176 | $ | 600 | $ | (212) | 2,050 | $ | (35) | $ | 2,529 | |||||||||||||||||||||||||||||||||
Net income | — | — | — | 210 | — | — | — | 210 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 18 | — | — | 18 | |||||||||||||||||||||||||||||||||||||||
Common stock issuance, net of shares withheld for taxes | 1,726 | — | 6 | — | — | 927 | (17) | (11) | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 44 | — | — | — | — | 44 | |||||||||||||||||||||||||||||||||||||||
Common stock repurchases | (2,559) | — | — | — | — | 2,559 | (41) | (41) | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2023 | 145,389 | $ | — | $ | 2,226 | $ | 810 | $ | (194) | 5,536 | $ | (93) | $ | 2,749 |
December 31, | |||||||||||
(in millions) | 2023 | 2022 | |||||||||
Raw materials | $ | 221 | $ | 251 | |||||||
Work in process | 18 | 25 | |||||||||
Finished products | 702 | 699 | |||||||||
Total inventories, net | $ | 941 | $ | 975 | |||||||
December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | Useful Lives | ||||||||||||||
Machinery and equipment | $ | 659 | $ | 647 | 3-16 years | ||||||||||||
Buildings and improvements | 314 | 303 | 10-50 years | ||||||||||||||
Construction in progress | 85 | 80 | NA | ||||||||||||||
Land | 10 | 9 | NA | ||||||||||||||
Gross property, plant and equipment | 1,068 | 1,039 | |||||||||||||||
Accumulated depreciation | (678) | (673) | |||||||||||||||
Total property, plant and equipment, net | $ | 390 | $ | 366 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Net revenue | |||||||||||||||||
Products and Solutions | $ | 2,672 | $ | 2,783 | $ | 2,468 | |||||||||||
ADI Global Distribution | 3,570 | 3,587 | 3,378 | ||||||||||||||
Total net revenue | $ | 6,242 | $ | 6,370 | $ | 5,846 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Income from operations | |||||||||||||||||
Products and Solutions | $ | 495 | $ | 527 | $ | 541 | |||||||||||
ADI Global Distribution | 270 | 313 | 268 | ||||||||||||||
Corporate | (218) | (229) | (250) | ||||||||||||||
Total income from operations | $ | 547 | $ | 611 | $ | 559 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Depreciation and amortization | |||||||||||||||||
Products and Solutions | $ | 71 | $ | 69 | $ | 65 | |||||||||||
ADI Global Distribution | 18 | 14 | 11 | ||||||||||||||
Corporate | 9 | 11 | 12 | ||||||||||||||
Total depreciation and amortization | $ | 98 | $ | 94 | $ | 88 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Capital expenditures | |||||||||||||||||
Products and Solutions | $ | 77 | $ | 55 | $ | 37 | |||||||||||
ADI Global Distribution | 26 | 29 | 24 | ||||||||||||||
Corporate | 2 | 1 | 2 | ||||||||||||||
Total capital expenditures | $ | 105 | $ | 85 | $ | 63 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Products and Solutions | |||||||||||||||||
Air | $ | 862 | $ | 953 | $ | 858 | |||||||||||
Safety and Security | 965 | 913 | 667 | ||||||||||||||
Energy | 525 | 595 | 594 | ||||||||||||||
Water | 320 | 322 | 349 | ||||||||||||||
Total Products and Solutions | 2,672 | 2,783 | 2,468 | ||||||||||||||
ADI Global Distribution | |||||||||||||||||
U.S. and Canada | 3,085 | 3,087 | 2,814 | ||||||||||||||
EMEA (1) | 485 | 474 | 523 | ||||||||||||||
APAC (2) | — | 26 | 41 | ||||||||||||||
Total ADI Global Distribution | 3,570 | 3,587 | 3,378 | ||||||||||||||
Total net revenue | $ | 6,242 | $ | 6,370 | $ | 5,846 |
Years Ended December 31, | |||||||||||||||||||||||
(in millions) | 2023 | 2022 | |||||||||||||||||||||
Products and Solutions | $ | 27 | $ | 29 | |||||||||||||||||||
ADI Global Distribution | 12 | 2 | |||||||||||||||||||||
Corporate | 3 | 4 | |||||||||||||||||||||
Restructuring and impairment expenses | $ | 42 | $ | 35 |
December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Beginning of year | $ | 27 | $ | 9 | $ | 24 | |||||||||||
Charges | 34 | 26 | — | ||||||||||||||
Usage (1) | (31) | (5) | (11) | ||||||||||||||
Other | — | (3) | (4) | ||||||||||||||
End of year | $ | 30 | $ | 27 | $ | 9 |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||
Change in benefit obligation: | |||||||||||||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 281 | $ | 348 | $ | 374 | $ | 96 | $ | 141 | $ | 161 | |||||||||||||||||||||||
Service cost | 3 | 7 | 7 | 4 | 5 | 7 | |||||||||||||||||||||||||||||
Interest cost | 13 | 11 | 10 | 3 | 2 | 1 | |||||||||||||||||||||||||||||
Actuarial losses (gains) | 23 | (66) | (20) | 8 | (45) | (18) | |||||||||||||||||||||||||||||
Net benefits paid | (3) | (18) | (5) | 4 | — | — | |||||||||||||||||||||||||||||
Settlements and curtailments | (83) | (1) | (18) | (13) | — | (1) | |||||||||||||||||||||||||||||
Other | — | — | — | 1 | 1 | 1 | |||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | 5 | (8) | (10) | |||||||||||||||||||||||||||||
Benefit obligation at end of year | 234 | 281 | 348 | 108 | 96 | 141 | |||||||||||||||||||||||||||||
Change in plan assets: | |||||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of year | 262 | 342 | 340 | 27 | 32 | 28 | |||||||||||||||||||||||||||||
Actual return on plan assets | 20 | (62) | 25 | 1 | (6) | 2 | |||||||||||||||||||||||||||||
Employer contributions | — | 1 | — | 2 | 3 | 3 | |||||||||||||||||||||||||||||
Net benefits paid | (3) | (18) | (5) | 4 | — | 1 | |||||||||||||||||||||||||||||
Settlements and curtailments | (83) | (1) | (18) | (11) | — | (1) | |||||||||||||||||||||||||||||
Other | 1 | — | — | 1 | (1) | — | |||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | 2 | (1) | (1) | |||||||||||||||||||||||||||||
Fair value of plan assets at end of year | 197 | 262 | 342 | 26 | 27 | 32 | |||||||||||||||||||||||||||||
Funded status of plans (non-current) | $ | (37) | $ | (19) | $ | (6) | $ | (82) | $ | (69) | $ | (109) |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Prior service cost | $ | — | $ | — | $ | 2 | $ | 2 | |||||||||||||||
Net actuarial loss (gain) | 20 | 13 | — | (8) | |||||||||||||||||||
Net amount recognized | $ | 20 | $ | 13 | $ | 2 | $ | (6) |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||
Net periodic benefit cost (income) | |||||||||||||||||||||||||||||||||||
Service cost | $ | 3 | $ | 7 | $ | 7 | $ | 4 | $ | 5 | $ | 7 | |||||||||||||||||||||||
Interest cost | 13 | 11 | 10 | 3 | 2 | 1 | |||||||||||||||||||||||||||||
Expected return on plan assets | (11) | (17) | (16) | (1) | (1) | (1) | |||||||||||||||||||||||||||||
Amortization of prior service credit | (1) | (1) | (1) | — | — | — | |||||||||||||||||||||||||||||
Amortization of actuarial losses (gains) | 2 | — | — | — | (33) | (3) | |||||||||||||||||||||||||||||
Settlement and curtailment losses (gains) | 6 | — | — | (2) | — | — | |||||||||||||||||||||||||||||
Net periodic benefit cost (income) | $ | 12 | $ | — | $ | — | $ | 4 | $ | (27) | $ | 4 |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||
Other changes in plan assets and benefits obligations recognized in other comprehensive (income) loss | |||||||||||||||||||||||||||||||||||
Actuarial losses (gains) | $ | 14 | $ | (66) | $ | (20) | $ | 9 | $ | (45) | $ | (18) | |||||||||||||||||||||||
Prior service costs arising during the year | — | — | — | — | 2 | — | |||||||||||||||||||||||||||||
Excess return on plan assets(1) | — | 79 | (9) | — | 6 | — | |||||||||||||||||||||||||||||
Actuarial (losses) gains recognized during the year | (8) | — | — | — | 33 | 3 | |||||||||||||||||||||||||||||
Other | 1 | — | 1 | (1) | — | (1) | |||||||||||||||||||||||||||||
Total recognized in other comprehensive (income) loss | 7 | 13 | (28) | 8 | (4) | (16) | |||||||||||||||||||||||||||||
Total recognized in net periodic benefit cost (income) and other comprehensive (income) loss | $ | 19 | $ | 13 | $ | (28) | $ | 12 | $ | (31) | $ | (12) |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||
Actuarial assumptions used to determine benefit obligations as of December 31: | |||||||||||||||||||||||||||||||||||
Discount rate | 5.2 | % | 3.1 | % | 3.0 | % | 3.4 | % | 1.2 | % | 1.2 | % | |||||||||||||||||||||||
Interest crediting rate | 6.0 | % | 6.0 | % | 6.0 | % | 2.5 | % | 1.5 | % | 1.5 | % | |||||||||||||||||||||||
Expected annual rate of compensation increase | 3.5 | % | 3.2 | % | 3.2 | % | 2.6 | % | 2.4 | % | 2.4 | % | |||||||||||||||||||||||
Actuarial assumptions used to determine net periodic benefit cost (income) for the year ended December 31: | |||||||||||||||||||||||||||||||||||
Discount rate - benefit obligation | 5.0 | % | 5.2 | % | 2.7 | % | 3.0 | % | 3.4 | % | 0.7 | % | |||||||||||||||||||||||
Interest crediting rate | 6.0 | % | 6.0 | % | 6.0 | % | 2.2 | % | 2.5 | % | 1.5 | % | |||||||||||||||||||||||
Expected rate of return on plan assets | 5.3 | % | 5.3 | % | 4.7 | % | 3.4 | % | 1.3 | % | 2.3 | % | |||||||||||||||||||||||
Expected annual rate of compensation increase | 3.5 | % | 3.5 | % | 3.5 | % | 2.7 | % | 2.6 | % | 2.4 | % |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Projected benefit obligation | $ | 234 | $ | 281 | $ | 106 | $ | 96 | |||||||||||||||
Accumulated benefit obligation | $ | 230 | $ | 278 | $ | 96 | $ | 86 | |||||||||||||||
Fair value of plan assets | $ | 197 | $ | 262 | $ | 25 | $ | 27 |
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Projected benefit obligation | $ | 234 | $ | 281 | $ | 108 | $ | 96 | |||||||||||||||
Accumulated benefit obligation | $ | 230 | $ | 278 | $ | 98 | $ | 87 | |||||||||||||||
Fair value of plan assets | $ | 197 | $ | 262 | $ | 26 | $ | 27 |
U.S. Plans NAV | |||||||||||||||||
(in millions) | 2023 | 2022 | |||||||||||||||
Cash and cash equivalents | $ | 3 | $ | 6 | |||||||||||||
Equity | 64 | 45 | |||||||||||||||
Government bonds | 14 | 21 | |||||||||||||||
Corporate bonds | 58 | 132 | |||||||||||||||
Real estate / property | 24 | 29 | |||||||||||||||
Other | 34 | 29 | |||||||||||||||
Total assets at fair value | $ | 197 | $ | 262 |
Non-U.S. Plans | |||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||
Equity | $ | 7 | $ | 7 | $ | — | $ | — | $ | 1 | $ | 1 | $ | — | $ | — | |||||||||||||||||||||||||||||||
Government bonds | 6 | — | 6 | — | 1 | — | 1 | — | |||||||||||||||||||||||||||||||||||||||
Insurance contracts | 7 | — | — | 7 | 6 | — | — | 6 | |||||||||||||||||||||||||||||||||||||||
Other | 6 | — | — | 6 | 19 | — | — | 19 | |||||||||||||||||||||||||||||||||||||||
Total assets at fair value | $ | 26 | $ | 7 | $ | 6 | $ | 13 | $ | 27 | $ | 1 | $ | 1 | $ | 25 |
(in millions) | Non-U.S. Plans | ||||
Balance at January 1, 2021 | $ | 26 | |||
Return on plan assets | 1 | ||||
Purchases, sales and settlements, net | 4 | ||||
Other | (1) | ||||
Balance at December 31, 2021 | 30 | ||||
Return on plan assets | (3) | ||||
Other | (2) | ||||
Balance at December 31, 2022 | 25 | ||||
Return on plan assets | 1 | ||||
Purchases, sales and settlements, net | (14) | ||||
Other | 1 | ||||
Balance at December 31, 2023 | $ | 13 |
(in millions) | U.S. Plans | Non-U.S. Plans | |||||||||
2024 | $ | 19 | $ | 3 | |||||||
2025 | $ | 19 | $ | 3 | |||||||
2026 | $ | 19 | $ | 3 | |||||||
2027 | $ | 19 | $ | 3 | |||||||
2028 | $ | 19 | $ | 4 | |||||||
2029-2033 | $ | 86 | $ | 26 |
Years Ended December 31, | |||||||||||||||||
2023 | 2022 | 2021 | |||||||||||||||
Expected volatility | 63.37 | % | 59.01 | % | 47.43 | % | |||||||||||
Risk-free interest rate % | 4.24 | % | 1.58 | % | 0.20 | % | |||||||||||
Expected term (in years) | 2.88 | 2.89 | 2.86 | ||||||||||||||
Dividend yield (1) | — | % | — | % | — | % |
PSUs | RSUs | ||||||||||||||||||||||
(in whole dollars) | Number of Performance Stock Units | Weighted Average Grant Date Fair Value Per Share | Number of Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||||||||
Non-vested as of January 1, 2023 | 1,722,380 | $ | 27.23 | 3,410,962 | $ | 20.57 | |||||||||||||||||
Granted | 553,071 | 29.89 | 2,298,936 | 18.79 | |||||||||||||||||||
Vested | (611,631) | 27.03 | (1,615,111) | 18.35 | |||||||||||||||||||
Forfeited | (69,954) | 38.47 | (238,291) | 21.88 | |||||||||||||||||||
Non-vested as of December 31, 2023 | 1,593,866 | $ | 35.80 | 3,856,496 | $ | 20.16 |
(in millions) | Unrecognized Compensation Cost | Weighted-Average Period | |||||||||
RSUs | $ | 48 | 1 year, 9 months | ||||||||
PSUs | 20 | 1 year, 2 months | |||||||||
Total unrecognized compensation cost | $ | 68 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
RSUs | $ | 29 | $ | 36 | $ | 48 | |||||||||||
PSUs | 14 | $ | 4 | NA | |||||||||||||
Total | $ | 43 | $ | 40 | $ | 48 |
Year Ended December 31, | ||||||||||||||
2021 | ||||||||||||||
Expected stock price volatility | 34% | |||||||||||||
Expected term of options | 5 years | |||||||||||||
Expected dividend yield (1) | —% | |||||||||||||
Risk-free interest rate | 0.77% |
Stock Options | |||||||||||||||||||||||
(in whole dollars) | Number of Stock Options | Weighted Average Exercise Price | Weighted Average Contractual Life | Aggregate Intrinsic Value | |||||||||||||||||||
Stock Options outstanding as of January 1, 2023 | 1,317,649 | $ | 15.25 | 4.0 years | $ | 6 | |||||||||||||||||
Granted | — | — | |||||||||||||||||||||
Forfeited | — | — | |||||||||||||||||||||
Expired | (96,692) | 24.35 | |||||||||||||||||||||
Exercised | — | — | — | ||||||||||||||||||||
Stock Options outstanding as of December 31, 2023 | 1,220,957 | $ | 14.52 | 3.2 years | $ | 8 | |||||||||||||||||
Vested and expected to vest at December 31, 2023 | 1,220,957 | $ | 14.52 | 3.2 years | $ | 8 | |||||||||||||||||
Exercisable at December 31, 2023 | 1,070,957 | $ | 12.99 | 2.9 years | $ | 8 |
(in millions) | Products and Solutions | ADI Global Distribution | Total | ||||||||||||||
Balance at January 1, 2022 | $ | 2,010 | $ | 651 | $ | 2,661 | |||||||||||
Acquisitions | 94 | 15 | 109 | ||||||||||||||
Divestiture | — | (4) | (4) | ||||||||||||||
Impact of foreign currency translation | (32) | (10) | (42) | ||||||||||||||
Balance at December 31, 2022 | 2,072 | 652 | 2,724 | ||||||||||||||
Acquisitions | 7 | 3 | 10 | ||||||||||||||
Divestitures | (46) | — | (46) | ||||||||||||||
Adjustments | (5) | — | (5) | ||||||||||||||
Impact of foreign currency translation | 17 | 5 | 22 | ||||||||||||||
Balance at December 31, 2023 | $ | 2,045 | $ | 660 | $ | 2,705 |
December 31, | |||||||||||
(in millions) | 2023 | 2022 | |||||||||
Intangible assets subject to amortization | $ | 281 | $ | 295 | |||||||
Indefinite-lived intangible assets | 180 | 180 | |||||||||
Total intangible assets | $ | 461 | $ | 475 |
December 31, 2023 | |||||||||||||||||||||||||||||
(in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Useful Lives | Weighted Average Amortization | ||||||||||||||||||||||||
Patents and technology | $ | 64 | $ | (26) | $ | 38 | 7 - 10 years | 10 years | |||||||||||||||||||||
Customer relationships | 319 | (138) | 181 | 7 - 15 years | 14 years | ||||||||||||||||||||||||
Trademarks | 9 | (8) | 1 | 5 - 10 years | 10 years | ||||||||||||||||||||||||
Software | 193 | (132) | 61 | 2 - 7 years | 5 years | ||||||||||||||||||||||||
Total intangible assets | $ | 585 | $ | (304) | $ | 281 |
December 31, 2022 | |||||||||||||||||||||||||||||
(in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Useful Lives | Weighted Average Amortization | ||||||||||||||||||||||||
Patents and technology | $ | 65 | $ | (28) | $ | 37 | 3 - 10 years | 10 years | |||||||||||||||||||||
Customer relationships | 313 | (117) | 196 | 7 - 15 years | 14 years | ||||||||||||||||||||||||
Trademarks | 14 | (8) | 6 | 10 years | 10 years | ||||||||||||||||||||||||
Software | 175 | (119) | 56 | 2 - 7 years | 6 years | ||||||||||||||||||||||||
Total intangible assets | $ | 567 | $ | (272) | $ | 295 |
(in millions) | Amortization Expense | ||||
2024 | $ | 38 | |||
2025 | $ | 40 | |||
2026 | $ | 35 | |||
2027 | $ | 29 | |||
2028 | $ | 26 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Operating lease cost: | |||||||||||||||||
Selling, general and administrative expenses | $ | 57 | $ | 50 | $ | 46 | |||||||||||
Cost of goods sold | 20 | 19 | 17 | ||||||||||||||
Total operating lease costs | $ | 77 | $ | 69 | $ | 63 |
December 31, | |||||||||||||||||
(in millions, except weighted-average data) | Financial Statement Line Item | 2023 | 2022 | ||||||||||||||
Operating lease assets | Other assets | $ | 192 | $ | 191 | ||||||||||||
Operating lease liabilities - current | Accrued liabilities | $ | 39 | $ | 37 | ||||||||||||
Operating lease liabilities - non-current | Other liabilities | $ | 166 | $ | 166 | ||||||||||||
Weighted-average remaining term | 6.32 years | 6.81 years | |||||||||||||||
Weighted-average incremental borrowing rate | 6.12 | % | 5.78 | % |
(in millions) | Commitments | ||||
2024 | $ | 46 | |||
2025 | 44 | ||||
2026 | 40 | ||||
2027 | 34 | ||||
2028 | 27 | ||||
Thereafter | 58 | ||||
Total lease payments | 249 | ||||
Less: Imputed interest | 44 | ||||
Present value of operating lease liabilities | $ | 205 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Cash paid for operating lease liabilities | $ | 36 | $ | 33 | $ | 33 | |||||||||||
Non-cash activities: operating lease assets obtained in exchange for new operating lease liabilities (1) | $ | 39 | $ | 97 | $ | 46 | |||||||||||
December 31, | |||||||||||
(in millions) | 2023 | 2022 | |||||||||
4.000% senior notes due 2029 | $ | 300 | $ | 300 | |||||||
Variable rate A&R Term B Facility | 1,119 | 1,131 | |||||||||
Gross debt | 1,419 | 1,431 | |||||||||
Less: current portion of long-term debt | (12) | (12) | |||||||||
Less: unamortized deferred financing costs | (11) | (15) | |||||||||
Total long-term debt | $ | 1,396 | $ | 1,404 |
(in millions) | Payments | ||||
2024 | $ | 12 | |||
2025 | 12 | ||||
2026 | 12 | ||||
2027 | 12 | ||||
2028 | 1,073 | ||||
Thereafter | 300 | ||||
Total | $ | 1,419 |
Fair Value of Derivative Assets | |||||||||||||||||
December 31, | |||||||||||||||||
(in millions) | Financial Statement Line Item | 2023 | 2022 | ||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||
Interest rate swaps | Other current assets | $ | 20 | $ | 23 | ||||||||||||
Interest rate swaps | Other assets | 10 | 22 | ||||||||||||||
Total derivative assets designated as hedging instruments | $ | 30 | $ | 45 | |||||||||||||
Unrealized gain | Accumulated other comprehensive loss | $ | 25 | $ | 42 |
Years Ended December 31, | |||||||||||||||||
(in millions) | Financial Statement Line Item | 2023 | 2022 | ||||||||||||||
Gains recorded in accumulated other comprehensive loss, beginning of year | $ | 42 | $ | 6 | |||||||||||||
Current period gain (loss) recognized in/reclassified from other comprehensive income | Interest expense, net | 25 | 42 | ||||||||||||||
(Gains) losses reclassified from accumulated other comprehensive loss to net income | Interest expense, net | (42) | (6) | ||||||||||||||
Gains recorded in accumulated other comprehensive loss, end of year | $ | 25 | $ | 42 |
December 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
(in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
Debt | |||||||||||||||||||||||
4.000% Senior Notes due 2029 | $ | 300 | $ | 266 | $ | 300 | $ | 242 | |||||||||||||||
Variable rate A&R Term B Facility | 1,119 | 1,122 | 1,131 | 1,125 | |||||||||||||||||||
Total debt | $ | 1,419 | $ | 1,388 | $ | 1,431 | $ | 1,367 |
December 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
(in millions) | Carrying Value | Significant other observable inputs (Level 2) | Carrying Value | Significant other observable inputs (Level 2) | |||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 30 | $ | 30 | $ | 45 | $ | 45 | |||||||||||||||||||||||||||
December 31, | |||||||||||
(in millions) | 2023 | 2022 | |||||||||
Obligations payable under Indemnification Agreements | $ | 140 | $ | 140 | |||||||
Compensation, benefit and other employee-related | 110 | 108 | |||||||||
Customer rebate reserve | 104 | 98 | |||||||||
Restructuring | 30 | 27 | |||||||||
Product warranties | 24 | 40 | |||||||||
Current operating lease liability | 39 | 37 | |||||||||
Taxes payable | 34 | 38 | |||||||||
Other (1) | 128 | 152 | |||||||||
Total accrued liabilities | $ | 608 | $ | 640 |
(in millions) | Reimbursement Agreement | Tax Matters Agreement | Total | ||||||||||||||
Beginning balance, January 1, 2022 | $ | 597 | $ | 128 | $ | 725 | |||||||||||
Accruals for liabilities deemed probable and reasonably estimable (1) | 157 | (2) | 155 | ||||||||||||||
Payments to Honeywell | (140) | (20) | (160) | ||||||||||||||
Balance as of December 31, 2022 | 614 | 106 | 720 | ||||||||||||||
Accruals for liabilities deemed probable and reasonably estimable (1) | 178 | (9) | $ | 169 | |||||||||||||
Payments to Honeywell | (140) | — | $ | (140) | |||||||||||||
Balance as of December 31, 2023 | $ | 652 | $ | 97 | $ | 749 |
Years Ended December 31, | |||||||||||
(in millions) | 2023 | 2022 | |||||||||
Accrued liabilities | $ | 140 | $ | 140 | |||||||
Obligations payable under Indemnification Agreements | 609 | 580 | |||||||||
Total indemnification liabilities | $ | 749 | $ | 720 |
December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Beginning balance | $ | 48 | $ | 23 | $ | 22 | |||||||||||
Accruals for warranties/guarantees issued during the year | 24 | 30 | 22 | ||||||||||||||
Adjustment of pre-existing warranties/guarantees | — | (2) | (3) | ||||||||||||||
Settlement of warranty/guarantee claims | (38) | (17) | (18) | ||||||||||||||
Reserve of acquired company at date of acquisition | — | 14 | — | ||||||||||||||
Ending balance | $ | 34 | $ | 48 | $ | 23 |
(in millions) | Payments | ||||
2024 | $ | 142 | |||
2025 | 113 | ||||
2026 | 85 | ||||
2027 | 2 | ||||
2028 and thereafter | — | ||||
Total | $ | 342 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Reimbursement Agreement expense | $ | 178 | $ | 157 | $ | 146 | |||||||||||
Return on pension assets | 9 | (39) | (9) | ||||||||||||||
Other, net | (18) | 21 | 22 | ||||||||||||||
Total other expenses, net | $ | 169 | $ | 139 | $ | 159 | |||||||||||
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
U.S. | $ | 76 | $ | 124 | $ | 79 | |||||||||||
Non-U.S. | 237 | 294 | 274 | ||||||||||||||
Total | $ | 313 | $ | 418 | $ | 353 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Current: | |||||||||||||||||
U.S. | $ | 80 | $ | 95 | $ | 60 | |||||||||||
Non-U.S. | 51 | 43 | 45 | ||||||||||||||
Total current | $ | 131 | $ | 138 | $ | 105 | |||||||||||
Deferred: | |||||||||||||||||
U.S. | $ | (6) | $ | (13) | $ | 5 | |||||||||||
Non-U.S. | (22) | 10 | 1 | ||||||||||||||
Total deferred | $ | (28) | $ | (3) | $ | 6 | |||||||||||
Total provision | $ | 103 | $ | 135 | $ | 111 |
Years Ended December 31, | |||||||||||||||||
2023 | 2022 | 2021 | |||||||||||||||
U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
Impact of foreign operations | (0.9) | (1.6) | (0.2) | ||||||||||||||
U.S. state income taxes | 4.4 | 3.0 | 3.6 | ||||||||||||||
Non-deductible indemnification costs | 10.9 | 7.7 | 8.4 | ||||||||||||||
Executive compensation over $1 million | 1.6 | 1.0 | 0.9 | ||||||||||||||
Other non-deductible expenses | 0.3 | (0.6) | 0.4 | ||||||||||||||
U.S. taxation of foreign earnings | 2.8 | 1.0 | 1.4 | ||||||||||||||
Tax credits | (0.8) | (0.5) | (0.7) | ||||||||||||||
Change in tax basis in foreign assets (1) | (6.5) | — | — | ||||||||||||||
All other items, net | (0.2) | 1.3 | (3.5) | ||||||||||||||
Effective income tax rate | 32.7 | % | 32.3 | % | 31.3 | % |
Years Ended December 31, | |||||||||||
(in millions) | 2023 | 2022 | |||||||||
Deferred tax assets: | |||||||||||
Pension | $ | 21 | $ | 16 | |||||||
Intangibles (2) | 28 | — | |||||||||
Other asset basis differences | 51 | 54 | |||||||||
Operating lease liabilities | 44 | 43 | |||||||||
Employee compensation and benefits | 23 | 17 | |||||||||
Inventory costing and related reserves | 11 | 15 | |||||||||
Capitalized research and development | 13 | 6 | |||||||||
Other accruals and reserves | 19 | 33 | |||||||||
Net operating and capital losses | 55 | 49 | |||||||||
Other | 11 | 1 | |||||||||
Gross deferred tax assets | 276 | 234 | |||||||||
Valuation allowance | (75) | (63) | |||||||||
Total deferred tax assets | $ | 201 | $ | 171 | |||||||
Deferred tax liabilities: | |||||||||||
Intangibles | $ | (42) | $ | (41) | |||||||
Property, plant and equipment | (16) | (24) | |||||||||
Operating lease assets | (41) | (40) | |||||||||
Other | (6) | (7) | |||||||||
Total deferred tax liabilities | $ | (105) | $ | (112) | |||||||
Net deferred tax asset | $ | 96 | $ | 59 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Beginning balance | $ | 63 | $ | 63 | $ | 60 | |||||||||||
Additions / (Subtractions) | 12 | — | 3 | ||||||||||||||
Ending balance | $ | 75 | $ | 63 | $ | 63 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Unrecognized tax benefits at beginning of year | $ | 22 | $ | 16 | $ | 10 | |||||||||||
Decreases related to positions taken on items from prior years | (1) | — | — | ||||||||||||||
Increases related to positions taken in the current year | 5 | 6 | 6 | ||||||||||||||
Decreases due to expiration of statutes of limitations | (4) | — | — | ||||||||||||||
Unrecognized tax benefits at end of year | $ | 22 | $ | 22 | 16 |
Years Ended December 31, | |||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | ||||||||||||||
Numerator for basic and diluted earnings per share: | |||||||||||||||||
Net income | $ | 210 | $ | 283 | $ | 242 | |||||||||||
Denominator for basic and diluted earnings per share: | |||||||||||||||||
Weighted average basic number of common shares outstanding | 147 | 146 | 144 | ||||||||||||||
Plus: dilutive effect of common stock equivalents | 1 | 3 | 4 | ||||||||||||||
Weighted average diluted number of common shares outstanding | 148 | 149 | 148 | ||||||||||||||
Earnings per share: | |||||||||||||||||
Basic | $ | 1.43 | $ | 1.94 | $ | 1.68 | |||||||||||
Diluted | $ | 1.42 | $ | 1.90 | $ | 1.63 |
Net Revenue (1) | Long-lived Assets (2) | |||||||||||||||||||||||||||||||||||||
Years Ended December 31, | December 31, | |||||||||||||||||||||||||||||||||||||
(in millions) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
U.S. | $ | 4,720 | $ | 4,795 | $ | 4,181 | $ | 332 | $ | 347 | $ | 244 | ||||||||||||||||||||||||||
Europe | 1,065 | 1,111 | 1,196 | 143 | 131 | 139 | ||||||||||||||||||||||||||||||||
Other International | 457 | 464 | 469 | 107 | 79 | 46 | ||||||||||||||||||||||||||||||||
Total | $ | 6,242 | $ | 6,370 | $ | 5,846 | $ | 582 | $ | 557 | $ | 429 |
Inc
.Dallas, Texas
Inc
Emphasis of Matter
As described in Note 1 to the financial statements, prior to the Spin-Off, the accompanying financial statements were derived from the separate records maintained by Honeywell International, Inc. (“Honeywell”). The financial statements also include expense allocations for certain corporate functions historically provided by Honeywell. These allocations may not be reflective of the actual expense that would have been incurred had the Company operated as a separate entity apart from Honeywell. A summary of transactions with related parties is included in Note 5 to the financial statements.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company adopted Accounting Standard Update No. 2016-02,
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
|
|
|
|
•We tested the effectiveness of controls related to remediation costs for environmental matters, including management’s controls over the recording of and changes to the liability for the Company’s obligations under the Reimbursement Agreement. |
|
•We read the Reimbursement Agreement and evaluated the Company’s compliance with it to the extent it has the potential to affect the Company’s related liability. |
|
|
|
|
|
–For a selection of incremental charges to the Honeywell Environmental liability (increases), obtained supporting documentation related to the valuation of the liability from management, including, but not limited to, regulatory records of decision, feasibility studies, and third-party engineering estimates. |
|
–For a selection of payments related to the Honeywell Environmental liability (decreases), obtained supporting documentation related to the original invoice and proof of payment. |
|
Dallas, Texas
14, 2024
45
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In millions except share and per share data)
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Net revenue |
| $ | 5,071 |
|
| $ | 4,988 |
|
| $ | 4,827 |
|
Cost of goods sold |
|
| 3,758 |
|
|
| 3,711 |
|
|
| 3,402 |
|
Gross profit |
|
| 1,313 |
|
|
| 1,277 |
|
|
| 1,425 |
|
Selling, general and administrative expenses |
|
| 1,002 |
|
|
| 1,019 |
|
|
| 932 |
|
Operating profit |
|
| 311 |
|
|
| 258 |
|
|
| 493 |
|
Other expense, net |
|
| 147 |
|
|
| 118 |
|
|
| 369 |
|
Interest expense |
|
| 63 |
|
|
| 69 |
|
|
| 20 |
|
Income before taxes |
|
| 101 |
|
|
| 71 |
|
|
| 104 |
|
Tax expense (benefit) |
|
| 64 |
|
|
| 35 |
|
|
| (301 | ) |
Net income |
| $ | 37 |
|
| $ | 36 |
|
| $ | 405 |
|
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 125,348 |
|
|
| 122,722 |
|
|
| 122,499 |
|
Diluted |
|
| 126,324 |
|
|
| 123,238 |
|
|
| 122,624 |
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.30 |
|
| $ | 0.29 |
|
| $ | 3.31 |
|
Diluted |
| $ | 0.29 |
|
| $ | 0.29 |
|
| $ | 3.30 |
|
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
46
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED AND COMBINED
STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Net income |
| $ | 37 |
|
| $ | 36 |
|
| $ | 405 |
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange translation adjustment |
|
| 63 |
|
|
| (2 | ) |
|
| (77 | ) |
Pension actuarial loss |
|
| (15 | ) |
|
| (3 | ) |
|
| (7 | ) |
Total other comprehensive income (loss), net of tax |
|
| 48 |
|
|
| (5 | ) |
|
| (84 | ) |
Comprehensive income |
| $ | 85 |
|
| $ | 31 |
|
| $ | 321 |
|
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
47
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 517 |
|
| $ | 122 |
|
Accounts receivable – net |
|
| 863 |
|
|
| 817 |
|
Inventories – net |
|
| 672 |
|
|
| 671 |
|
Other current assets |
|
| 173 |
|
|
| 175 |
|
Total current assets |
|
| 2,225 |
|
|
| 1,785 |
|
Property, plant and equipment – net |
|
| 318 |
|
|
| 316 |
|
Goodwill |
|
| 2,691 |
|
|
| 2,642 |
|
Other assets |
|
| 376 |
|
|
| 385 |
|
Total assets |
| $ | 5,610 |
|
| $ | 5,128 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 936 |
|
| $ | 920 |
|
Current maturities of debt |
|
| 7 |
|
|
| 22 |
|
Accrued liabilities |
|
| 595 |
|
|
| 552 |
|
Total current liabilities |
|
| 1,538 |
|
|
| 1,494 |
|
Long-term debt |
|
| 1,155 |
|
|
| 1,158 |
|
Obligations payable under Indemnification Agreements |
|
| 590 |
|
|
| 594 |
|
Other liabilities |
|
| 334 |
|
|
| 280 |
|
COMMITMENTS AND CONTINGENCIES (Note 19) |
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 700,000 shares authorized, 143,959 and 143,059 shares issued and outstanding as of December 31, 2020, 123,488 and 122,873 shares issued and outstanding as of December 31, 2019, respectively |
| 0 |
|
|
| 0 |
| |
Additional paid-in capital |
|
| 2,070 |
|
|
| 1,761 |
|
Treasury stock, at cost |
|
| (6 | ) |
|
| (3 | ) |
Retained earnings |
|
| 75 |
|
|
| 38 |
|
Accumulated other comprehensive loss |
|
| (146 | ) |
|
| (194 | ) |
Total equity |
|
| 1,993 |
|
|
| 1,602 |
|
Total liabilities and equity |
| $ | 5,610 |
|
| $ | 5,128 |
|
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
48
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOW
(In millions)
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Cash flows provided by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 37 |
|
| $ | 36 |
|
| $ | 405 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 86 |
|
|
| 80 |
|
|
| 66 |
|
Stock compensation expense |
|
| 29 |
|
|
| 25 |
|
|
| 20 |
|
Deferred income taxes |
|
| 22 |
|
|
| (25 | ) |
|
| (323 | ) |
Other |
|
| 21 |
|
|
| 18 |
|
|
| 22 |
|
Changes in assets and liabilities, net of acquired companies: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (27 | ) |
|
| 7 |
|
|
| (62 | ) |
Inventories – net |
|
| 19 |
|
|
| (44 | ) |
|
| (172 | ) |
Other current assets |
|
| 5 |
|
|
| (53 | ) |
|
| (27 | ) |
Other assets |
|
| - |
|
|
| (15 | ) |
|
| (4 | ) |
Accounts payable |
|
| (1 | ) |
|
| (38 | ) |
|
| 231 |
|
Accrued liabilities |
|
| 31 |
|
|
| 28 |
|
|
| 61 |
|
Obligations payable under Indemnification Agreements |
|
| (4 | ) |
|
| (35 | ) |
|
| 24 |
|
Other liabilities |
|
| 26 |
|
|
| 39 |
|
|
| 221 |
|
Net cash provided by operating activities |
|
| 244 |
|
|
| 23 |
|
|
| 462 |
|
Cash flows (used for) provided by for investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant, equipment and other intangibles |
|
| (70 | ) |
|
| (95 | ) |
|
| (81 | ) |
Cash paid for acquisitions, net of cash acquired |
|
| (35 | ) |
|
| (17 | ) |
|
| - |
|
Other |
|
| 2 |
|
|
| - |
|
|
| 7 |
|
Net cash used for investing activities |
|
| (103 | ) |
|
| (112 | ) |
|
| (74 | ) |
Cash flows provided by (used for) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock through public offering, net of issuance cost |
| 279 |
|
|
| - |
|
|
| - |
| |
Proceeds from long-term debt |
|
| - |
|
|
| - |
|
|
| 1,225 |
|
Payment of debt facility issuance and modification costs |
|
| - |
|
|
| (4 | ) |
|
| (29 | ) |
Repayment of long-term debt |
|
| (22 | ) |
|
| (22 | ) |
|
| - |
|
Distribution to Honeywell in connection with Spin-Off |
|
| - |
|
|
| - |
|
|
| (1,415 | ) |
Net increase in invested equity |
|
| - |
|
|
| - |
|
|
| 39 |
|
Non-operating obligations from Honeywell, net |
|
| (2 | ) |
|
| (24 | ) |
|
| 26 |
|
Other |
|
| (2 | ) |
|
| (3 | ) |
|
| (13 | ) |
Net cash provided by (used for) financing activities |
|
| 253 |
|
|
| (53 | ) |
|
| (167 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents |
|
| 1 |
|
|
| (1 | ) |
|
| (12 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 395 |
|
|
| (143 | ) |
|
| 209 |
|
Cash and cash equivalents at beginning of period |
|
| 122 |
|
|
| 265 |
|
|
| 56 |
|
Cash and cash equivalents at end of period |
| $ | 517 |
|
| $ | 122 |
|
| $ | 265 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 57 |
|
| $ | 72 |
|
| $ | - |
|
Income taxes paid (net of refunds) |
| $ | 32 |
|
| $ | 86 |
|
| $ | 28 |
|
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
49
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(In millions, shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Shares |
|
| Treasury Shares |
|
| Common Stock |
|
| Treasury Stock |
|
| Additional Paid- In Capital |
|
| Retained Earnings |
|
| Invested Equity |
|
| Accumulated Other Comprehensive Loss |
|
| Total Equity |
| |||||||||
Balance at January 1, 2018 |
|
| - |
|
|
| - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 2,703 |
|
| $ | (100 | ) |
| $ | 2,603 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2 |
|
|
| 403 |
|
|
| - |
|
|
| 405 |
|
Other comprehensive (loss), net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (84 | ) |
|
| (84 | ) |
Change in invested equity |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,398 | ) |
|
| - |
|
|
| (1,398 | ) |
Issuance of common stock and reclassification of invested equity |
|
| 122,499 |
|
|
| 468 |
|
|
| - |
|
|
| - |
|
|
| 1,713 |
|
|
| - |
|
|
| (1,708 | ) |
|
| (5 | ) |
|
| - |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4 |
|
Other |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3 |
|
Balance at December 31, 2018 |
|
| 122,499 |
|
|
| 468 |
|
|
| - |
|
|
| - |
|
|
| 1,720 |
|
|
| 2 |
|
|
| - |
|
|
| (189 | ) |
|
| 1,533 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 36 |
|
|
| - |
|
|
| - |
|
|
| 36 |
|
Other comprehensive (loss), net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5 | ) |
|
| (5 | ) |
Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes |
|
| 374 |
|
|
| 147 |
|
|
| - |
|
|
| (3 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3 | ) |
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 25 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 25 |
|
Adjustments due to Spin-Off |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
Balance at December 31, 2019 |
|
| 122,873 |
|
|
| 615 |
|
|
| - |
|
|
| (3 | ) |
|
| 1,761 |
|
|
| 38 |
|
|
| - |
|
|
| (194 | ) |
|
| 1,602 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 37 |
|
|
| - |
|
|
| - |
|
|
| 37 |
|
Other comprehensive income, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 48 |
|
|
| 48 |
|
Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes |
|
| 636 |
|
|
| 285 |
|
|
| - |
|
|
| (3 | ) |
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2 | ) |
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 29 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 29 |
|
Issuance of common stock through public offering, net of issuance costs |
|
| 19,550 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 279 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 279 |
|
Balance at December 31, 2020 |
|
| 143,059 |
|
|
| 900 |
|
| $ | - |
|
| $ | (6 | ) |
| $ | 2,070 |
|
| $ | 75 |
|
| $ | - |
|
| $ | (146 | ) |
| $ | 1,993 |
|
The Notes to Consolidated and Combined Financial Statements are an integral part ofthese statements.
50
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
Note 1. Organization, Operations and Basis of Presentation
Business Description
Resideo Technologies, Inc. (“Resideo” or “the Company”), is a leading manufacturer and distributor of technology-driven products that provide critical comfort, residential thermal and security solutions to homes globally. The Company is also the leading wholesale distributor of low-voltage security products including intrusion, access control and video products and participates significantly in the broader related markets of smart home, fire, power, audio, ProAV, networking, communications, wire and cable, enterprise connectivity, and structured wiring products. The Company has a global footprint serving commercial and residential end markets.
Separation from Honeywell
The Company was incorporated in Delaware on April 24, 2018. On October 29, 2018, the Company separated from Honeywell International Inc. (“Honeywell”) becoming an independent publicly traded company as a result of a pro rata distribution of the Company’s common stock to shareholders of Honeywell (the “Spin-Off”). The Company began trading “regular way” under the ticker symbol “REZI” on the New York Stock Exchange on October 29, 2018.
In connection with the separation, Resideo and Honeywell entered into a Reimbursement Agreement (as defined in Note 2. Summary of Significant Accounting Policies), a Separation and Distribution Agreement, an Employee Matters Agreement, a Tax Matters Agreement, a Transition Services Agreement, a Trademark License Agreement and a Patent Cross-License Agreement. The agreements govern the relationship between Resideo and Honeywell following the separation and provide for the allocation of various assets, liabilities, rights, and obligations. These agreements also include arrangements for transition services provided by Honeywell to Resideo and by Resideo to Honeywell.
Basis of Presentation
Prior to the Spin-Off, the Company’s historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 29, 2018, these financial statements are presented on a combined basis and for the periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Financial Statements”). The Consolidated and Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
All intracompany transactions have been eliminated for all periods presented. As described in Note 5. Related Party Transactions with Honeywell, all significant transactions between the Company and Honeywell occurring prior to the Spin-Off have been included in these Consolidated and Combined Financial Statements.
51
RESIDEO TECHNOLOGIES, INC.
While the Company was owned by Honeywell, a centralized approach to cash management and financing was used. Prior to the consummation of the Spin-Off, the majority of the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed.
The combined financial statements prior to the Spin-Off include certain assets and liabilities that have historically been held at Honeywell corporate level but were specifically identifiable or otherwise attributable to the Company. The cash and cash equivalents held by Honeywell at the corporate level were not specifically identifiable to the Company and therefore were not attributed. Honeywell third-party debt and the related interest expense were not allocated as Honeywell’s borrowings were not directly attributable to the company. In periods subsequent to the Spin-Off, the Company made adjustments to balances transferred at the Spin-Off, including adjustments to the classification of assets or liabilities transferred. Any such adjustments are recorded directly to equity in Adjustments due to the Spin-Off and are considered immaterial.
Prior to the Spin-Off, Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The cost of these services has been allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider these allocations to be a reasonable reflection of the benefits received by the Company. However, the financial information presented in these Consolidated and Combined Financial Statements may not reflect the consolidated and combined financial position, operating results and cash flows of the Company had the Company been a separate stand-alone entity during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both Resideo and Honeywell consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefits received by the Company during the periods presented. After the Spin-Off, a number of the above services have continued under a Transition Service Agreement with Honeywell, which the Company expenses as incurred based on the contractual pricing terms.
The Company reports financial information on a fiscal quarter basis using a “modified” 4-4-5 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31) that requires its businesses to close their first, second and third quarter books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year.
52
RESIDEO TECHNOLOGIES, INC.
Reclassification
On January 1, 2020, the Company changed its classification of research and development expenses in the Consolidated and Combined Statements of Operations from Cost of goods sold to Selling, general and administrative expenses, such that research and development expenses are excluded from the calculation of Gross profit. This change had no impact on Net income and earnings per share or the Consolidated Balance Sheet, Consolidated and Combined Statements of Cash Flow or Equity. The Company determined the impact on previously issued consolidated and combined annual and interim financial statements was not material. The impact for the years ended December 31, 2019 and 2018 was a decrease in Cost of goods sold, an increase in Gross profit and in Selling, general and administrative expenses of $87 million and $59 million, respectively. The impact of the reclassification for the year ended December 31, 2019 is also reflected in Note 7. Restructuring Charges and Note 23. Unaudited Quarterly Financial Information.
In addition, the prior year segment information was recast to present Corporate separately. See Note 21. Segment Financial Data for additional information. Certain reclassifications have been made to the prior period financial statements to conform to the classification adopted in the current period.
Issuance of Common Stock through Public Offering
On November 17, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) which provided for the offer and sale by the Company of 17,000,000 shares of common stock of the Company at the public offering price of $15.00 per share (the “Offering”). The Offering closed on November 20, 2020. On December 14, 2020, the Company completed the closing of the exercise of the underwriters’ option to purchase an additional 2,550,000 shares of common stock of the Offering price of $15.00 per share as allowed in the Underwriting Agreement. The Company received net proceeds of approximately $279 million, after deducting underwriting discounts of $13 million and offering expenses payable by the Company of $1 million.
Note 2. Summary of Significant Accounting Policies
The World Health Organization (“WHO”) declared the novel coronavirus disease ("COVID-19") a pandemic in March 2020. Starting at the end of the first quarter and throughout the second quarter, the Company experienced constrained supply and slowed customer demand that adversely impacted the Company’s business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, during the second half of 2020 customer demand improved and on-going cost actions and transformation efforts contributed to improvements in the Company’s results of operations and overall financial performance. As there remains uncertainty around the impacts of the COVID-19 pandemic, the Company addresses and evaluates the impacts frequently. At December 31, 2020, the Company believes that the accounting policies most likely affected by the COVID-19 pandemic are the use of estimates and goodwill policies.
Accounting Principles—The financial statements and accompanying notes are prepared in accordance with U.S. GAAP. The following is a description of Resideo’s significant accounting policies.
Principles of Consolidation—The Consolidated and Combined Financial Statements include the accounts of Resideo Technologies, Inc. and all of its subsidiaries in which a controlling interest is maintained. All intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand and highly liquid investments having an original maturity of three months or less.
Accounts Receivables and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount as a result of transactions with customers. The Company maintains allowances for doubtful accounts for estimated losses as a result of customers’ inability to make required payments. The Company estimates anticipated losses from doubtful accounts based on days past due as measured from the contractual due date and historical collection history. The Company also takes into consideration changes in economic conditions that may not be reflected in historicaltrends, for example customers in bankruptcy, liquidation or reorganization. Receivables are written-off against the allowance for doubtful accounts whenthey are determined to be uncollectible. Such determination includes analysis and consideration of the particular conditions of the account, including time
53
RESIDEO TECHNOLOGIES, INC.
intervals since last collection, customer performance against agreed upon payment plans, solvency of customer and any bankruptcy proceedings.
Inventories—Inventories in the Products & Solutions business are stated at the lower of cost or net realizable value, determined on a first-in, first-out basis, including direct material costs and direct and indirect manufacturing costs, or net realizable value. Inventories in the ADI Global Distribution business are stated at average cost. Reserves are maintained for obsolete and surplus items.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost, less accumulated depreciation. For financial reporting, the straight-line method of depreciation is used over the estimated useful lives of 10 to 50 years for buildings and improvements, 3 to 16 years for machinery and equipment and 3 to 10 years for tooling equipment.
Goodwill—The Company performs goodwill impairment testing annually, on the first day of the fourth quarter each year or more frequently if indicators of potential impairment exist. The goodwill impairment test is performed at the reporting unit level. The Company has 2 reporting units, Products & Solutions and ADI Global Distribution. The Company performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 2020 annual impairment test, the Company used a weighting of fair values derived from the income approach and market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value, and appropriate discount rates. Under the market approach, the Company utilizes the public company guideline method.
The Company believes the estimates and assumptions used in the calculations are reasonable. In addition, the extent to which COVID-19 may adversely impact the Company’s business depends on future developments, which are uncertain and unpredictable, depending upon severity and duration of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time but may adversely affect the Company’s business and financial results. It is likely that into 2021, macroeconomic conditions may have unexpected impacts on the Company’s business. If there were an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. Should the fair value of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. The Company monitors its reporting units to determine if there is an indicator of potential impairment.
Other Intangible Assets and Long-lived Assets—Other intangible assets with determinable lives consist of customer lists, technology, patents and trademarks and software intangibles and are amortized over their estimated useful lives, ranging from 3 to 15 years. They are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
Warranties and Guarantees—Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of the warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims.
54
RESIDEO TECHNOLOGIES, INC.
Leases—Effective January 1, 2019, arrangements containing leases are evaluated as an operating or finance lease at lease inception. For operating leases, the Company recognizes an operating right-of-use asset and operating lease liability at lease commencement based on the present value of lease payments over the lease term.
Since an implicit rate of return is not readily determinable for the Company’s leases, an incremental borrowing rate is used in determining the present value of lease payments and is calculated based on information available at the lease commencement date. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow funds on a collateralized basis over a similar term. The Company references a market yield curve consistent with the Company’s credit rating which is risk-adjusted to approximate a collateralized rate in the currency of the lease. These rates are updated on a quarterly basis for measurement of new lease obligations.Most leases include renewal options; however, generally it is not reasonably certain that these options will be exercised at lease commencement. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recognized on the Company’s balance sheet. The Company does not separate lease and non-lease components for its real estate and automobile leases.
Revenue Recognition—Product and service revenues are recognized when or as the Company transfers control of the promised products or services to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.
In the sale of products, the terms of a contract or the historical business practice can give rise to variable consideration due to, but not limited to, discounts and rebates. The Company estimates variable consideration at the most likely amount that will be received from customers and reduces revenues recognized accordingly. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company.
Sales, use and value added taxes collected by the Company and remitted to various government authorities were not recognized as revenues and are reported on a net basis.
Shipping and handling fees billed to customers were included in Cost of goods sold.
Royalty—In connection with the Spin-Off, the Company and Honeywell entered into a 40-year Trademark License Agreement (“the Trademark Agreement”) that authorizes the Company’s use of certain licensed trademarks in the operation of Resideo’s business for the advertising, sale and distribution of certain licensed products. In exchange, the Company pays a royalty fee of 1.5% of net revenue of the licensed products to Honeywell which is recorded in Selling, general and administrative expense on the Consolidated and Combined Statements of Operations.
Reimbursement Agreement—In connection with the Spin-Off the Company entered into an Indemnification and Reimbursement Agreement with Honeywell (the “Reimbursement Agreement”) on October 14, 2018, pursuant to which it has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case, including consequential damages (the “liabilities”) in respect of specified Honeywell properties contaminated through historical business operations prior to the Spin-Off (“Honeywell Sites”), including the legal and other costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable in respect of such liabilities arising in any given year is subject to a cap of $140 million. Reimbursement Agreement expenses are presented within Other expense, net in the Consolidated and Combined Statements of Operations and within Accrued liabilities and Obligations payable under Indemnification Agreements in the Consolidated Balance Sheets. For additional information, see Note 19. Commitments and Contingencies.
55
RESIDEO TECHNOLOGIES, INC.
Environmental—The Company accrues costs related to environmental matters when it is probable that it has incurred a liability related to a contaminated site and the amount can be reasonably estimated. Environmental costs for the Company’s owned sites are presented within Cost of goods sold for operating sites. Prior to the Spin-off, sites now under the Reimbursement Agreement were presented within Other expense, net in the Consolidated and Combined Statements of Operations. For additional information, see Note 19. Commitments and Contingencies.
Tax Indemnification Agreement—The Tax Matters Agreement provides that Resideo is required to indemnify Honeywell for any taxes (and reasonable expenses) resulting from the failure of the Spin-Off and related internal transactions to qualify for their intended tax treatment under U.S. federal, state and local income tax law, as well as foreign tax law, where such taxes result from (a) breaches of covenants and representations the Company makes and agrees to in connection with the Spin-Off, (b) the application of certain provisions of U.S. federal income tax law to these transactions or (c) any other action taken or omission made (other than actions expressly required or permitted by the Separation and Distribution Agreement, the Tax Matters Agreement or other ancillary agreements) after the consummation of the Spin-Off that gives rise to these taxes. As of December 31, 2020 and 2019, the Company had an indemnity outstanding to Honeywell of $139 million and $149 million, respectively. See Note 19. Commitments and Contingencies.
Research and Development—The Company conducts research and development activities, which consist primarily of the development of new products as well as enhancements and improvements to existing products that substantially change the product. Research and development costs primarily relate to employee compensation and consulting fees which are charged to expense as incurred. Such costs are included in Selling, general and administrative expenses and amount to$77 million, $87 million and $59 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Advertising Costs—The Company expenses advertising costs as incurred. Advertising costs totaled $25 million and $46 million for the years ended December 31, 2020 and 2019, respectively. Prior to the Spin-Off, advertising costs were allocated from Honeywell as described in Note 5. Related Party Transactions with Honeywell. Advertising costs are included within Selling, general and administrative expense.
Defined Contribution Plans—The Company sponsors various defined contribution plans with varying terms depending on the country of employment. The Company recognized compensation expense of $18 million for both years ended December 31, 2020 and 2019 related to employer contributions to these plans. Prior to the Spin-Off, costs were allocated from Honeywell as described in Note 5. Related Party Transactions with Honeywell.
Stock-Based Compensation Plans—The principal awards issued under Resideo’s stock-based compensation plans, which are described in Note 18. Stock-Based Compensation Plans, are restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. Some awards are issued with a market condition which are valued on the grant date utilizing a Monte Carlo simulation model. Stock options are also issued under Resideo’s stock-based compensation plans and are valued on the grant date using the Black-Scholes option pricing model.
The Black-Scholes option pricing model and the Monte Carlo simulation model require estimates of future stock price volatility, expected term, risk-free interest rate and forfeitures.
For all stock-based compensation, the fair value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. Forfeitures are estimated at the time of grant to recognize expense for those awards that are expected to vest and are based on historical forfeiture rates.
Pension—The Company disaggregates the service cost component of net benefit costs and reports those costs in the same line item or items in the Consolidated and Combined Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other non-service components of net benefit costs are required to be presented separately from the service cost component and outside of income from operations.
56
RESIDEO TECHNOLOGIES, INC.
The Company has recorded the service cost component of pension expense in Costs of goods sold and Selling, general and administrative expenses based on the classification of the employees it relates to. The remaining components of net benefit costs within pension expense, primarily interest costs and expected return on plan assets, are recorded in Other expense, net. The Company recognizes net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year. This adjustment known as the mark to market adjustment is reported in Other expense, net.
Foreign Currency Translation—Assets and liabilities of operations outside the United States with a functional currency other than U.S. Dollars are translated into U.S. Dollars using year-end exchange rates. Revenue, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive loss.
Income Taxes—Significant judgment is required in evaluating tax positions. The Company establishes additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance which determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a change in estimate become known.
Earnings Per Share—Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.For additional information, see Note 3. Earnings Per Share.
Use of Estimates—The preparation of the Company’s Consolidated and Combined Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated and Combined Financial Statements and related disclosures in the accompanying notes. Actual resultscould differ from those estimates. Estimates and assumptions are periodically reviewed, and the effects of changes are reflected in the Consolidated and Combined Financial Statements in the period they are determined to be necessary. Estimates are used when accounting for stock-based compensation, pension benefits, indemnification liabilities, goodwill and intangible assets, and valuation allowances for accounts receivable, inventory, deferred tax assets, and the amounts of revenue and expenses reported during the period. The Company has used information available to identify potential impacts cause by the COVID-19 pandemic at December 31, 2020 in these estimates.
Recent Accounting Pronouncements—The Company considers the applicability and impact of all recent accounting standardsupdates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed below were assessed anddetermined to be either not applicable or are expected to have an immaterial impact on the Company’s consolidated and combined financial position or results ofoperations.
The Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, and applied the changes prospectively as of the adoption date. As permitted by the new guidance, the Company elected the package of practical expedients, which, among other things, allowed historical lease classification to be carried forward.
Upon adoption of ASU No. 2016-02, the Company recognized an aggregate lease liability of $115 million, calculated based on the present value of the remaining minimum lease payments for qualifying leases as of January 1, 2019, with a corresponding right-of-use asset of $112 million. The cumulative-effect adjustment recognized to opening retained earnings was not material. The adoption of the new guidance did not impact the Company’s Consolidated and Combined Statements of Operations or Cash Flows.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for an entity to elect to reclassify, to retained earnings, the
57
RESIDEO TECHNOLOGIES, INC.
one-time income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”). An entity that elects to make this reclassification must consider all items in AOCI that have tax effects stranded as a result of the tax rate change and must disclose the reclassification of these tax effects as well as the entity’s policy for releasing income tax effects from AOCI. The ASU may be applied either retrospectively or as of the beginning of the period of adoption. The Company adopted the standard on January 1, 2019 using the aggregate portfolio accounting policy for recognizing the disproportionateincome tax effects in AOCI and has elected not to reclassify the stranded income tax effects of U.S. Tax Reform from AOCI to retained earnings.
In August 2018, the FASB issued ASU No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans, which amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans and allows for the removal of certain disclosures, while adding certain new disclosure requirements. The Company adopted the standard effective January 1, 2020 and the adoption did not have a material financial statement impact.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combinations that result in a step-up in the tax basis of goodwill. The Company early adopted the provisions of this guidance on January 1, 2020. Adoption of this guidance did not have a material financial statement impact.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is optional guidance related to reference rate reform that provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for the Company’s Term Loans and Revolving Credit Facility, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. Refer to Note 15. Long-term Debt and Credit Agreement for further details on the Company’s Term Loans and Revolving Credit Facility. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in millions except shares in thousands and per share data):
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 37 |
|
| $ | 36 |
|
| $ | 405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share |
|
| 125,348 |
|
|
| 122,722 |
|
|
| 122,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents |
|
| 976 |
|
|
| 516 |
|
|
| 125 |
|
Shares used in computing diluted earnings per share |
|
| 126,324 |
|
|
| 123,238 |
|
|
| 122,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.30 |
|
| $ | 0.29 |
|
| $ | 3.31 |
|
Diluted |
| $ | 0.29 |
|
| $ | 0.29 |
|
| $ | 3.30 |
|
58
RESIDEO TECHNOLOGIES, INC.
On October 29, 2018, the date of consummation of the Spin-Off, 122,499 shares of the Company’s Common Stock, par value $0.001 per share, were distributed to Honeywell shareholders of record as of October 16, 2018. For the 2018 year to date calculation, these shares are treated as issued and outstanding from January 1, 2018 for purposes of calculating historical basic earnings per share. For December 31, 2020 and 2019, this calculation excludes 900 and 615 treasury shares, respectively.
Diluted Earnings Per Share is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of the Company’s common stock for the period. For the year ended December 31, 2018, the average market price of the Company’s common stock was calculated from the Spin-Off date to December 31, 2018. In periods where the Company has a net loss, 0 dilutive common shares are included in the calculation for diluted shares as they are considered anti-dilutive. For the year ended December 31, 2020, average options and other rights to purchase approximately 2.5 million shares of common stock were outstanding, all of which were anti-dilutive during the year ended December 31, 2020, and therefore excluded from the computation of diluted earnings per common share. Additionally, an average of approximately 0.5 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the year ended December 31, 2020 as the contingency has not been satisfied at December 31, 2020. For the year ended December 31, 2019, average option and other rights to purchase approximately 2.8 million shares of common stock were outstanding, all of which were anti-dilutive during the year ended December 31, 2019, and therefore excluded from the computation of diluted earnings per common share. Additionally, an average of approximately 0.2 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the year ended December 31, 2019 as the contingency has not been satisfied at December 31, 2019.
Note 4. Acquisitions
During the year ended December 31, 2020, the Company completed 1 acquisition which has been integrated into the ADI Global Distribution segment. On February 10, 2020, the Company completed the acquisition of privately held Herman ProAV, a leading provider and distributer of professional audio-visual products, procurement services and labor resources to systems integrators in the commercial audio-visual industry. The purchase price paid for this acquisition was approximately $36 million. In connection with this acquisition, the Company recognized goodwill and intangible assets of $4 million and $18 million, respectively. This acquisition was integrated into and builds upon ADI Global Distribution’s product portfolio and expands its presence in the pro-AV market. The Herman ProAV acquisition agreements include deferred payments for certain individuals that are contingent upon employment as well as financial performance. The Company determined that these deferred payments are accounted for as compensation expense over the requisite service period.
During the year ended December 31, 2019, the Company completed 3 acquisitions which have been integrated into the Products & Solutions segment. On March 28, 2019, the Company acquired all of the capital stock of Buoy Labs primarily to obtain the technology assets. Buoy provides innovative Wi-Fi enabled solutions that track the amount of water used in a home, integrating smart software and hardware that can help consumers identify potential leaks and allow consumers to act to prevent them through its subscription-based app services. On May 21, 2019, the Company acquired certain assets relating to innovative energy efficiency from Whisker Labs. The acquired technology creates a thermodynamic model of a home to accurately predict home heating and air conditioning run time and energy use to enable a homeowner to use less energy while maintaining comfort. On June 27, 2019, the Company acquired all of the membership interests of LifeWhere. LifeWhere uses machine learning and analytics to predict potential failure on critical home appliances, such as water heaters, furnaces, and air conditioners. This service provides the detailed analytics required for professional contractors to dispatch technicians with the right skills to quickly repair the appliance before it causes catastrophic failure. The aggregate purchase price paid for these acquisitions was $17 million. In connection with these acquisitions, the Company recognized goodwill and intangible assets of $10 million and $7 million, respectively.
These acquisitions have an immaterial financial statement impact on both an individual basis and when considered in the aggregate. Pro-forma disclosures are not provided as the acquisitions have an immaterial financial statement impact.
59
RESIDEO TECHNOLOGIES, INC.
Note 5. Related Party Transactions with Honeywell
Prior to the Spin-Off, the Consolidated and Combined Financial Statements were derived from the unaudited Consolidated Financial Statements and accounting records of Honeywell.
Prior to the Spin-Off, Honeywellwas a related party that provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The costs of these services were allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider the allocations to be a reasonable reflection of the benefits received by the Company.
During the period from January 1, 2018 until October 29, 2018, the Company was allocated $228 million of general corporate expenses incurred by Honeywell and such amounts are included within Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. As certain expenses reflected in the Consolidated and Combined Financial Statements include allocations of corporate expenses from Honeywell, these statements could differ from those that would have been prepared had the Company operated on a stand-alone basis.
All significant intercompany transactions between the Company and Honeywell have been included in these Consolidated and Combined Financial Statements. During the period from January 1, 2018 until October 29, 2018, sales to Honeywell, Cost of goods sold to Honeywell, and purchases from Honeywell were $24 million, $19 million, and $212 million, respectively. The total net effect of the settlement of these intercompany transactions is reflected in the Consolidated and Combined Statements of Cash Flows as a financing activity.
Prior to the consummation of the Spin-Off, Honeywell managed the Company’s hedging activity which included centrally hedging its exposure to changes in foreign exchange rates principally with forward contracts. Certain contracts were specifically designated to and entered on behalf of the Company with Honeywell as a counterparty and were used to hedge known or probable anticipated foreign currency sales and purchases. The Company designated these hedges as cash flow hedges and the impact to the financial statements for 2018 was not material.
While the Company was owned by Honeywell, a centralized approach to cash management and financing of operations was used. Prior to consummation of the Spin-Off, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed. Net transfers to and from Honeywell are included within Invested equity on the Consolidated and Combined Statements of Equity. The components of the net transfers to and from Honeywell as of December 31, 2018 are as follows:
|
| December 31, |
| |
|
| 2018 |
| |
General financing activities |
| $ | (383 | ) |
Distribution to Honeywell in connection with Spin-Off |
|
| (1,415 | ) |
Net contribution of assets and liabilities upon Spin-Off |
|
| 81 |
|
Unbilled corporate allocations |
|
| 228 |
|
Purchases from Honeywell |
|
| 161 |
|
Mandatory transition tax |
|
| (85 | ) |
Other |
|
| 15 |
|
Net decrease in invested equity |
| $ | (1,398 | ) |
Subsequent to the Spin-Off on October 29, 2018, transactions with Honeywell were not considered related party transactions.
60
RESIDEO TECHNOLOGIES, INC.
Note 6. Revenue Recognition
Disaggregated Revenue
Revenues by channel are as follows for the years ended December 31:
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Comfort |
| $ | 1,079 |
|
| $ | 1,103 |
|
| $ | 1,114 |
|
Security |
|
| 538 |
|
|
| 520 |
|
|
| 479 |
|
Residential Thermal Solutions |
|
| 504 |
|
|
| 552 |
|
|
| 576 |
|
Products & Solutions |
|
| 2,121 |
|
|
| 2,175 |
|
|
| 2,169 |
|
U.S. and Canada |
|
| 2,427 |
|
|
| 2,294 |
|
|
| 2,147 |
|
EMEA (1) |
|
| 480 |
|
|
| 459 |
|
|
| 456 |
|
APAC (2) |
|
| 43 |
|
|
| 60 |
|
|
| 55 |
|
ADI Global Distribution |
|
| 2,950 |
|
|
| 2,813 |
|
|
| 2,658 |
|
Net revenue |
| $ | 5,071 |
|
| $ | 4,988 |
|
| $ | 4,827 |
|
|
|
|
|
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For product sales, typically each product sold to a customer represents a distinct performance obligation. The Company recognizes the majority of its revenue from performance obligations outlined in contracts with its customers that are satisfied at a point in time. Approximately 3% of the Company’s revenue is satisfied over time. As of December 31, 2020 and December 31, 2019, contract assets and liabilities were not material.
The timing of satisfaction of the Company’s performance obligations does not significantly vary from the typical timing of payment. For some contracts, the Company may be entitled to receive an advance payment.
The Company has applied the practical expedient to not disclose the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which it recognizes revenue in proportion to the amount it has the right to invoice for services performed.
Note 7. Restructuring Charges
During 2019, the Company retained industry-recognized experts in supply chain optimization and organizational excellence to assist in a comprehensive financial and operational review which was focused on product cost and gross margin improvement, and general and administrative expenses simplification. Certain restructuring actions have been implemented under this program as well as previous programs. Product & Solutions segment restructuring expenses for the years ended December 31, 2020, 2019, and 2018 were $19 million, $26 million, and $5 million, respectively. ADI Global Distribution segment restructuring expenses for the years ended December 31, 2020, 2019, and 2018 were $6 million, $4 million, and $0 million, respectively. Corporate restructuring expenses for the years ended December 31, 2020, 2019 and 2018 were $15 million, $7 million, and $0 million, respectively. Restructuring expenses for all periods are primarily related to severance.
The Company’s restructuring expenses for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Cost of goods sold |
| $ | 9 |
|
| $ | 13 |
|
| $ | 4 |
|
Selling, general and administrative expenses |
|
| 31 |
|
|
| 24 |
|
|
| 1 |
|
|
| $ | 40 |
|
| $ | 37 |
|
| $ | 5 |
|
61
RESIDEO TECHNOLOGIES, INC.
The following table summarizes the status of total restructuring reserves related to severance cost included in Accrued liabilities in the Consolidated Balance Sheets:
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Beginning of year |
| $ | 19 |
|
| $ | 13 |
|
| $ | 22 |
|
Charges |
|
| 40 |
|
|
| 38 |
|
|
| 5 |
|
Usage |
|
| (35 | ) |
|
| (31 | ) |
|
| (9 | ) |
Other |
|
| - |
|
|
| (1 | ) |
|
| (5 | ) |
End of year |
| $ | 24 |
|
| $ | 19 |
|
| $ | 13 |
|
Note 8. Other Expense, Net
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Environmental expense |
| $ | - |
|
| $ | - |
|
| $ | 323 |
|
Reimbursement Agreement expense |
|
| 146 |
|
|
| 108 |
|
|
| 49 |
|
Other, net |
|
| 1 |
|
|
| 10 |
|
|
| (3 | ) |
|
| $ | 147 |
|
| $ | 118 |
|
| $ | 369 |
|
Refer to Note 19. Commitments and Contingencies for further details on environmental and Reimbursement Agreement expense.
NoteItem 9. Income Taxes
Prior to the consummation of the Spin-Off, Resideo’s operating results were included in Honeywell’s various consolidated U.S. federal and state income tax returns, as well as non-U.S. filings. For the purposes of the Company’s Consolidated and Combined Financial Statements for periods prior to the Spin-Off, Income tax expense and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis separate from Honeywell. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise prior to the separation from Honeywell.
Income before taxes
|
| Years Ended December 31, |
| |||||||||||
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |||
U.S. |
| $ | (93 | ) |
|
| $ | (83 | ) |
|
| $ | (169 | ) |
Non-U.S. |
|
| 194 |
|
|
|
| 154 |
|
|
|
| 273 |
|
|
| $ | 101 |
|
|
| $ | 71 |
|
|
| $ | 104 |
|
62
RESIDEO TECHNOLOGIES, INC.
Income tax expense (benefit)
|
| Years Ended December 31, |
| |||||||||||
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
| |||
Tax expense (benefit) consists of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
| $ | 21 |
|
|
| $ | 23 |
|
|
| $ | (26 | ) |
Non-U.S. |
|
| 21 |
|
|
|
| 37 |
|
|
|
| 48 |
|
|
| $ | 42 |
|
|
| $ | 60 |
|
|
| $ | 22 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
| $ | 11 |
|
|
| $ | (11 | ) |
|
| $ | (15 | ) |
Non-U.S. |
|
| 11 |
|
|
|
| (14 | ) |
|
|
| (308 | ) |
|
|
| 22 |
|
|
|
| (25 | ) |
|
|
| (323 | ) |
|
| $ | 64 |
|
|
| $ | 35 |
|
|
| $ | (301 | ) |
|
| Years Ended December 31, |
|
| |||||||||||
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
| |||
The U.S. federal statutory income tax rate is reconciled to the Company’s effective income tax rate as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal statutory income tax rate |
|
| 21.0 |
| % |
|
| 21.0 |
| % |
|
| 21.0 |
| % |
Impact of foreign operations |
|
| (5.4 | ) |
|
|
| (10.2 | ) |
|
|
| (11.6 | ) |
|
U.S. state income taxes |
|
| 6.4 |
|
|
|
| 6.6 |
|
|
|
| 6.4 |
|
|
U.S. Tax Reform and related items |
|
| - |
|
|
|
| - |
|
|
|
| (385.1 | ) |
|
Non-deductible indemnification costs |
|
| 29.0 |
|
|
|
| 28.0 |
|
|
|
| 75.4 |
|
|
Executive compensation over $1 million |
|
| 2.5 |
|
|
|
| 0.6 |
|
|
|
| - |
|
|
Other non-deductible expenses |
|
| 3.7 |
|
|
|
| 2.9 |
|
|
|
| - |
|
|
U.S. taxation of foreign earnings |
|
| 3.5 |
|
|
|
| 5.3 |
|
|
|
| 6.0 |
|
|
Tax credits |
|
| (0.2 | ) |
|
|
| (2.6 | ) |
|
|
| (2.1 | ) |
|
Change in tax rates |
|
| 1.3 |
|
|
|
| 1.7 |
|
|
|
| - |
|
|
All other items – net |
|
| 1.8 |
|
|
|
| (4.7 | ) |
|
|
| 0.6 |
|
|
|
|
| 63.6 |
| % |
|
| 48.6 |
| % |
|
| (289.4 | ) | % |
63
RESIDEO TECHNOLOGIES, INC.
Deferred tax assets (liabilities)
The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:
|
| Years Ended December 31, |
| ||||||
|
| 2020 |
|
|
| 2019 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Pension |
| $ | 37 |
|
|
| $ | 27 |
|
Other asset basis differences |
|
| 70 |
|
|
|
| 70 |
|
Operating lease liabilities |
|
| 34 |
|
|
|
| 33 |
|
Accruals and reserves |
|
| 61 |
|
|
|
| 61 |
|
Net operating and capital losses |
|
| 47 |
|
|
|
| 32 |
|
Other |
|
| - |
|
|
|
| 6 |
|
Gross deferred tax assets |
|
| 249 |
|
|
|
| 229 |
|
Valuation allowance |
|
| (60 | ) |
|
|
| (32 | ) |
Total deferred tax assets |
| $ | 189 |
|
|
| $ | 197 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Other intangible assets |
| $ | (44 | ) |
|
| $ | (42 | ) |
Property, plant and equipment |
|
| (25 | ) |
|
|
| (22 | ) |
Operating lease assets |
|
| (32 | ) |
|
|
| (32 | ) |
Other |
|
| (13 | ) |
|
|
| (12 | ) |
Total deferred tax liabilities |
|
| (114 | ) |
|
|
| (108 | ) |
Net deferred tax asset |
| $ | 75 |
|
|
| $ | 89 |
|
Deferred tax assets:
The Company maintains a valuation allowance of $60million against a portion of the non-U.S. gross deferred tax assets. Valuation allowances principally relate to foreign net operating loss carryforwards where the future potential benefits do not meet the more-likely-than-not realization test. Changes in valuation allowance positions related to historic losses resulted in increases of $20 million and $3 million to tax expense in 2020Disagreements With Accountants on Accounting and 2019, respectively. The remaining changes in valuation allowances relate primarily to current year net operating losses on entities from which the company already maintains valuation allowancesFinancial Disclosure
The Company has not provided deferred taxes on unremitted earnings of its foreign affiliates that exist at December 31, 2020 as the earnings are considered permanently reinvested. Accordingly, 0 deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of the Company’s approximately $1.6 billion of undistributed earnings from foreign subsidiaries to the United States. It is impracticable to calculate the tax cost of repatriating the Company’s unremitted earnings which are considered indefinitely reinvested.
As of December 31, 2020, the Company has federal tax credit carryforwards of $1 million, federal net operating loss carryforwards of $2 million, and foreign net operating loss carryforwards of $196 million. The federal tax credit carryforwards expire in 2029. The federal net operating loss carryforwards expire in 2027. $178 million of foreign net operating losses can be carried forward indefinitely with the remainder expiring between 2021 and 2030.
Many jurisdictions impose limitations on the timing and utilization of net operating loss carryforwards. In those instances where the net operating loss or tax credit carryforward will not be utilized in the carryforward period due to the limitation, the deferred tax asset and amount of the carryforward have been reduced.
64
RESIDEO TECHNOLOGIES, INC.
As of December 31, 2020, 2019, and 2018 there were $10 million, $6 million, and $2 million of unrecognized tax benefits, respectively, that if recognized would be recorded as a component of Income tax expense. The change in unrecognized tax benefits resulted in increases (decreases) of $4 million, $4 million, and ($18) million to tax expense in 2020, 2019, and 2018, respectively. The decrease in 2018 was primarily driven by the reclassification of unrecognized tax benefits attributable to periods prior to the consummation of the Spin-Off to the indemnity payable to Honeywell under the terms of the Tax Matters Agreement.
As of December 31, 2020, 2019 and 2018 there were 0 unrecognized tax benefits related to examinations in progress. An immaterial amount of estimated interest and penalties related to the underpayment of income taxes is included in the liability for unrecognized tax benefits, both of which are included as a component of Income tax expense in the Consolidated and Combined Statements of Operations. The Company does not anticipate significant changes in total unrecognized tax benefits during the next twelve months.
The Company files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. The Company’s US federal returns are no longer subject to income tax examinations for taxable years before 2016. With limited exception, state, local, and foreign income tax returns for taxable years before 2015 are no longer subject to examination.
On December 22, 2017, the U.S. government enacted U.S. Tax Reform, which included changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The U.S. Tax Reform also included a permanent reduction in the corporate tax rate, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax was imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates.
As described in the Combined Financial Statements for the year ended December 31, 2017, the Company reasonably estimated certain effects of U.S. Tax Reform and, therefore, recorded provisional amounts, including the deemed repatriation transition tax and withholding taxes on undistributed earnings. For the year ended December 31, 2018, the Company recorded an adjustment to the provisional tax amount related to the deemed repatriation transition tax and taxes on undistributed earnings of $(85.4) million and $(234.7) million, respectively. This adjustment resulted in a decrease to the effective tax rate for the year ended December 31, 2018 of 307.8%. The adjustment reflects the revised determination of the fair value of assets and liabilities of legal entities included in the Company’s business. The accounting for the income tax effects of the U.S. Tax Reform was complete as of December 31, 2018.
Note 10. Accounts Receivable — Net
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Accounts receivable |
| $ | 875 |
|
| $ | 834 |
|
Allowance for doubtful accounts |
|
| (12 | ) |
|
| (17 | ) |
|
| $ | 863 |
|
| $ | 817 |
|
Note 11. Inventories — Net
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Raw materials |
| $ | 127 |
|
| $ | 121 |
|
Work in process |
|
| 19 |
|
|
| 17 |
|
Finished products |
|
| 526 |
|
|
| 533 |
|
|
| $ | 672 |
|
| $ | 671 |
|
The expense related to inventory was $31 million, $56 million and $10 million for the years ended December 31, 2020, 2019 and 2018, respectively.
65
RESIDEO TECHNOLOGIES, INC.
Note 12. Property, Plant and Equipment — Net
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Machinery and equipment |
| $ | 598 |
|
| $ | 562 |
|
Buildings and improvements |
|
| 289 |
|
|
| 260 |
|
Construction in progress |
|
| 46 |
|
|
| 57 |
|
Others |
|
| 14 |
|
|
| 16 |
|
|
|
| 947 |
|
|
| 895 |
|
Accumulated depreciation |
|
| (629 | ) |
|
| (579 | ) |
|
| $ | 318 |
|
| $ | 316 |
|
Depreciation expense was $56 million, $50 million and $45 million in 2020, 2019 and 2018, respectively.
Note 13. Goodwill and Other Intangible Assets — Net
Goodwill as of December 31, 2020 and 2019 for Products & Solutions was $2,037 million and $2,004 million, respectively. The increase relates to foreign currency translation adjustments. Goodwill as of December 31, 2020 and 2019 for ADI Global Distribution was $654 million and $639 million, respectively.The carrying value of goodwill increased by $4 million due to an acquisition during the year. The remainder of the increase relates to foreign currency translation adjustments.
Other intangible assets with finite lives are comprised of:
|
| December 31, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
| ||||||
Patents and technology |
| $ | 37 |
|
| $ | (23 | ) |
| $ | 14 |
|
| $ | 35 |
|
| $ | (19 | ) |
| $ | 16 |
|
Customer relationships |
|
| 192 |
|
|
| (122 | ) |
|
| 70 |
|
|
| 170 |
|
|
| (106 | ) |
|
| 64 |
|
Trademarks |
|
| 15 |
|
|
| (8 | ) |
|
| 7 |
|
|
| 9 |
|
|
| (7 | ) |
|
| 2 |
|
Software |
|
| 146 |
|
|
| (102 | ) |
|
| 44 |
|
|
| 139 |
|
|
| (94 | ) |
|
| 45 |
|
|
| $ | 390 |
|
| $ | (255 | ) |
| $ | 135 |
|
| $ | 353 |
|
| $ | (226 | ) |
| $ | 127 |
|
Other intangible assets amortization expense was $31 million, $30 million and $21 million in 2020, 2019 and 2018, respectively. Estimated intangible asset amortization expense for each of the next five years approximates $28 million in 2021, $22 million in 2022, $19 million in 2023, $17 million in 2024 and $16 million in 2025.
Note 14. Accrued Liabilities
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Obligations payable under Indemnification Agreements |
| $ | 140 |
|
| $ | 140 |
|
Taxes payable |
|
| 62 |
|
|
| 66 |
|
Compensation, benefit and other employee-related |
|
| 105 |
|
|
| 66 |
|
Customer rebate reserve |
|
| 91 |
|
|
| 78 |
|
Other |
|
| 197 |
|
|
| 202 |
|
|
| $ | 595 |
|
| $ | 552 |
|
Refer to Note 19. Commitments and Contingencies for further details on Obligations payable under Indemnification Agreements.
66
RESIDEO TECHNOLOGIES, INC.
Note 15. Long-term Debt and Credit Agreement
The Company’s debt at December 31, 2020 and December 31, 2019 consisted of the following:
|
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
6.125% notes due 2026 |
| $ | 400 |
|
| $ | 400 |
|
Five-year variable rate term loan A due 2023 |
|
| 315 |
|
|
| 333 |
|
Seven-year variable rate term loan B due 2025 |
|
| 465 |
|
|
| 470 |
|
Unamortized deferred financing costs |
|
| (18 | ) |
|
| (23 | ) |
Total outstanding indebtedness |
|
| 1,162 |
|
|
| 1,180 |
|
Less: Amounts expected to be paid within one year |
|
| 7 |
|
|
| 22 |
|
Total long-term debt due after one year |
| $ | 1,155 |
|
| $ | 1,158 |
|
Scheduled principal repayments under the Senior Credit Facilities (defined below) and Senior Notes (defined below) subsequent to December 31, 2020 are as follows:
|
| December 31, |
| |
|
| 2020 |
| |
2021 |
| $ | 40 |
|
2022 |
|
| 57 |
|
2023 |
|
| 232 |
|
2024 |
|
| 5 |
|
2025 |
|
| 446 |
|
Thereafter |
|
| 400 |
|
|
|
| 1,180 |
|
Amounts expected to be paid within one year |
|
| 7 |
|
|
| $ | 1,173 |
|
Subsequent to December 31, 2020, the Company entered into a refinancing agreement which modified the scheduled principal repayments related to the Company’s long-term debt as described in Note 24. Subsequent Events. Among other changes, the refinancing agreement resulted in a reduction of principal repayments to be made in 2021 to $7 million which represents the Current maturities of debt in the Consolidated Balance Sheet as of December 31, 2020.
At December 31, 2020 and 2019, the interest rate for the Term Loans (defined below) was 2.51% and 4.36%, respectively. At December 31, 2020, there were 0 borrowings and 0 letters of credit issued under the $350 million Revolving Credit Facility (defined below).Interest expense presented in the Statements of Operations is from the Senior Notes and Senior Credit Facilities, which includes the amortization of debt issuance cost and debt discounts.
Senior Notes
In October of 2018, the Company issued $400 million in principal amount of 6.125% senior unsecured notes due in 2026 (the "Senior Notes"). The Senior Notes are senior unsecured and unsubordinated obligations of Resideo and rank equally with all of Resideo’s existing and future senior unsecured debt and senior to all of Resideo’s subordinated debt.
Resideo may, at its option, redeem the Senior Notes in whole or part prior to November 1, 2021, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest, if any, plus a “make-whole” premium. On or after November 1, 2021 Resideo may, at its option, redeem the Senior Notes in whole or in part plus accrued and unpaid interest, plus a fixed redemption percentage on the principal amount of the Senior Notes redeemed of (i) 104.594% if redeemed during the twelve-month period beginning on November 1, 2021 (ii) 103.063% if redeemed during the twelve-month period beginning onNovember
67
RESIDEO TECHNOLOGIES, INC.
1, 2022, (iii) 101.531% if redeemed during the twelve-month period beginning on November 1, 2023, or (iv) 100% if redeemed on or after November 1, 2024.
Credit Agreement
On October 25, 2018, in connection with the consummation of the Spin-Off, the Company as the borrower, entered into a credit agreement with JP Morgan Chase Bank N.A. as administrative agent (the “Credit Agreement”), which was subsequently amended on November 26, 2019 (the “Credit Agreement First Amendment”) and on November 16, 2020 (the “Credit Agreement Second Amendment”).
The Credit Agreement provides for a seven-year LIBOR plus 2.25% senior secured first-lien term B loan facility in an aggregate principal amount of $475 million (the "Term B Facility") and a five-year LIBOR plus 2.25% senior secured first-lien term A loan facility in an aggregate principal amount of $350 (the "Term A Facility" and, together with the Term B Facility, the “Term Loans” or "Term Loan Facilities”). The Company is obligated to make quarterly principal payments throughout the term of the Term Loan Facilities according to the amortization provisions in the Credit Agreement. Borrowings under the Credit Agreement are able to be prepaid at the Company’s option without premium or penalty other than a 1.00% prepayment premium that may be payable in connection with certain repricing transactions within a certain period of time after the closing date. Amounts repaid or prepaid in respect of Term Loan Facilities may not be re-borrowed.
The Credit Agreement also established a five-year senior secured first-lien revolving credit facility to be used for the Company’s working capital and other cash needs from time to time in an aggregate principal amount of $350 million (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Senior Credit Facilities"). The interest rate on the Revolving Credit Facility borrowings are based on, at the option of the Company, either, (i) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (ii) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.75% and (iii) the one month adjusted LIBOR rate, plus 1.25% per annum. If the Company chooses to make a LIBOR borrowing on a one, two, three or six-month basis, the interest rate will be based on an adjusted LIBOR rate (which shall not be less than zero) based on the interest period for the borrowing. The applicable margin for the Term B Facility is (i) on or prior to the Credit Agreement First Amendment 2.00% per annum (for Libor loans) and 1.00% per annum (for base rate loans) and (ii) after the Credit Agreement First Amendment 2.25% per annum (for LIBOR loans) and 1.25% per annum (for base rate loans). The applicable margin for each of the Term A Facility and the Revolving Credit Facility varies (i) on or prior to the Credit Agreement First Amendment from 2.00% per annum to 1.50% per annum (for Libor loans) and 1.00% to 0.50% per annum (for base rate loans) and (ii) after the credit Agreement First Amendment from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for base rate loans) based on the Company’s leverage ratio. Accordingly, the interest rates for the Senior Credit Facilities will fluctuate during the term of the Credit Agreement based on changes in the base rate, LIBOR or future changes in the Company’s leverage ratio. Interest payments with respect to the borrowings are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. The Revolving Credit Facility has a quarterly commitment fee based on the unused portion, which is determined by the Company’s leverage ratio and ranges from 0.25% to 0.35% per annum.
The net proceeds from the borrowings under the Credit Agreement and the offering of the Senior Notes were used as part of the financing for the Spin-Off. For the year ended December 31, 2018, the Company incurred approximately $16 million in debt issuance costs related to the Term Loans, $5 million in costs related to the Revolving Credit Facility and $8 million in costs related to the Senior Notes. The debt issuance costs associated with the Term Loans and Senior Notes were recorded as a reduction of the principal balance of the debt, and the Revolving Credit Facility costs were capitalized in Other assets. The issuance costs are being amortized through Interest expense for the duration of each respective debt facility.
68
RESIDEO TECHNOLOGIES, INC.
The Credit Agreement and Senior Notes contain customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets.
The Credit Agreement First Amendment amended the Credit Agreement to: (i) increase the levels of the maximum consolidated total leverage ratio under the Credit Agreement, to not greater than 5.25 to 1.00 for the quarter ended December 31, 2019, with step-downs to 4.75 to 1.00 starting in the quarter ending December 31, 2020, 4.25 to 1.00 starting in the quarter ending December 31, 2021, and 3.75 to 1.00 starting in the quarter ending December 31, 2022; (ii) increase each applicable interest rate margin on loans outstanding after the first amendment effective date by 25 basis points per annum, 2.25% per annum (for LIBOR loans) and 1.25% per annum (for ABR loans) in respect of the Term B Loan Facility, and based on the Company’s leverage ratio, from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for ABR loans) for the Term A Loan Facility and the Revolving Credit Facility; and (iii) modify the defined terms “Consolidated EBITDA” and “Pro Forma Basis” set forth in the Credit Agreement. In connection with the Credit Agreement First Amendment, the Company incurred costs of approximately $4 million. The Term Loan costs were recorded as a reduction of the principal balance of the debt and the Revolving Credit Facility costs were capitalized in Other assets.
The Credit Agreement Second Amendment amended the Credit agreement to permit the sale and leaseback transactions in an aggregate amount not to exceed $150 million for all such sale and leaseback transactions, provided that (x) each sale and leaseback transactions is undertaken on arm’s length commercial terms and (y) no Event of Default (as defined in the Credit Agreement) has occurred and is continuing or would result therefrom.
As of December 31, 2020, the Company was in compliance with all covenants related to the Credit Agreement and Senior Notes.
Note 16. Leases
As discussed in Note 2, the Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019. The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment.Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation, and certain automobile lease agreements include rental payments which fluctuate based on mileage. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company’s operating lease costs for the years ended December 31, 2020 and 2019 consisted of the following:
|
|
|
| |||||
|
| Years Ended December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Selling, general and administrative expenses |
| $ | 44 |
|
| $ | 37 |
|
Cost of goods sold |
|
| 17 |
|
|
| 16 |
|
Total operating lease costs |
| $ | 61 |
|
| $ | 53 |
|
Total operating lease costs include variable lease costs of $16 million and $11 million for the years ended December 31, 2020 and 2019, respectively. Total operating lease costs also include offsetting sub-lease income which is immaterial for the years ended December 31, 2020 and 2019.
69
RESIDEO TECHNOLOGIES, INC.
The Company recognized the following related to its operating leases:
|
| Financial Statement Line Item |
| At December 31, 2020 |
| At December 31, 2019 |
Operating right-of-use assets |
| Other assets |
| $133 |
| $137 |
Operating lease liabilities - current |
| Accrued liabilities |
| $33 |
| $31 |
Operating lease liabilities - non-current |
| Other liabilities |
| $107 |
| $111 |
Maturities of the Company’s operating lease liabilities were as follows:
|
| At December 31, 2020 |
| |
2021 |
| $ | 40 |
|
2022 |
|
| 36 |
|
2023 |
|
| 29 |
|
2024 |
|
| 18 |
|
2025 |
|
| 12 |
|
Thereafter |
|
| 30 |
|
Total lease payments |
|
| 165 |
|
Less: Imputed interest |
|
| 25 |
|
Present value of operating lease liabilities |
| $ | 140 |
|
Weighted-average remaining lease term (years) |
|
| 5.43 |
|
Weighted-average incremental borrowing rate |
|
| 5.88 | % |
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
|
| Years Ended December 31, |
| |||||
|
|
|
| 2020 |
|
| 2019 |
| ||
Operating cash outflows |
|
|
| $ | 30 |
|
| $ | 35 |
|
Operating right-of-use assets obtained in exchange for operating lease liabilities |
|
|
| $ | 26 |
|
| $ | 60 |
|
As of December 31, 2020, the Company has additional operating leases that have not yet commenced. Obligations under these leases are not material. Additionally, as a lessor, the Company leases all or a portion of certain owned properties. Rental income for the years ended December 31, 2020 and 2019 was not material.
Note 17. Financial Instruments and Fair Value Measures
Credit and Market Risk—The Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The terms and conditions of credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.
Foreign Currency Risk Management—The Company conducts its business on a multinational basis in a wide variety of foreign currencies. It is exposed to market risks from changes in currency exchange rates. These exposures may impact future earnings and/or operating cash flows. The exposure to market risk for changes in foreign currency exchange rates arises from transactions arising from international trade, foreign currency denominated monetary assets and liabilities, and international financing activities between subsidiaries. The Company relies primarily on natural offsets to address the exposures and may supplement this approach from time to time by entering into forward and option hedging contracts. As of December 31, 2020 and 2019, the Company had no forward or hedging contracts.
70
RESIDEO TECHNOLOGIES, INC.
Senior Notes and Credit Agreement—As of December 31, 2020, the Company assessed the amount recorded under the Term Loans, the Senior Notes, and the Revolving Credit Facility. The Term A Loan Facility, Term B Loan Facility and the Senior Notes’ fair values are approximately $305 million, $461 million and $422 million, respectively. The Company determined that the Revolving Credit Facility approximated fair value. The fair values of the debt are based on the quoted inactive prices and are therefore classified as Level 2 within the valuation hierarchy.
The carrying value of cash and cash equivalents, accounts receivables - net, and accounts payables contained in the Consolidated Balance Sheets approximates fair value.
Fair Value of Financial Instruments—The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:
|
|
|
|
|
|
Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Note 18. Stock-Based Compensation Plans
On October 29, 2018, the Board adopted, and Honeywell, as the Company’s sole shareholder, approved, the 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates and the 2018 Stock Incentive Plan for Non-Employee Directors of Resideo Technologies, Inc. as may be amended from time to time (together, the “Stock Incentive Plan”). On or about December 21, 2018, the Board adopted the Amended and Restated 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates. The Stock Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, other stock-based awards and cash-based awards. The maximum aggregate number of shares of the Company’s common stock that may be issued under awards granted under the Stock Incentive Plan is 16 million. As of December 31, 2020, 7,664,452 shares of the Company’s common stock were available to be granted under the Stock Incentive Plan.
Summary of Restricted Stock Unit Activity
Restricted stock unit (“RSU”) awards entitle the holder to receive one share of common stock for each unit when the units vest. RSUs are issued to certain key employees and to non-employee directors. RSUs typically become fully vested over periods ranging from one to seven years and are payable in Resideo common stock upon vesting.
Since the Spin-Off on October 29, 2018 through December 31, 2018, the Company granted the following awards:
|
|
|
|
|
|
71
RESIDEO TECHNOLOGIES, INC.
The following table summarizes RSU activity related to the Stock Incentive Plan during the years ended December 31, 2020 and 2019:
|
| RSUs |
| |||||
|
| Number of Restricted Stock Units |
|
| Weighted Average Grant Date Fair Value Per Share |
| ||
Non-vested as of January 1, 2019 |
|
| 3,338,184 |
|
| $ | 24.05 |
|
Granted |
|
| 1,607,204 |
|
|
| 21.83 |
|
Vested |
|
| (509,366 | ) |
|
| 23.78 |
|
Forfeited |
|
| (641,491 | ) |
|
| 24.07 |
|
Non-vested as of December 31, 2019 |
|
| 3,794,531 |
|
|
| 23.14 |
|
Granted |
|
| 3,057,775 |
|
|
| 9.45 |
|
Vested |
|
| (921,060 | ) |
|
| 21.07 |
|
Forfeited |
|
| (731,482 | ) |
|
| 18.57 |
|
Non-vested as of December 31, 2020 |
|
| 5,199,764 |
|
| $ | 16.10 |
|
As of December 31, 2020, there was approximately $22 million of total unrecognized compensation cost related to non-vested RSUs granted under the Stock Incentive Plan, which is expected to be recognized over a weighted-average period of 1.6 years. The fair value of RSUs that vested during the year ended December 31, 2020 is $9 million. Included in the outstanding RSUs are 867,732 performance-based RSU's as of December 31, 2020 and the related expense was $2 million during the year ended December 31, 2020.
Summary of Stock Option Activity
Stock option awards entitle the holder to purchase shares of common stock at a specific price when the options vest. Stock options typically vest over three years from the date of grant and expire seven years from the grant date.
The fair value of stock options was calculated using the following assumptions in the Black-Scholes model:
|
| December 31, | ||
|
| 2020 |
| 2019 |
Expected stock price volatility |
| 31% - 37% |
| 30% - 32% |
Expected term of options |
| 4.5 years |
| 4.5 years |
Expected dividend yield |
| — |
| — |
Risk-free interest rate |
| 0.25% - 1.41% |
| 2.22% - 2.47% |
The aggregate intrinsic value disclosed below represents the total intrinsic value (the difference between the fair market value of the Company’s common stock as of December 31, 2020, and the exercise price, multiplied by the number of in-the-money service-based stock options) that would have been received by the option holders had all option holders exercised their options on December 31, 2020. This amount is subject to change based on changes to the fair market value of the Company’s common stock.
72
RESIDEO TECHNOLOGIES, INC.
The following table summarizes stock option activity related to the Stock Incentive Plan during the year ended December 31, 2020:
|
| Stock Options |
| |||||||||||||
|
| Number of Stock Options |
|
| Weighted Average Exercise Price |
|
| Weighted Average Contractual Life (years) |
|
| Aggregate Intrinsic Value |
| ||||
Stock Options outstanding as of January 1, 2019 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
Granted |
|
| 1,155,566 |
|
|
| 24.37 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (165,312 | ) |
|
| 24.39 |
|
|
|
|
|
|
|
|
|
Stock Options outstanding as of December 31, 2019 |
|
| 990,254 |
|
|
| 24.36 |
|
|
| 6.0 |
|
|
| - |
|
Granted |
|
| 1,083,665 |
|
|
| 9.17 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (348,696 | ) |
|
| 18.39 |
|
|
|
|
|
|
|
|
|
Stock Options outstanding as of December 31, 2020 |
|
| 1,725,223 |
|
|
| 15.98 |
|
|
| 4.9 |
|
|
| 12 |
|
Vested and expected to vest at December 31, 2020 |
|
| 1,446,606 |
|
|
| 16.97 |
|
|
| 4.7 |
|
|
| 9 |
|
Exercisable at December 31, 2020 |
|
| 442,013 |
|
| $ | 23.13 |
|
|
| 2.3 |
|
| $ | - |
|
Stock options granted during the year ended December 31, 2020 had a weighted average grant date fair value per share of $2.61. As of December 31, 2020, there was approximately $1 million of total unrecognized compensation cost related to non-vested stock options granted under the Stock Incentive Plan, which is expected to be recognized over a weighted-average period of 1.5 years. NaN stock options were exercised during the year ended December 31, 2020.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits under the Company’s plans:
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Stock-based compensation expense before income taxes |
| $ | 29 |
|
| $ | 25 |
|
| $ | 20 |
|
Less: Income tax expense (benefit) |
|
| 1 |
|
|
| (1 | ) |
|
| (5 | ) |
Stock-based compensation expense, net of income taxes |
| $ | 30 |
|
| $ | 24 |
|
| $ | 15 |
|
Certain share-based compensation expense relates to stock-based awards awarded to key employees of the Company as part of Honeywell’s incentive compensation plans prior to the Spin-Off. Such share-based compensation expense was $16 million for the period from January 1, 2018 until October 29, 2018.
Note 19. Commitments and Contingencies
Environmental Matters
The Company is subject to various federal, state, local, and foreign government requirements relating to the protection of the environment. It believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that its handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. The Company has incurred remedial response and voluntary cleanup costs for site contamination and is a party to claims associated with environmental and safety matters, including products containing hazardous substances. Additional claims and costs involving environmental matters are likely to continue to arise in the future.
73
RESIDEO TECHNOLOGIES, INC.
With respect to environmental matters involving site contamination, the Company continually conducts studies, individually or jointly with other potentially responsible parties, to determine the feasibility of various remedial techniques. It is its policy to record appropriate liabilities for environmental matters when remedial efforts or damage claim payments are probable and the costs can be reasonably estimated. Such liabilities are based on the best estimate of the undiscounted future costs required to complete the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other potentially responsible parties, technology and information related to individual sites, the Company does not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of the Company’s recorded liabilities. The Company expects to fund expenditures for these matters from operating cash flow. The timing of cash expenditures depends on a number of factors, including the timing of remedial investigations and feasibility studies, the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, remedial techniques to be utilized, and agreements with other parties.
The Company accrues costs related to environmental matters when it is probable that it has incurred a liability related to a contaminated site and the amount can be reasonably estimated. Environmental-related expenses for sites owned and operated by Resideo are presented within Cost of goods sold in the Consolidated and Combined Statements of Operations. Prior to the Spin-Off, expenses related to Honeywell Sites now under the Reimbursement Agreement were presented within Other expense, net in the Consolidated and Combined Statements of Operations.
The following table summarizes information concerning the recorded liabilities for environmental costs for the year ended December 31, 2020, 2019 and 2018. On October 29, 2018, upon the consummation of the Spin-Off, certain environmental liabilities became subject to the Reimbursement Agreement and were reclassified to Obligations payable under Indemnification Agreements. For additional information, see Reimbursement Agreement below.
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Beginning balance |
| $ | 22 |
|
| $ | 20 |
|
| $ | 537 |
|
Accruals for environmental matters deemed probable and reasonably estimable |
|
| 1 |
|
|
| 2 |
|
|
| 340 |
|
Less: Environmental liability payments |
|
| (1 | ) |
|
| - |
|
|
| (179 | ) |
Less: Change due to the Reimbursement Agreement payments |
|
| - |
|
|
| - |
|
|
| (86 | ) |
Less: Liabilities subject to the Reimbursement Agreement payments |
|
| - |
|
|
| - |
|
|
| (592 | ) |
Ending balance |
| $ | 22 |
|
| $ | 22 |
|
| $ | 20 |
|
The$86 million change for the year ended December 31, 2018 due to the Reimbursement Agreement represents a reduction in the estimated liability driven by the terms of Reimbursement Agreement at October 29, 2018. Pursuant to the Reimbursement Agreement, the Company is responsible to indemnify Honeywell in amounts equal to 90% of the environmental-liability payments of certain sites, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. Prior to the Spin-Off, the Company’s estimated liability for resolution of the same pending and future environmental-related liabilities was calculated as if it was responsible for 100% of the environmental-liability payments. In addition, prior to the Spin-Off, these costs were calculated on the gross basis, excluding any insurance receipts or proceeds received by Honeywell.
The Company does not currently possess sufficient information to reasonably estimate the amounts of environmental liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to the Company’s consolidated and combined results of operations and operating cash flows in the periods recognized or paid.
74
RESIDEO TECHNOLOGIES, INC.
Obligations Payable Under Indemnification Agreements
In connection with the Spin-Off, the Company entered into a Reimbursement Agreement and a tax matters agreement (the “Tax Matters Agreement”) (collectively, the “Indemnification Agreements”) which are further described below.
Reimbursement Agreement
On October 29, 2018, in connection with the Spin-Off, the Company entered into the Reimbursement Agreement pursuant to which the Company has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed (“payments”), less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the “recoveries”). The amount payable by the Company in respect of such liabilities arising in respect of any given year is subject to a cap of $140 million.
Payments in respect of the liabilities arising in a given year will be made quarterly throughout such year on the basis of an estimate of the liabilities and recoveries provided by Honeywell. Following the end of any such year, Honeywell will provide the Company with a calculation of the amount of payments and the recoveries actually received.
Payment amounts under the Reimbursement Agreement will be deferred to the extent that a specified event of default has occurred and is continuing under certain indebtedness, including under the Credit Agreement, or the payment thereof causes the Company to not be compliant with certain financial covenants in certain indebtedness, including the Company’s Credit Agreement on a pro forma basis, including the maximum total leverage ratio (ratio of consolidated debt to consolidated EBITDA, which excludes any amounts owed to Honeywell under the Reimbursement Agreement), and the minimum interest coverage ratio.
The obligations under the Reimbursement Agreement will continue until the earlier of: (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.
During the year, the Company and Honeywell entered into several amendments to the Reimbursement Agreement. These amendments included modifications of certain covenants in Exhibit G to conform to the amended covenants included in the Credit Agreement First Amendment, deferment of certain payments under the Reimbursement Agreement to later in the year, and amendment of Exhibit G to, among other things, permit sale and leaseback transaction. An aggregate amount of up to $150 million would be permitted thereunder so long as the same conditions that are applicable under the Credit Agreement are satisfied.
On February 12, 2021, the Company entered into another amendment with Honeywell. See Note 24. Subsequent Events for a further discussion of this amendment.
The following table summarizes information concerning the Company’s Reimbursement Agreement liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Beginning balance |
| $ | 585 |
|
| $ | 616 |
|
| $ | - |
|
Liabilities subject to the Reimbursement Agreement payments |
|
| - |
|
|
| - |
|
|
| 592 |
|
Accruals for indemnification liabilities deemed probable and reasonably estimable |
|
| 146 |
|
|
| 179 |
|
|
| 49 |
|
Reduction (1) |
|
| - |
|
|
| (71 | ) |
|
| - |
|
Indemnification payment |
|
| (140 | ) |
|
| (139 | ) |
|
| (25 | ) |
Ending balance(2) |
| $ | 591 |
|
| $ | 585 |
|
| $ | 616 |
|
75
RESIDEO TECHNOLOGIES, INC.
|
|
|
|
Reimbursement Agreement liabilities are included in the following balance sheet accounts:
|
| Years Ended December 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Accrued liabilities |
| $ | 140 |
|
| $ | 140 |
|
Obligations payable under Indemnification Agreements |
|
| 451 |
|
|
| 445 |
|
|
| $ | 591 |
|
| $ | 585 |
|
The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to the Company’s consolidated and combined results of operations and operating cash flows in the periods recognized or paid.
Independent of the Company’s payments under the Reimbursement Agreement, the Company will have ongoing liability for certain environmental claims which are part of the Company’s going forward business.
Tax Matters Agreement
In connection with the Spin-Off, the Company entered into the Tax Matters Agreement with Honeywell pursuant to which it is responsible and will indemnify Honeywell for all taxes, including income taxes, sales taxes, VAT and payroll taxes, relating to the business for all periods, including periods prior to the consummation of the Spin-Off. In addition, the Tax Matters Agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the Spin-Off.
In addition, the Tax Matters Agreement provides that the Company is required to indemnify Honeywell for any taxes (and reasonable expenses) resulting from the failure of the Spin-Off and related internal transactions to qualify for their intended tax treatment under U.S. federal, state and local income tax law, as well as foreign tax law, where such taxes result from (a) breaches of covenants and representations it makes and agrees to in connection with the Spin-Off, (b) the application of certain provisions of U.S. federal income tax law to these transactions or (c) any other action or omission (other than actions expressly required or permitted by the Separation and Distribution Agreement, the Tax Matters Agreement or other ancillary agreements) the Company takes after the consummation of the Spin-Off that gives rise to these taxes.
As of December 31, 2020, and 2019, the Company had an indemnity outstanding to Honeywell for future tax payments of $139 million and $149 million, which is included in Obligations payable under Indemnification Agreements.
Trademark Agreement
The Company and Honeywell entered into a 40-year Trademark License Agreement (the “Trademark Agreement”) that authorizes the Company’s use of certain licensed trademarks in the operation of Resideo’s business for the advertising, sale and distribution of certain licensed products. In exchange, the Company will pay a royalty fee of 1.5% on net revenue to Honeywell related to such licensed products which is recorded in Selling, general and administrative expense on the Consolidated and Combined Statements of Operations. For the years ended December 31, 2020, 2019, and 2018, royalty fees were $26 million, $27 million, and $4 million, net of a one-time credit of $2 million received in December 31, 2018 for inventory on hand as of the Spin-Off, respectively.
76
RESIDEO TECHNOLOGIES, INC.
Other Matters
The Company is subject to lawsuits, investigations and disputes arising out of the conduct of its business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee matters, intellectual property, and environmental, health and safety matters. The Company recognizes a liability for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgments for outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a carefulanalysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. No such matters are material to the Company’s unaudited financial statements.
The Company, the Company’s former CEO Michael Nefkens, the Company’s former CFO Joseph Ragan, and the Company’s former CIO Niccolo de Masi are named defendants of a class action securities suit in the U.S. District Court for the District of Minnesota styled In re Resideo Technologies, Inc. Securities Litigation, 19-cv-02863 (the “Securities Litigation”). The Securities Litigation is a class action securities suit with the class defined as all persons or entities who purchased or otherwise acquired common stock of Resideo during the class period of October 29, 2018 to November 6, 2019. The complaint asserts claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, broadly alleging, among other things, that the defendants (or some of them) made false and misleading statements regarding, among other things, Resideo’s business, performance, the efficiency of its supply chain, operational and administrative issues resulting from the spin-off from Honeywell, certain business initiatives, and financial guidance in 2019. The defendants filed a motion to dismiss the complaint on July 10, 2020. The motion to dismiss has been fully briefed and a hearing was held on the motion on December 1, 2020. The court has not yet issued its decision regarding the motion to dismiss. The Company and the plaintiffs are scheduled to participate in a mediation on February 25, 2021, in an effort to settle the Securities Litigation. There can be no assurance that a settlement will be reached. If a settlement cannot be reached, the Company intends to vigorously defend against the allegations in the Securities Litigation. However, there can be no assurance that the defense will be successful.
On July 7, 2020, Jawad A. Ayaz as Trustee of the Shiv Venkatasetty 2016 Trust (“Derivative Plaintiff”) filed a shareholder derivative complaint (the “Derivative Complaint”) against certain current or former directors and officers of the Company (“Derivative Defendants”) in the District Court for the District of Delaware, captioned Ayaz v. Nefkens, 20-cv-00915. Derivative Plaintiff alleges generally that Derivative Defendants breached fiduciary duties owed to the Company by allegedly causing or allowing the Company to make materially false and misleading statements to the public regarding the Company’s business operations and financial prospects. Derivative Plaintiff also alleges that the Company’s 2019 proxy statement was materially false and misleading, in violation of Section 14(a) of the Securities Exchange Act of 1934, and asserts claims of corporate waste and unjust enrichment, among other allegations, and relies on a similar set of facts as alleged in the Securities Litigation. The Derivative Complaint seeks declaratory relief and unspecified money damages on behalf of the Company. On July 28, 2020, certain of the Derivative Defendants filed a stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation. An additional shareholder derivative complaint was filed on August 12, 2020, by Plaintiff Daniel Sanclemente (the “Sanclemente Action”) on behalf of the Company in the District Court for the District of Delaware, captioned Sanclemente v. Nefkens, 20-cv-1062, alleging substantially the same facts and making substantially the same claims against the same defendants as in the Derivative Complaint. The District Court has consolidated the Derivative Complaint and the Sanclemente Action. The consolidated action is styled In re Resideo Technologies, Inc. Derivative Litigation, 20-cv-00915 (the “Derivative Action”), and lead counsel has been appointed.Additionally, the court has granted a stipulation to stay the consolidated action pending the resolution of the motion to dismiss in the Securities Litigation. On August 28, 2020, Riviera Beach Police Pension Fund (“Riviera Beach”) filed a motion to intervene in the Derivative Action. On September 18, 2020, Riviera Beach and the existing plaintiffs reached an agreement regarding the leadership structure of the Derivative Action in the event that Riviera Beach files its own complaint in the future, and in connection therewith, Riviera Beach withdrew its motion to intervene. The Company intends to defend this action vigorously, but there can be no assurance that the defense will be successful.
77
RESIDEO TECHNOLOGIES, INC.
Warranties and Guarantees
In the normal course of business, the Company issues product warranties and product performance guarantees. It accrues for the estimated cost of product warranties and product performance guarantees based on contract terms and historical experience at the time of sale. Adjustments to initial obligations for warranties and guarantees are made as changes to the obligations become reasonably estimable. Product warranties and product performance guarantees are included in Accrued liabilities. The following table summarizes information concerning recorded obligations for product warranties and product performance guarantees.
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Beginning balance |
| $ | 25 |
|
| $ | 26 |
|
| $ | 17 |
|
Accruals for warranties/guarantees issued during the year |
|
| 21 |
|
|
| 15 |
|
|
| 17 |
|
Adjustment of pre-existing warranties/guarantees |
|
| (7 | ) |
|
| - |
|
|
| (1 | ) |
Settlement of warranty/guarantee claims |
|
| (17 | ) |
|
| (16 | ) |
|
| (7 | ) |
Ending balance |
| $ | 22 |
|
| $ | 25 |
|
| $ | 26 |
|
Purchase Commitments
The Company’s unconditional purchase obligations include purchase commitments with suppliers and other obligations entered in to during the normal course of business regarding the purchase of goods and services. As of December 31, 2020, the Company’s estimated minimum obligations associated with unconditional purchase obligations, which are not recognized in the Company’s Consolidated Balance Sheet, were $16 million in 2021, $17 million in 2022, $9 million in 2023 and $3 million in 2024. For the years ended December 31, 2020 and 2019, purchases related to these obligations were $15 million and $26 million, respectively. Purchases under these obligations were not material for the year ended December 31, 2018.
Note 20. Pension
Prior to the Spin-Off, certain of Resideo’s employees participated in multiple U.S. and non-U.S. defined benefit pension plans (the “Shared Plans”) sponsored by Honeywell, which includes participants from other Honeywell subsidiaries and operations. The Company accounted for participation in the Shared Plans as if the Shared Plans were a multiemployer benefit plan. Accordingly, it did not record an asset or liability to recognize the funded status of the Shared Plans.
The related pension expense was allocated based on annual service cost of active participants and reported within Costs of goods sold and Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. The pension expense related to participation in the Shared Plans for the period from January 1, 2018 until October 29, 2018 and the year ended December 31, 2018 was $11 million and $16 million, respectively.
As of the date of separation from Honeywell, these employees’ and certain former Honeywell employees’ entitlement to benefits in Honeywell’s plans were transferred to Resideo sponsored plans.
The Resideo defined benefit pension plans have substantially similar benefit formulas as the Honeywell defined benefit pension plans. Moreover, vesting service, benefit accrual service and compensation credited under the Honeywell defined benefit pension plans apply to the determination of pension benefits under the Resideo defined benefit pension plan.
The Company sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of its U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit plans. It also sponsors defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in certain jurisdictions, principally Germany, Austria, Belgium, France, India, Switzerland, and the Netherlands.
78
RESIDEO TECHNOLOGIES, INC.
The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with the pension plans.
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||||||||||||||||||
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year (1) |
| $ | 344 |
|
| $ | 286 |
|
| $ | 279 |
|
| $ | 137 |
|
| $ | 93 |
|
| $ | 95 |
|
Service cost |
|
| 7 |
|
|
| 5 |
|
|
| 1 |
|
|
| 7 |
|
|
| 5 |
|
|
| 1 |
|
Interest cost |
|
| 11 |
|
|
| 13 |
|
|
| 2 |
|
|
| 1 |
|
|
| 2 |
|
|
| - |
|
Actuarial losses (gains) |
|
| 38 |
|
|
| 51 |
|
|
| 5 |
|
|
| 6 |
|
|
| 27 |
|
|
| (3 | ) |
Net benefits paid |
|
| (4 | ) |
|
| (13 | ) |
|
| (1 | ) |
|
| - |
|
|
| - |
|
| - |
| |
Settlements |
|
| (22 | ) |
|
| - |
|
|
| - |
|
|
| (6 | ) |
|
| (3 | ) |
|
| - |
|
Other |
|
| - |
|
|
| 2 |
|
|
| - |
|
|
| 2 |
|
|
| 13 |
|
| - |
| |
Exchange rate adjustments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14 |
|
|
| - |
|
|
| - |
|
Benefit obligation at end of year |
|
| 374 |
|
|
| 344 |
|
|
| 286 |
|
|
| 161 |
|
|
| 137 |
|
|
| 93 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year (1) |
|
| 331 |
|
| 274 |
|
| 279 |
|
|
| 27 |
|
| 20 |
|
| 20 |
| ||||
Actual return (loss) on plan assets |
|
| 35 |
|
|
| 70 |
|
|
| (4 | ) |
|
| - |
|
|
| 2 |
|
|
| - |
|
Contributions |
|
| 1 |
|
|
| - |
|
|
| - |
|
|
| 2 |
|
|
| 2 |
|
|
| - |
|
Net benefits paid |
|
| (4 | ) |
|
| (13 | ) |
|
| (1 | ) |
|
| - |
|
|
| 1 |
|
|
| - |
|
Settlements |
|
| (22 | ) |
|
| - |
|
|
| - |
|
|
| (6 | ) |
|
| (3 | ) |
|
| - |
|
Other |
|
| (1 | ) |
|
| - |
|
|
| - |
|
|
| 3 |
|
|
| 5 |
|
|
| - |
|
Exchange rate adjustments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2 |
|
|
| - |
|
|
| - |
|
Fair value of plan assets at end of year |
|
| 340 |
|
| 331 |
|
| 274 |
|
|
| 28 |
|
| 27 |
|
| 20 |
| ||||
Funded status of plans (non-current) |
| $ | (34 | ) |
| $ | (13 | ) |
| $ | (12 | ) |
| $ | (133 | ) |
| $ | (110 | ) |
| $ | (73 | ) |
|
|
The benefit obligation generated a global net actuarial loss of $44 million for the year ended December 31, 2020. A global decrease in discount rates over the course of the year was the main driver, generating a total loss of $50 million across all plans, partially offset by gains on inflation related assumptions of approximately $5 million (driven primarily by inflation/pension increase assumption in the Germany, which resulted in a gain of $5 million), and by gains on demographic assumptions of approximately $2 million (driven primarily by change in mortality assumption in the U.S., which resulted in a gain of $2 million). Experience losses added $1 million of net actuarial loss globally, while losses from other assumption changes were not significant.
Actual return on plan assets for the year ended December 31, 2020 was higher than expected due to equity and bonds performance being above expectations leading to an additional asset gain of $17 million globally, for a total asset return of $35 million globally.
Amounts recognized in Accumulated other comprehensive (loss) associated with pension plans at December 31, 2020 and 2019 are as follows:
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||||||||||
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2020 |
|
|
| 2019 |
|
Prior service credit |
| $ | (2 | ) |
| $ | (3 | ) |
| $ | - |
|
| $ | - |
|
Net actuarial loss |
|
| 30 |
|
|
| 12 |
|
|
| 14 |
|
|
| 13 |
|
Net amount recognized |
| $ | 28 |
|
| $ | 9 |
|
| $ | 14 |
|
| $ | 13 |
|
79
RESIDEO TECHNOLOGIES, INC.
The components of net periodic benefit cost and other amounts recognized in Comprehensive income for pension plans include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||||||||||||||||||
|
| 2020 |
|
|
| 2019 |
|
| 2018 (1) |
|
| 2020 |
|
|
| 2019 |
|
| 2018 (1) |
| ||||
Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 7 |
|
| $ | 5 |
|
| $ | 1 |
|
| $ | 7 |
|
| $ | 5 |
|
| $ | 1 |
|
Interest cost |
|
| 11 |
|
|
| 13 |
|
|
| 2 |
|
|
| 1 |
|
|
| 2 |
|
|
| - |
|
Expected return on plan assets |
|
| (17 | ) |
|
| (16 | ) |
|
| (3 | ) |
|
| (1 | ) |
|
| (1 | ) |
|
| - |
|
Amortization of prior service credit |
|
| (1 | ) |
|
| (1 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Mark to market adjustment |
|
| - |
|
|
| 1 |
|
|
| - |
|
|
| 6 |
|
|
| 16 |
|
|
| - |
|
Other |
|
| 3 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2 |
|
|
| - |
|
Net periodic benefit cost |
| $ | 3 |
|
| $ | 2 |
|
| $ | - |
|
| $ | 13 |
|
| $ | 24 |
|
| $ | 1 |
|
|
|
The components of net periodic benefit cost other than the service cost are included in Other expense, net in the Consolidated and Combined Statements of Operations for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||||||||||||||||||
|
| 2020 |
|
|
| 2019 |
|
| 2018 (1) |
|
| 2020 |
|
|
| 2019 |
|
| 2018 (1) |
| ||||
Other Changes in Plan Assets and Benefits Obligations Recognized in Other Comprehensive Loss (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses (gains) |
| $ | 38 |
|
| $ | 51 |
|
| $ | 12 |
|
| $ | 6 |
|
| $ | 26 |
|
| $ | (3 | ) |
Excess return on plan assets(2) |
|
| (17 | ) |
|
| (54 | ) |
|
| - |
|
|
| - |
|
|
| (1 | ) |
|
| - |
|
Actuarial gains recognized during the year |
|
| (2 | ) |
|
| - |
|
|
| - |
|
|
| (6 | ) |
|
| (17 | ) |
|
| - |
|
Other |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1 |
|
|
| - |
|
|
| - |
|
Total recognized in other comprehensive loss (income) |
| $ | 19 |
|
| $ | (3 | ) |
| $ | 12 |
|
| $ | 1 |
|
| $ | 8 |
|
| $ | (3 | ) |
Total recognized in net periodic benefit cost and other comprehensive loss (income) |
| $ | 22 |
|
| $ | (1 | ) |
| $ | 12 |
|
| $ | 14 |
|
| $ | 32 |
|
| $ | (2 | ) |
|
|
|
|
80
RESIDEO TECHNOLOGIES, INC.
Significant actuarial assumptions used in determining the benefit obligations and net periodic benefit (income) cost for benefit plans are presented in the following table as weighted averages.
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||||||||||||||||||
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2018 |
|
Actuarial assumptions used to determine benefit obligations as of December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 2.7 | % |
|
| 3.3 | % |
|
| 4.5 | % |
|
| 0.7 | % |
|
| 1.1 | % |
|
| 1.9 | % |
Interest crediting rate |
|
| 6.0 | % |
|
| 6.0 | % |
|
| 6.0 | % |
|
| 1.5 | % |
|
| 1.5 | % |
|
| 1.5 | % |
Expected annual rate of compensation increase |
|
| 3.5 | % |
|
| 3.4 | % |
|
| 3.4 | % |
|
| 2.4 | % |
|
| 2.4 | % |
|
| 2.3 | % |
Actuarial assumptions used to determine net periodic benefit cost for the twelve months ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate - benefit obligation |
|
| 3.3 | % |
|
| 4.5 | % |
|
| 4.5 | % |
|
| 1.1 | % |
|
| 2.0 | % |
|
| 1.9 | % |
Interest crediting rate |
|
| 6.0 | % |
|
| 6.0 | % |
|
| 6.0 | % |
|
| 1.5 | % |
|
| 1.5 | % |
|
| 1.5 | % |
Expected rate of return on plan assets |
|
| 5.4 | % |
|
| 5.7 | % |
|
| 5.7 | % |
|
| 2.7 | % |
|
| 2.8 | % |
|
| 3.3 | % |
Expected annual rate of compensation increase |
|
| 3.4 | % |
|
| 3.4 | % |
|
| 3.4 | % |
|
| 2.4 | % |
|
| 2.4 | % |
|
| 2.3 | % |
The discount rate for the U.S. pension plans reflects the current rate at which the associated liabilities could be settled at the measurement date of December 31. To determine discount rates for the U.S. pension plans, the Company uses a modeling process that involves matching the expected cash outflows of its benefit plans to a yield curve constructed from a portfolio of high-quality, fixed income debt instruments. The Company uses the single weighted-average yield of this hypothetical portfolio as a discount rate benchmark.
The expected rate of return on U.S. plan assets of 5.4% is a long-term rate based on historical plan asset returns over varying long-term periods combined with current market conditions and broad asset mix considerations. The Company reviews the expected rate of return on an annual basis and revises it as appropriate.
For non-U.S. benefit plans, actuarial assumptions reflect economic and market factors relevant to each country.
The following amounts relate to pension plans with accumulated benefit obligations exceeding the fair value of plan assets.
|
| December 31, |
| |||||||||||||
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||||||||||
|
|
| 2020 |
|
|
| 2019 |
|
|
| 2020 |
|
|
| 2019 |
|
Projected benefit obligation |
| $ | 374 |
|
| $ | 344 |
|
| $ | 161 |
|
| $ | 137 |
|
Accumulated benefit obligation |
| $ | 358 |
|
| $ | 332 |
|
| $ | 139 |
|
| $ | 116 |
|
Fair value of plan assets |
| $ | 340 |
|
| $ | 331 |
|
| $ | 28 |
|
| $ | 27 |
|
The Company utilized a third-party investment management firm to serve as its Outsourced Chief Investment Officer; however, the Company has appointed an internal fiduciary committee that monitors adherence to the investment guidelines the firm will follow.
The Company employs an investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and plan funded status. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate and hedge funds may be used to improve portfolio diversification.
The non-U.S. investment policies are different for each country as local regulations, funding requirements, and financial and tax considerations are part of the funding and investment allocation process in each country.
81
RESIDEO TECHNOLOGIES, INC.
A majority of the U.S. pension plan assets as of December 31, 2020 do not have published pricing and are valued using Net Asset Value (“NAV”) which approximates fair value. NAV by asset category and fair value by asset category are as follows for December 31, 2020 and 2019:
|
| U.S. Plans |
| |||||||||||||||||||||||||||||||||||||
|
| December 31, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||||||||||
|
| Total |
|
| NAV |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| NAV |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||||
Cash |
| $ | 6 |
|
| $ | 1 |
|
| $ | 5 |
|
| $ | - |
|
| $ | - |
|
| $ | 4 |
|
| $ | - |
|
| $ | 4 |
|
| $ | - |
|
| $ | - |
|
Equity |
|
| 105 |
|
|
| 105 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 100 |
|
|
| 100 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Investment funds |
|
| 14 |
|
|
| 14 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 15 |
|
|
| 15 |
|
|
| - |
|
|
| - |
|
|
| - |
|
U.S. treasury obligations |
|
| 16 |
|
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 132 |
|
|
| 132 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Government bonds |
|
| 41 |
|
|
| 41 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32 |
|
|
| 32 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Corporate bonds |
|
| 126 |
|
|
| 126 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Real estate / property |
|
| 32 |
|
|
| 32 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32 |
|
|
| 32 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total assets at fair value |
| $ | 340 |
|
| $ | 335 |
|
| $ | 5 |
|
| $ | - |
|
| $ | - |
|
| $ | 331 |
|
| $ | 327 |
|
| $ | 4 |
|
| $ | - |
|
| $ | - |
|
The fair values of the non-U.S. pension plan assets as by asset category are as follows:
|
| Non-U.S. Plans |
| |||||||||||||||||||||||||||||
|
| December 31, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
Equity |
| $ | 1 |
|
| $ | 1 |
|
| $ | - |
|
| $ | - |
|
| $ | 1 |
|
| $ | 1 |
|
| $ | - |
|
| $ | - |
|
Government bonds |
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| - |
|
Corporate bonds |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1 |
|
|
| - |
|
|
| 1 |
|
|
| - |
|
Insurance contracts |
|
| 10 |
|
|
| - |
|
|
| - |
|
|
| 10 |
|
|
| 8 |
|
|
| - |
|
|
| - |
|
|
| 8 |
|
Other |
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
Total assets at fair value |
| $ | 28 |
|
| $ | 1 |
|
| $ | 1 |
|
| $ | 26 |
|
| $ | 27 |
|
| $ | 1 |
|
| $ | 2 |
|
| $ | 24 |
|
5
The following table summarizes changes in the fair value of Level 3 assets for Non-U.S. plans:
|
| Non-U.S. Plans |
| |
Balance at October 29, 2018 |
| $ | 5 |
|
Return on plan assets |
|
| 1 |
|
Purchases, sales and settlements, net |
|
| - |
|
Balance at December 31, 2018 |
|
| 6 |
|
Return on plan assets |
|
| 2 |
|
Purchases, sales and settlements, net |
|
| 15 |
|
Other |
|
| 1 |
|
Balance at December 31, 2019 |
|
| 24 |
|
Return on plan assets |
|
| - |
|
Purchases, sales and settlements, net |
|
| (1 | ) |
Other |
|
| 3 |
|
Balance at December 31, 2020 |
| $ | 26 |
|
82
RESIDEO TECHNOLOGIES, INC.
Corporate Bonds and Government Bonds held as of December 31, 2020 and 2019 are valued either by using pricing models, bids provided by brokers or dealers, quoted prices of securities with similar characteristics or discounted cash flows and as such include adjustments for certain risks that may not be observable such as credit and liquidity risks. Other investments as of December 31, 2020 and 2019 and Insurance Contracts are classified as Level 3 as there are neither quoted prices nor other observable inputs for pricing. Insurance Contracts are issued by insurance companies and are valued at cash surrender value, which approximates the contract fair value. Other investments consist of a collective pension foundation that is valued and allocated by the plan administrator.
The Company utilizes the services of retirement and investment consultants to actively manage the assets of the Company’s pension plans. The Company has established asset allocation targets and investment guidelines based on the guidance of the consultants. The Company’s target allocations are 51% fixed income investments, 29% global equity investments, 10% global real estate investments and 10% cash and other investments.
The Company’s general funding policy for qualified defined benefit pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. In 2020, it was not required to make contributions to the U.S. pension plans, however $1 million of contributions were made. There is no requirement to make any contributions to the U.S. pension plans in 2021. In 2020, contributions of $2 million were made to the non-U.S. pension plans to satisfy regulatory funding requirements. In 2021, the Company expects to make contributions of cash and/or marketable securities of approximately $2 million to the non-U.S. pension plans to satisfy regulatory funding standards. Contributions for both the U.S. and non-U.S. pension plans do not reflect benefits paid directly from Company assets.
Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:
|
| U.S. Plans |
|
| Non-U.S. Plans |
| ||
2021 |
| $ | 19 |
|
| $ | 2 |
|
2022 |
| $ | 20 |
|
| $ | 2 |
|
2023 |
| $ | 21 |
|
| $ | 2 |
|
2024 |
| $ | 23 |
|
| $ | 3 |
|
2025 |
| $ | 23 |
|
| $ | 3 |
|
2026-2030 |
| $ | 114 |
|
| $ | 21 |
|
Note 21. Segment Financial Data
In May 2020, the Board appointed Jay Geldmacher as President and CEO of the Company. As part of this transition, during the fourth quarter of 2020, the format of the Chief Operating Decision Maker's reporting package was modified which resulted in changes to how business operations are presented.
The Company continues to monitor its business operations through 2 operating segments, Products & Solutions and ADI Global Distribution. The Company now reports Corporate separately from the 2 operating segments.The reporting package also includes segment Operating profit, which replaces Segment Adjusted EBITDA as a performance metric.
These changes were designed to better align accountability and authority, give a clearer view into the operational performance of the two segments and increase accountability for management of corporate spending. As a result, the Company recast prior periods to conform with the new fourth quarter 2020 presentation.
Products & Solutions—The Products & Solutions business is a leading global provider of products, software solutions and technologies that help homeowners stay connected and in control of their comfort, security and energy use.
ADI Global Distribution—The ADI Global Distribution business is the leading wholesale distributor of low-voltage security products including intrusion, access control and video products and participates significantly in
83
RESIDEO TECHNOLOGIES, INC.
the broader related markets of smart home, fire, access control, power, audio, ProAV, networking, communications, wire and cable, enterprise connectivity, and structured wiring products.
Corporate—Corporate includes headquarter type expenses associated with legal, finance, information technology, human resources, strategy and communications related to the Corporate office as well as supporting the operating segments, but do not relate directly to revenue-generating activities.
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance.
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Total Products & Solutions revenue |
| $ | 2,488 |
|
| $ | 2,487 |
|
| $ | 2,474 |
|
Less: Intersegment revenue |
|
| 367 |
|
|
| 312 |
|
|
| 305 |
|
External Products & Solutions revenue |
|
| 2,121 |
|
|
| 2,175 |
|
|
| 2,169 |
|
External ADI Global Distribution revenue |
|
| 2,950 |
|
|
| 2,813 |
|
|
| 2,658 |
|
Total revenue |
| $ | 5,071 |
|
| $ | 4,988 |
|
| $ | 4,827 |
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Operating profit |
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions |
| $ | 407 |
|
| $ | 327 |
|
| $ | 591 |
|
ADI Global Distribution |
|
| 194 |
|
|
| 210 |
|
|
| 205 |
|
Corporate |
|
| (290 | ) |
|
| (279 | ) |
|
| (303 | ) |
Total |
| $ | 311 |
|
| $ | 258 |
|
| $ | 493 |
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions |
| $ | 63 |
|
| $ | 62 |
|
| $ | 48 |
|
ADI Global Distribution |
|
| 12 |
|
|
| 10 |
|
|
| 10 |
|
Corporate |
|
| 11 |
|
|
| 8 |
|
|
| 8 |
|
Total |
| $ | 86 |
|
| $ | 80 |
|
| $ | 66 |
|
|
| Years Ended December 31, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
| |||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions |
| $ | 41 |
|
| $ | 71 |
|
| $ | 61 |
|
ADI Global Distribution |
|
| 15 |
|
|
| 5 |
|
|
| 5 |
|
Corporate |
|
| 14 |
|
|
| 19 |
|
|
| 15 |
|
Total |
| $ | 70 |
|
| $ | 95 |
|
| $ | 81 |
|
The Company’s CODM does not use segment assets information to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
84
RESIDEO TECHNOLOGIES, INC.
Note 22. Geographic Areas—Financial Data
|
| Net Revenue (1) Years Ended December 31, |
|
| Long-lived Assets (2) December 31, |
| ||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||||
United States |
| $ | 3,543 |
|
| $ | 3,423 |
|
| $ | 3,289 |
|
| $ | 260 |
|
| $ | 272 |
|
| $ | 184 |
|
Europe |
|
| 1,121 |
|
|
| 1,117 |
|
|
| 1,138 |
|
|
| 144 |
|
|
| 136 |
|
|
| 91 |
|
Other International |
|
| 407 |
|
|
| 448 |
|
|
| 400 |
|
|
| 47 |
|
|
| 45 |
|
|
| 25 |
|
|
| $ | 5,071 |
|
| $ | 4,988 |
|
| $ | 4,827 |
|
| $ | 451 |
|
| $ | 453 |
|
| $ | 300 |
|
|
|
|
|
Note 23. Unaudited Quarterly Financial Information
The following tables show selected unaudited quarterly results of operations for 2020 and 2019. The quarterly data have been prepared on the same basis as the audited annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the results of operations for these periods.
|
| 2020 |
| |||||||||||||||||
|
| Q1 |
|
| Q2 |
|
| Q3 |
|
| Q4 |
|
| Year Ended December 31, |
| |||||
Net revenue |
| $ | 1,179 |
|
| $ | 1,029 |
|
| $ | 1,362 |
|
| $ | 1,501 |
|
| $ | 5,071 |
|
Gross profit |
|
| 284 |
|
|
| 236 |
|
|
| 370 |
|
|
| 423 |
|
|
| 1,313 |
|
Net (loss) income |
|
| (21 | ) |
|
| (76 | ) |
|
| 75 |
|
|
| 59 |
|
|
| 37 |
|
Earnings (loss) per share -basic |
|
| (0.17 | ) |
|
| (0.62 | ) |
|
| 0.61 |
|
|
| 0.45 |
|
|
| 0.30 |
|
Earnings (loss) per share - diluted |
|
| (0.17 | ) |
|
| (0.62 | ) |
|
| 0.60 |
|
|
| 0.44 |
|
|
| 0.29 |
|
|
| 2019 |
| |||||||||||||||||
|
| Q1 |
|
| Q2 |
|
| Q3 |
|
| Q4 |
|
| Year Ended December 31, |
| |||||
Net revenue |
| $ | 1,216 |
|
| $ | 1,242 |
|
| $ | 1,226 |
|
| $ | 1,304 |
|
| $ | 4,988 |
|
Gross profit |
|
| 332 |
|
|
| 323 |
|
|
| 309 |
|
|
| 313 |
|
|
| 1,277 |
|
Net income (loss) |
|
| 48 |
|
|
| (11 | ) |
|
| 8 |
|
|
| (9 | ) |
|
| 36 |
|
Earnings (loss) per share - basic |
|
| 0.39 |
|
|
| (0.09 | ) |
|
| 0.07 |
|
|
| (0.07 | ) |
|
| 0.29 |
|
Earnings (loss) per share - diluted |
|
| 0.39 |
|
|
| (0.09 | ) |
|
| 0.06 |
|
|
| (0.07 | ) |
|
| 0.29 |
|
Note 24. Subsequent Events
Amended and Restated Credit Agreement
On February 12, 2021, the Company entered into an amended and restated credit agreement (the “A&R Credit Agreement”). The A&R Credit Agreement provides for (i) a seven-year senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the Term Loan Facilities, the “A&R Senior Credit Facilities”).
The Company is obligated to make quarterly principal payments of approximately $2.4 million throughout the term of the A&R Term B Facility according to the amortization provisions in the A&R Credit Agreement. In addition to paying interest on outstanding borrowings under the A&R Revolving Credit Facility, the Company is
85
RESIDEO TECHNOLOGIES, INC.
required to pay a quarterly commitment fee based on the unused portion of the A&R Revolving Credit Facility. Borrowings under the A&R Credit Agreement can be prepaid at the Company’s option without premium or penalty other than a 1.00% prepayment premium that may be payable in connection with certain repricing transactions within a certain period of time after the closing date. Up to $75 million may be utilized under the A&R Revolving Credit Facility for the issuance of letters of credit to the Company or any of the Company’s subsidiaries. Letters of credit are available for issuance under the A&R Credit Agreement on terms and conditions customary for financings of this kind, which issuances will reduce the available funds under the A&R Revolving Credit Facility.
The A&R Senior Credit Facilities are subject to an interest rate and interest period which the Company will elect. If the Company chooses to make a base rate borrowing on an overnight basis, the interest rate will be based on the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1.00% per annum. For the A&R Term Loan B, the applicable LIBOR rate will not be less than 0.50% per annum. The applicable margin for the A&R Term B Facility is 2.25% per annum (for LIBOR loans) and 1.25% per annum (for base rate loans). The applicable margin for the A&R Revolving Credit Facility varies from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for base rate loans) based on the Company’s leverage ratio. Accordingly, the interest rates for A&R the Senior Credit Facilities will fluctuate during the term of the A&R Credit Agreement based on changes in the base rate, LIBOR rate or future changes in the Company’s leverage ratio. Interest payments with respect to the borrowings are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months.
The A&R Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit the Company and the Company’s subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends, to make other distributions or redemptions/repurchases, in respect of the Company and the Company’s subsidiaries’ equity interests, to engage in transactions with affiliates or amend certain material documents. In addition, the A&R Revolving Credit Facility also contains certain financial maintenance covenants. The A&R Credit Agreement contains customary events of default, including with respect to a failure to make payments under the A&R Senior Credit Facilities, cross-default, certain bankruptcy and insolvency events and customary change of control events.
All obligations under the A&R Senior Credit Facilities are or will be unconditionally guaranteed jointly and severally, by: (a) the Company and (b) substantially all of the direct and indirect wholly owned subsidiaries of the Company that are organized under the laws of the United States, any state thereof or the District of Columbia (collectively, the “Guarantors”). The Guarantors entered into a guarantee under the A&R Credit Agreement concurrently with the effectiveness of the A&R Credit Agreement. Subject to certain limitations, the A&R Senior Credit Facilities are or will be secured on a first priority basis by: (x) a perfected security interest in the equity interests of each direct subsidiary of the Company and each Guarantor under the A&R Senior Credit Facilities (subject to certain customary exceptions) and (y) perfected, security interests in, and mortgages on, substantially all tangible and intangible personal property and material real property of the Company and each of the Guarantors under the A&R Senior Credit Facilities, subject, in each case, to certain exceptions. The Company and the Guarantors entered into security documents concurrently with effectiveness of the A&R Credit Agreement.
Senior Notes
On February 16, 2021 the Company redeemed $140 million in principal amount of the Senior Notes at a redemption price of 106.125% of par plus accrued interest.
Amendmentto Reimbursement Agreement
On February 12, 2021, in connection with entering into the A&R Credit Agreement, the Company entered into a Fourth Amendment to the Reimbursement Agreement. The covenants in Exhibit G of the Reimbursement Agreement were amended and restated in their entirety to substantially conform to the affirmative and negative covenants contained in the A&R Credit Agreement.
86
RESIDEO TECHNOLOGIES, INC.
|
|
Not Applicable.
|
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Evaluation of Disclosure Controls and Procedures
The Company’s management
Based on this assessment, management determined that the Companywe maintained effective internal control over financial reporting as of December 31, 2020.
2023.
87
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None.
PART III.
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Information relating to executive compensation is contained
| Item 12. Security Ownership |
Information relating to certain beneficial ownership of certain stockholdersCertain Beneficial Owners and management, as well as certain otherManagement and Related Stockholder Matters
| Item 13. Certain Relationships |
Information relating to certain relationships and related transactions, asRelated Transactions, and Director Independence
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88
Item 15. Exhibits and Financial Statement Schedules |
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(a)(1)Financial Statements
Exhibit
| Exhibit Description | |||||||
2.1 | ||||||||
2.2 | ||||||||
2.3 | ||||||||
2.4 | ||||||||
2.5 | ||||||||
2.6 | ||||||||
2.7 | ||||||||
2.8 |
89
RESIDEO TECHNOLOGIES, INC.
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2.9 | ||||||||
2.10 | ||||||||
2.11 | ||||||||
2.12 | ||||||||
2.13 |
2.14 | ||||||||
2.15 | ||||||||
3.1 | ||||||||
3.2 | ||||||||
4.1 | ||||||||
4.2 | ||||||||
4.3 | ||||||||
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4.4 | ||||||||
4.5 | ||||||||
4.6 | ||||||||
4.7 | ||||||||
10.01 | ||||||||
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90
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10.18 | ||||||||
10.19 | ||||||||
10.20 | ||||||||
10.21 | ||||||||
10.22 | ||||||||
91
RESIDEO TECHNOLOGIES, INC.
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10.27 | ||||||||
10.28 | ||||||||
10.29 | ||||||||
10.30 | ||||||||
10.31 | ||||||||
10.32 |
21.1 | ||||||||
23.1 | ||||||||
24.1 | ||||||||
31.1 | ||||||||
31.2 | ||||||||
32.1 | ||||||||
32.2 | ||||||||
97 | ||||||||
101.INS | Inline XBRL Instance Document (filed herewith) | |||||||
101.SCH | Inline XBRL Taxonomy Extension Schema (filed herewith) | |||||||
92
RESIDEO TECHNOLOGIES, INC.
|
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) | |||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith) | |||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) | |||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith) | |||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* | Certain schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules and similar attachments upon request by the U.S. Securities and Exchange Commission. |
‡ | Indicates management contracts or compensatory plans or arrangements. |
Item 16. |
|
The Company has elected not to include a Form 10-K summary under this Item 16.
93
Resideo Technologies, Inc. | ||||||||
Date: February | By: | /s/ Anthony L. Trunzo | ||||||
Anthony L. Trunzo | ||||||||
Executive Vice President and Chief Financial Officer | ||||||||
(on behalf of the Registrant and as the | ||||||||
|
Name | Title | Date | |||||||||||||
/s/ Jay Geldmacher | President, Chief Executive Officer and Director
| February | |||||||||||||
Jay Geldmacher | |||||||||||||||
/s/ | Vice President, Controller and Chief Accounting Officer
| February | |||||||||||||
| |||||||||||||||
* | Chairman of the Board | February | |||||||||||||
Roger B. Fradin | |||||||||||||||
* | Director | February 14, 2024 | |||||||||||||
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Paul F. Deninger | |||||||||||||||
* | Director | February 14, 2024 | |||||||||||||
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* | Director | February | |||||||||||||
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Brian G. Kushner | |||||||||||||||
* | Director | February 14, 2024 | |||||||||||||
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Jack R. Lazar | |||||||||||||||
* | Director | February 14, 2024 | |||||||||||||
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Nina L. Richardson | |||||||||||||||
* | Director | February 14, 2024 | |||||||||||||
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Andrew C. Teich | |||||||||||||||
* | Director | February 14, 2024 | |||||||||||||
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* | Director | February | |||||||||||||
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* | Director | February 14, 2024 |
*By: | /s/ Jeannine J. Lane | ||||||||||
(Jeannine J. Lane, Attorney-in-Fact) | |||||||||||
February |
94