UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OctoberJuly 2, 20212022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission File Number 001-38635
Resideo Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 82-5318796 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Scottsdale, Arizona |
| |
(Address of principal executive offices) | (Zip Code) |
(512480) 726-3500573-5340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of OctoberJuly 29, 20212022 was 144,386,057145,686,840 shares.
TABLE OF CONTENTS
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Part I. |
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| Consolidated Interim Balance Sheets (unaudited) – October 2, 2021 and December 31, 2020 | 7 |
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| Notes to Consolidated Interim Financial Statements (unaudited) | 10 |
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| 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 |
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| 3. | 34 | |
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| 4. | 35 | |
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Part II. | 1. | 36 | |
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| 1A. | 36 | |
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| 6. | 37 | |
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| 38 |
Page | |||
Item 1. | Unaudited Consolidated Financial Statements | ||
3 | |||
4 | |||
Unaudited Consolidated Balance Sheets as of July 2, 2022 and December 31, 2021 | 5 | ||
6 | |||
7 | |||
8 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
Item 3. | 32 | ||
Item 4. | 33 | ||
Item 1. | 34 | ||
Item 1A. | 34 | ||
Item 6. | 35 |
2
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industries and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:
3
These and other factors are more fully discussed in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our 2020 Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) and “Management’s Discussion and Analysis ofPart I. Financial Condition and Results of Operations” section in this Form 10-Q. There have been no material changes to the risk factors described in our 2020 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
PART I
The financial statements and related footnotes as of October 2, 2021 should be read in conjunction with the financial statements for the year ended December 31, 2020 contained in our 2020 Annual Report on Form 10-K.
4
Information
Item 1. Unaudited Consolidated Financial Statements
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In millions, except shareshares in thousands, and per share data)
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||||||
Net revenue |
| $ | 1,496 |
| $ | 1,362 |
| $ | 4,392 |
| $ | 3,570 |
|
| $ | 1,686 |
|
| $ | 1,477 |
|
| $ | 3,192 |
|
| $ | 2,896 |
| |||
Cost of goods sold |
|
| 1,080 |
|
|
| 992 |
|
|
| 3,227 |
|
|
| 2,680 |
|
|
| 1,219 |
|
|
| 1,091 |
|
|
| 2,287 |
|
|
| 2,135 |
|
Gross profit |
| 416 |
| 370 |
| 1,165 |
| 890 |
|
|
| 467 |
|
|
| 386 |
|
|
| 905 |
|
|
| 761 |
| |||||||
Research and development expenses |
|
| 28 |
|
|
| 22 |
|
|
| 52 |
|
|
| 43 |
| ||||||||||||||||
Selling, general and administrative expenses |
| 229 |
| 221 |
| 684 |
| 676 |
|
|
| 244 |
|
|
| 236 |
|
|
| 479 |
|
|
| 451 |
| |||||||
Research and development expenses |
|
| 20 |
|
|
| 18 |
|
|
| 63 |
|
|
| 55 |
| ||||||||||||||||
Operating profit |
| 167 |
| 131 |
| 418 |
| 159 |
| |||||||||||||||||||||||
Intangible asset amortization |
|
| 9 |
|
|
| 7 |
|
|
| 16 |
|
|
| 16 |
| ||||||||||||||||
Income from operations |
|
| 186 |
|
|
| 121 |
|
|
| 358 |
|
|
| 251 |
| ||||||||||||||||
Other expense, net |
| 58 |
| 35 |
| 130 |
| 106 |
|
|
| 41 |
|
|
| 28 |
|
|
| 81 |
|
|
| 72 |
| |||||||
Interest expense |
|
| 12 |
|
|
| 14 |
|
|
| 37 |
|
|
| 49 |
| ||||||||||||||||
Interest expense, net |
|
| 14 |
|
|
| 12 |
|
|
| 25 |
|
|
| 25 |
| ||||||||||||||||
Income before taxes |
| 97 |
| 82 |
| 251 |
| 4 |
|
|
| 131 |
|
|
| 81 |
|
|
| 252 |
|
|
| 154 |
| |||||||
Tax expense |
|
| 29 |
|
|
| 7 |
|
|
| 76 |
|
|
| 26 |
| ||||||||||||||||
Net income (loss) |
| $ | 68 |
|
| $ | 75 |
|
| $ | 175 |
|
| $ | (22 | ) | ||||||||||||||||
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Provision for income taxes |
|
| 37 |
|
|
| 23 |
|
|
| 71 |
|
|
| 47 |
| ||||||||||||||||
Net income |
| $ | 94 |
|
| $ | 58 |
|
| $ | 181 |
|
| $ | 107 |
| ||||||||||||||||
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic |
|
| 144,284 |
| 123,421 |
| 143,865 |
| 123,194 |
|
| $ | 0.65 |
|
| $ | 0.40 |
|
| $ | 1.25 |
|
| $ | 0.74 |
| ||||||
Diluted |
| 148,559 |
| 125,235 |
| 148,260 |
| 123,194 |
|
| $ | 0.63 |
|
| $ | 0.39 |
|
| $ | 1.22 |
|
| $ | 0.72 |
| |||||||
Earnings (Loss) Per Share |
|
|
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| ||||||||||||||||||||
Weighted average number of common shares outstanding |
|
|
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|
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| ||||||||||||||||||||
Basic |
| $ | 0.47 |
| $ | 0.61 |
| $ | 1.22 |
| $ | (0.18 | ) |
|
| 145,457 |
|
|
| 143,939 |
|
|
| 145,286 |
|
|
| 143,657 |
| |||
Diluted |
| $ | 0.46 |
| $ | 0.60 |
| $ | 1.18 |
| $ | (0.18 | ) |
|
| 148,829 |
|
|
| 148,328 |
|
|
| 148,836 |
|
|
| 148,050 |
| |||
|
|
|
|
|
|
|
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|
TheSee accompanying notes to the unaudited Notes to Consolidated Interim Financial Statements are an integral part of theseconsolidated financial statements.
53
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Net income (loss) |
| $ | 68 |
|
| $ | 75 |
|
| $ | 175 |
|
| $ | (22 | ) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange translation adjustment |
|
| (24 | ) |
|
| 28 |
|
|
| (41 | ) |
|
| 6 |
|
Changes in unrealized gain on derivatives |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total other comprehensive income (loss), net of tax |
|
| (24 | ) |
|
| 28 |
|
|
| (41 | ) |
|
| 6 |
|
Comprehensive income (loss) |
| $ | 44 |
|
| $ | 103 |
|
| $ | 134 |
|
| $ | (16 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 94 |
|
| $ | 58 |
|
| $ | 181 |
|
| $ | 107 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange translation (loss) gain |
|
| (70 | ) |
|
| 9 |
|
|
| (79 | ) |
|
| (17 | ) |
Changes in unrealized gain (loss) on derivatives, net of tax |
|
| 1 |
|
|
| (2 | ) |
|
| 24 |
|
|
| - |
|
Total other comprehensive (loss) income, net of tax |
|
| (69 | ) |
|
| 7 |
|
|
| (55 | ) |
|
| (17 | ) |
Comprehensive income |
| $ | 25 |
|
| $ | 65 |
|
| $ | 126 |
|
| $ | 90 |
|
TheSee accompanying notes to the unaudited Notes to Consolidated Interim Financial Statements are an integral part of theseconsolidated financial statements.
64
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands, and par value)per share data)
(Unaudited)
|
| October 2, 2021 |
|
| December 31, 2020 |
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 686 |
| $ | 517 |
|
| $ | 251 |
|
| $ | 775 |
| |
Accounts receivable – net |
| 932 |
| 863 |
| |||||||||||
Inventories – net |
| 710 |
| 672 |
| |||||||||||
Accounts receivable less allowances of $11 million and $9 million, respectively |
|
| 1,073 |
|
|
| 876 |
| ||||||||
Inventories, net |
|
| 971 |
|
|
| 740 |
| ||||||||
Other current assets |
|
| 179 |
|
|
| 173 |
|
|
| 186 |
|
|
| 150 |
|
Total current assets |
| 2,507 |
| 2,225 |
|
|
| 2,481 |
|
|
| 2,541 |
| |||
Property, plant and equipment – net |
| 290 |
| 318 |
| |||||||||||
Property, plant and equipment, net |
|
| 363 |
|
|
| 287 |
| ||||||||
Goodwill |
| 2,671 |
| 2,691 |
|
|
| 2,695 |
|
|
| 2,661 |
| |||
Other intangible assets, net |
|
| 463 |
|
|
| 120 |
| ||||||||
Other assets |
|
| 366 |
|
|
| 376 |
|
|
| 314 |
|
|
| 244 |
|
Total assets |
| $ | 5,834 |
|
| $ | 5,610 |
|
| $ | 6,316 |
|
| $ | 5,853 |
|
LIABILITIES |
|
|
|
|
|
| ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| ||||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
| $ | 905 |
| $ | 936 |
|
| $ | 987 |
|
| $ | 883 |
| |
Current maturities of debt |
| 10 |
| 7 |
| |||||||||||
Current maturities of long-term debt |
|
| 12 |
|
|
| 10 |
| ||||||||
Accrued liabilities |
|
| 617 |
|
|
| 595 |
|
|
| 580 |
|
|
| 601 |
|
Total current liabilities |
| 1,532 |
| 1,538 |
|
|
| 1,579 |
|
|
| 1,494 |
| |||
Long-term debt |
| 1,222 |
| 1,155 |
| |||||||||||
Long-term debt, net of current maturities |
|
| 1,410 |
|
|
| 1,220 |
| ||||||||
Obligations payable under Indemnification Agreements |
| 587 |
| 590 |
|
|
| 601 |
|
|
| 585 |
| |||
Other liabilities |
| 335 |
| 334 |
|
|
| 332 |
|
|
| 302 |
| |||
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
|
|
|
| ||||||||||
EQUITY |
|
|
|
|
|
| ||||||||||
Common stock, $0.001 par value, 700,000 shares authorized, |
| 0 |
| 0 |
| |||||||||||
Total liabilities |
|
| 3,922 |
|
|
| 3,601 |
| ||||||||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
| ||||||||||
Stockholders’ Equity: |
|
|
|
|
|
| ||||||||||
Common stock, $0.001 par value, 700,000 shares authorized, |
|
| 0 |
|
|
| 0 |
| ||||||||
Additional paid-in capital |
| 2,111 |
| 2,070 |
|
|
| 2,147 |
|
|
| 2,121 |
| |||
Retained earnings |
|
| 498 |
|
|
| 317 |
| ||||||||
Accumulated other comprehensive loss, net |
|
| (220 | ) |
|
| (165 | ) | ||||||||
Treasury stock, at cost |
| (16 | ) |
| (6 | ) |
|
| (31 | ) |
|
| (21 | ) | ||
Retained earnings |
| 250 |
| 75 |
| |||||||||||
Accumulated other comprehensive loss |
|
| (187 | ) |
|
| (146 | ) | ||||||||
Total equity |
|
| 2,158 |
|
|
| 1,993 |
| ||||||||
Total liabilities and equity |
| $ | 5,834 |
|
| $ | 5,610 |
| ||||||||
Total stockholders’ equity |
|
| 2,394 |
|
|
| 2,252 |
| ||||||||
Total liabilities and stockholders’ equity |
| $ | 6,316 |
|
| $ | 5,853 |
|
TheSee accompanying notes to the unaudited Notes to Consolidated Interim Financial Statements are an integral part of theseconsolidated financial statements.
75
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
| Nine Months Ended |
| |||||
|
| October 2, 2021 |
|
| September 26, 2020 |
| ||
Cash flows provided by operating activities: |
|
|
|
|
|
| ||
Net income (loss) |
| $ | 175 |
|
| $ | (22 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 67 |
|
|
| 64 |
|
Stock compensation expense |
|
| 29 |
|
|
| 21 |
|
Loss on extinguishment of debt |
|
| 41 |
|
|
| - |
|
Other |
|
| 4 |
|
|
| 20 |
|
Changes in assets and liabilities, net of acquired companies: |
|
|
|
|
|
| ||
Accounts receivable |
|
| (78 | ) |
|
| (64 | ) |
Inventories – net |
|
| (40 | ) |
|
| 64 |
|
Other current assets |
|
| (6 | ) |
|
| 15 |
|
Accounts payable |
|
| (19 | ) |
|
| (62 | ) |
Accrued liabilities |
|
| 26 |
|
|
| 52 |
|
Obligations payable under Indemnification Agreements |
|
| (3 | ) |
|
| (8 | ) |
Other |
|
| 7 |
|
|
| 12 |
|
Net cash provided by operating activities |
|
| 203 |
|
|
| 92 |
|
Cash flows used for investing activities: |
|
|
|
|
|
| ||
Expenditures for property, plant, equipment and other intangibles |
|
| (48 | ) |
|
| (50 | ) |
Cash paid for acquisitions, net of cash acquired |
|
| (11 | ) |
|
| (35 | ) |
Other |
|
| 3 |
|
|
| - |
|
Net cash used for investing activities |
|
| (56 | ) |
|
| (85 | ) |
Cash flows provided by financing activities: |
|
|
|
|
|
| ||
Proceeds from long-term debt |
|
| 1,250 |
|
|
| - |
|
Payment of debt facility issuance and modification costs |
|
| (39 | ) |
| - |
| |
Net proceeds from revolving credit facility |
|
| - |
|
|
| 150 |
|
Repayment of long-term debt |
|
| (1,185 | ) |
|
| (11 | ) |
Other |
|
| 2 |
|
|
| (4 | ) |
Net cash provided by financing activities |
|
| 28 |
|
|
| 135 |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
| (6 | ) |
|
| (4 | ) |
Net increase in cash and cash equivalents |
|
| 169 |
|
|
| 138 |
|
Cash and cash equivalents at beginning of period |
|
| 517 |
|
|
| 122 |
|
Cash and cash equivalents at end of period |
| $ | 686 |
|
| $ | 260 |
|
|
| Six Months Ended |
| |||||
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income |
| $ | 181 |
|
| $ | 107 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 45 |
|
|
| 45 |
|
Share-based compensation expense |
|
| 22 |
|
|
| 19 |
|
Other, net |
|
| (5 | ) |
|
| 9 |
|
Changes in operating assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
| ||
Accounts receivable, net |
|
| (145 | ) |
|
| (33 | ) |
Inventories, net |
|
| (127 | ) |
|
| (8 | ) |
Other current assets |
|
| (21 | ) |
|
| (24 | ) |
Accounts payable |
|
| 54 |
|
|
| (15 | ) |
Accrued liabilities |
|
| (47 | ) |
|
| (1 | ) |
Other, net |
|
| 19 |
|
|
| - |
|
Net cash (used in) provided by operating activities |
|
| (24 | ) |
|
| 99 |
|
Cash flows from investing activities: |
|
|
|
|
|
| ||
Capital expenditures |
|
| (24 | ) |
|
| (35 | ) |
Acquisitions, net of cash acquired |
|
| (633 | ) |
|
| (10 | ) |
Other, net |
|
| (13 | ) |
|
| 3 |
|
Net cash used in investing activities |
|
| (670 | ) |
|
| (42 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Proceeds from issuance of A&R Term B Facility |
|
| 200 |
|
|
| 950 |
|
Payments of debt facility issuance and modification costs |
|
| (4 | ) |
|
| (21 | ) |
Repayments of long-term debt |
|
| (6 | ) |
|
| (923 | ) |
Other, net |
|
| (7 | ) |
|
| 1 |
|
Net cash provided by financing activities |
|
| 183 |
|
|
| 7 |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
| (13 | ) |
|
| (2 | ) |
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
| (524 | ) |
|
| 62 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 779 |
|
|
| 517 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 255 |
|
| $ | 579 |
|
|
|
|
|
|
|
| ||
Supplemental Cash Flow Information: |
|
|
|
|
|
| ||
Interest paid |
| $ | 21 |
|
| $ | 21 |
|
Income taxes paid, net |
| $ | 79 |
|
| $ | 46 |
|
TheSee accompanying notes to the unaudited Notes to Consolidated Interim Financial Statements are an integral part of theseconsolidated financial statements.
86
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except shares in thousands)
(Unaudited)
Three Months Ended October 2, 2021 |
| Common |
|
| Treasury |
|
| Common |
|
| Treasury |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||||
Balance at July 3, 2021 |
|
| 144,171 |
|
|
| 1,188 |
|
| $ | - |
|
| $ | (14 | ) |
| $ | 2,098 |
|
| $ | 182 |
|
| $ | (163 | ) |
| $ | 2,103 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68 |
|
|
| - |
|
|
| 68 |
|
Other comprehensive loss, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (24 | ) |
|
| (24 | ) |
Stock issuances, net of shares withheld for taxes |
|
| 212 |
|
|
| 45 |
|
|
| - |
|
|
| (2 | ) |
|
| 3 |
|
|
| - |
|
|
| - |
|
|
| 1 |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 10 |
|
|
| - |
|
|
| - |
|
|
| 10 |
|
Balance at October 2, 2021 |
|
| 144,383 |
|
|
| 1,233 |
|
| $ | - |
|
| $ | (16 | ) |
| $ | 2,111 |
|
| $ | 250 |
|
| $ | (187 | ) |
| $ | 2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Three Months Ended September 26, 2020 |
| Common |
|
| Treasury |
|
| Common |
|
| Treasury |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||||
Balance at June 27, 2020 |
|
| 123,378 |
|
|
| 852 |
|
| $ | - |
|
| $ | (5 | ) |
| $ | 1,775 |
|
| $ | (59 | ) |
| $ | (216 | ) |
| $ | 1,495 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 75 |
|
|
| - |
|
|
| 75 |
|
Other comprehensive income, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 28 |
|
|
| 28 |
|
Stock issuances, net of shares withheld for taxes |
|
| 65 |
|
|
| 29 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0 |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7 |
|
|
| - |
|
|
| - |
|
|
| 7 |
|
Balance at September 26, 2020 |
|
| 123,443 |
|
|
| 881 |
|
| $ | - |
|
| $ | (5 | ) |
| $ | 1,782 |
|
| $ | 16 |
|
| $ | (188 | ) |
| $ | 1,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nine Months ended October 2, 2021 |
| Common |
|
| Treasury |
|
| Common |
|
| Treasury |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||||
Balance at January 1, 2021 |
|
| 143,059 |
|
|
| 900 |
|
| $ | - |
|
| $ | (6 | ) |
| $ | 2,070 |
|
| $ | 75 |
|
| $ | (146 | ) |
| $ | 1,993 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 175 |
|
|
| - |
|
|
| 175 |
|
Other comprehensive loss, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (41 | ) |
|
| (41 | ) |
Stock issuances, net of shares withheld for taxes |
|
| 1,324 |
|
|
| 333 |
|
|
| - |
|
|
| (10 | ) |
|
| 12 |
|
|
| - |
|
|
| - |
|
|
| 2 |
|
Stock-based compensation |
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 29 |
|
|
| - |
|
| - |
|
|
| 29 |
| |||
Balance at October 2, 2021 |
|
| 144,383 |
|
|
| 1,233 |
|
| $ | - |
|
| $ | (16 | ) |
| $ | 2,111 |
|
| $ | 250 |
|
| $ | (187 | ) |
| $ | 2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nine Months Ended September 26, 2020 |
| Common |
|
| Treasury |
|
| Common |
|
| Treasury |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||||
Balance at January 1, 2020 |
|
| 122,873 |
|
|
| 615 |
|
| $ | - |
|
| $ | (3 | ) |
| $ | 1,761 |
|
| $ | 38 |
|
| $ | (194 | ) |
| $ | 1,602 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (22 | ) |
|
| - |
|
|
| (22 | ) |
Other comprehensive income, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6 |
|
|
| 6 |
|
Stock issuances, net of shares withheld for taxes |
|
| 570 |
|
|
| 266 |
|
|
| - |
|
|
| (2 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2 | ) |
Stock-based compensation |
| - |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 21 |
|
|
| - |
|
| - |
|
|
| 21 |
| |||
Balance at September 26, 2020 |
|
| 123,443 |
|
|
| 881 |
|
| $ | - |
|
| $ | (5 | ) |
| $ | 1,782 |
|
| $ | 16 |
|
| $ | (188 | ) |
| $ | 1,605 |
|
Fiscal Quarters |
| Common |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Treasury |
|
| Treasury |
| Total |
| ||||||||
Balance as of April 2, 2022 |
|
| 145,372 |
|
| $ | 0 |
|
| $ | 2,135 |
|
| $ | 404 |
|
| $ | (151 | ) |
|
| 1,696 |
|
| $ | (27 | ) | $ | 2,361 |
|
Net income |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 94 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
| 94 |
|
Other comprehensive loss, net of tax |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (69 | ) |
|
| - |
|
|
| 0 |
|
| (69 | ) |
Stock issuances, net of shares withheld for taxes |
|
| 312 |
|
|
| 0 |
|
|
| 1 |
|
|
| 0 |
|
|
| 0 |
|
|
| 148 |
|
|
| (4 | ) |
| (3 | ) |
Share-based compensation |
|
| - |
|
|
| 0 |
|
|
| 11 |
|
|
| 0 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
| 11 |
|
Balance as of July 2, 2022 |
|
| 145,684 |
|
| $ | 0 |
|
| $ | 2,147 |
|
| $ | 498 |
|
| $ | (220 | ) |
|
| 1,844 |
|
| $ | (31 | ) | $ | 2,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance as of April 3, 2021 |
|
| 143,819 |
|
| $ | 0 |
|
| $ | 2,088 |
|
| $ | 124 |
|
| $ | (170 | ) |
|
| 1,069 |
|
| $ | (10 | ) | $ | 2,032 |
|
Net income |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 58 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
| 58 |
|
Other comprehensive income, net of tax |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 7 |
|
|
| - |
|
|
| 0 |
|
| 7 |
|
Stock issuances, net of shares withheld for taxes |
|
| 352 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 119 |
|
|
| (4 | ) |
| (4 | ) |
Share-based compensation |
|
| - |
|
|
| 0 |
|
|
| 10 |
|
|
| 0 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
| 10 |
|
Balance as of July 3, 2021 |
|
| 144,171 |
|
| $ | 0 |
|
| $ | 2,098 |
|
| $ | 182 |
|
| $ | (163 | ) |
|
| 1,188 |
|
| $ | (14 | ) | $ | 2,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fiscal Year to Date Periods |
| Common |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Treasury |
|
| Treasury |
| Total |
| ||||||||
Balance as of December 31, 2021 |
|
| 144,808 |
|
| $ | 0 |
|
| $ | 2,121 |
|
| $ | 317 |
|
| $ | (165 | ) |
|
| 1,440 |
|
| $ | (21 | ) | $ | 2,252 |
|
Net income |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 181 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
| 181 |
|
Other comprehensive loss, net of tax |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (55 | ) |
|
| - |
|
|
| 0 |
|
| (55 | ) |
Stock issuances, net of shares withheld for taxes |
|
| 876 |
|
|
| 0 |
|
|
| 4 |
|
|
| 0 |
|
|
| 0 |
|
|
| 404 |
|
|
| (10 | ) |
| (6 | ) |
Share-based compensation |
| - |
|
|
| 0 |
|
|
| 22 |
|
|
| 0 |
|
| 0 |
|
| - |
|
|
| 0 |
|
| 22 |
| |||
Balance as of July 2, 2022 |
|
| 145,684 |
|
| $ | 0 |
|
| $ | 2,147 |
|
| $ | 498 |
|
| $ | (220 | ) |
|
| 1,844 |
|
| $ | (31 | ) | $ | 2,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance as of December 31, 2020 |
|
| 143,059 |
|
| $ | 0 |
|
| $ | 2,070 |
|
| $ | 75 |
|
| $ | (146 | ) |
|
| 900 |
|
| $ | (6 | ) | $ | 1,993 |
|
Net income |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 107 |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
| 107 |
|
Other comprehensive loss, net of tax |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (17 | ) |
|
| - |
|
|
| 0 |
|
| (17 | ) |
Stock issuances, net of shares withheld for taxes |
|
| 1,112 |
|
|
| 0 |
|
|
| 9 |
|
|
| 0 |
|
|
| 0 |
|
|
| 288 |
|
|
| (8 | ) |
| 1 |
|
Share-based compensation |
| - |
|
|
| 0 |
|
|
| 19 |
|
|
| 0 |
|
| 0 |
|
| - |
|
|
| 0 |
|
| 19 |
| |||
Balance as of July 3, 2021 |
|
| 144,171 |
|
| $ | 0 |
|
| $ | 2,098 |
|
| $ | 182 |
|
| $ | (163 | ) |
|
| 1,188 |
|
| $ | (14 | ) | $ | 2,103 |
|
TheSee accompanying notes to the unaudited Notes to Consolidated Interim Financial Statements are an integral part of theseconsolidated financial statements.
97
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
Note 1. Organization, Operations, and Basis of Presentation
Business Description
Resideo Technologies, Inc. (“Resideo” or “the Company”), is a leading global manufacturer and developer of technology-driven products that provide critical comfort, residential thermal,energy, smoke and carbon monoxide detection home safety products, and security solutions to homes globally. The Company is also the leading wholesale distributor of low-voltage security products including intrusion, access control, fire detection, fire suppression, intrusion, and video products, and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, fire, power, audio, ProAV, networking, communications,and wire and cable, and data communications.cable. The Company has a global footprint serving commercial and residential end markets.
We acquired First Alert, Inc. (“First Alert”) on March 31, 2022. Refer toNote 11. Acquisitions for further detail on the First Alert acquisition.
The Company was incorporated in Delaware on April 24, 2018. The Company separated from Honeywell International Inc. (“Honeywell”) on October 29, 2018, 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”).
Basis of Presentation
The Company’saccompanying unaudited consolidated financial statements are presented on a consolidated basis (collectively, the “Interim Financial“Financial Statements”) and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted in the United States of Americaaccounting principles (“U.S. GAAP”). All intercompany transactions have been eliminated for all periods presented. The Interim Financial Statements are unaudited; however, incomplete financial statements. In the opinion of management, theythe unaudited consolidated financial statements included herein contain all the adjustments, (consistingwhich consist of those of a normal recurring nature) consideredadjustments, necessary to state fairly present the Company’s financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods.
The Company reports financial information on a fiscal quarter basis using a “modified” 4-4-5 calendar (modified inindicated. Operating results for the period from January 1, 2022 through July 2, 2022 are not necessarily indicative of the results that may be expected for the fiscal year always begins on January 1 and ends onending December 31) that requires its businesses to close their first, second, and third quarter books on a Saturday in order to minimize31, 2022.
During 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. In the event that differences in closing dates are material to year-over-year comparisons of quarterly or year-to-date results,three months ended July 2, 2022, the Company will provide appropriate disclosures.changed the presentation of intangible asset amortization. These expenses are now presented as a separate line on the unaudited consolidated statements of operations, whereas they were previously included in cost of goods sold and selling, general and administrative expenses. Prior periods have been reclassified to conform to the current period presentation. The reclassification decreased cost of goods sold by $7 million and $11 million, and decreased selling, general and administrative expenses by $2 million and $5 million for the three and six months ended July 2, 2022, respectively. The reclassification decreased cost of goods sold by $5 million and $12 million, and decreased selling, general and administrative expenses by $2 million and $4 million for the three and six months ended July 3, 2021, respectively. The reclassification had no impact on total operating costs, income from operations, net income, earnings per common share or total equity
Reclassification
The prior year segment information was recast. See Note 4. Segment Financial Data for additional information. Certain reclassifications have been made to the prior period amounts in the unaudited consolidated financial statements to conform to the classification adoptedcurrent presentation.
For additional information, refer to the consolidated financial statements and notes thereto included in the current period.Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2022.
Reporting Periods
The Company’s fiscal quarters are based on a four-four-five week calendar with the periods ending on the Saturday of the last week in the quarter except that December 31st will always be the year end date. Therefore, the financial results of certain fiscal quarters may not be comparable to prior year unaudited Consolidated Interim Statementsfiscal quarters.
8
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
Restricted Cash
The following table provides a reconciliation of Operations were reclassified to present researchcash, cash and development expenses as a separate line itemcash equivalents and restricted cash reported within the statements. Research and development expenses were formerly included within Selling, general and administrative expenses.consolidated balance sheets that total the amounts shown in the consolidated statements of cash flows (in millions):
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||
Cash and cash equivalents |
| $ | 251 |
|
| $ | 775 |
|
Restricted cash included in Other current assets (1) |
|
| 4 |
|
|
| 4 |
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cashflows |
| $ | 255 |
|
| $ | 779 |
|
|
|
|
|
|
|
|
Note 2. Summary of Significant Accounting Policies
The Company’s accounting policies are set forth in Note 2. Summary of Significant Accounting Policies of the Company’s Notes to Consolidated and Combined Financial Statements included in the 2020 Annual Report on Form 10-K.
Recent Accounting Pronouncements—The Company considers the applicability and impact of all recent accounting standards updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s consolidated financial position or results of operations.
10
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
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 along with its subsequent clarifications, is effective from March 12, 2020 through December 31, 2022 and is applicable for the Company’s A&R Senior Credit Facilities and Swap Agreements, which use LIBOR as a reference rate. The A&R Senior Credit Facilities include a transition clause to a new reference rate in the event LIBOR is discontinued and Swap Agreements will be amended to match the new reference rate. We have evaluated the potential impact of adopting this guidance, and we do not expect it to have a material impact on our consolidated financial statements. Refer to Note 13.15. Long-term Debt and Credit Agreement for further details on the Company’s Swap Agreements and A&R Senior Credit FacilitiesFacilities.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Note 14. Derivative InstrumentsContract Liabilities from Contracts with Customers. Under this guidance, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance is effective for further detailsinterim and annual periods beginning after December 15, 2022, with early adoption permitted. We adopted ASU 2021-08 effective April 1, 2022, on the Company's Swap Agreements.a prospective basis. The Company is currently evaluating the potential impact of adoption of this standard on itsour consolidated financial statements.statements, including accounting policies, processes, and systems, was not material.
9
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
Note 3. Revenue Recognition
Disaggregated Revenue
The Company has two operating segments, Products & Solutions and ADI Global Distribution. Disaggregated revenue information for Products & Solutions is presented by product grouping while ADI Global Distribution is presented by region. Beginning January 1, 2022, the Products & Solutions segment further disaggregated the Comfort product grouping into Air and Water and Residential Thermal Solutions is now referenced as Energy. As of April 1, 2022, the First Alert business is included in the results of operations as of its March 31, 2022 acquisition date in the Security and Safety grouping.
Revenues by geographyproduct grouping and business lineregion are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Comfort |
| $ | 303 |
|
| $ | 297 |
|
| $ | 877 |
|
| $ | 725 |
|
Security |
|
| 172 |
|
|
| 142 |
|
|
| 512 |
|
|
| 379 |
|
Residential Thermal Solutions |
|
| 156 |
|
|
| 133 |
|
|
| 446 |
|
|
| 341 |
|
Products & Solutions |
|
| 631 |
|
|
| 572 |
|
|
| 1,835 |
|
|
| 1,445 |
|
U.S. and Canada |
|
| 727 |
|
|
| 650 |
|
|
| 2,125 |
|
|
| 1,758 |
|
EMEA (1) |
|
| 128 |
|
|
| 129 |
|
|
| 402 |
|
|
| 338 |
|
APAC (2) |
|
| 10 |
|
|
| 11 |
|
|
| 30 |
|
|
| 29 |
|
ADI Global Distribution |
|
| 865 |
|
|
| 790 |
|
|
| 2,557 |
|
|
| 2,125 |
|
Net revenue |
| $ | 1,496 |
|
| $ | 1,362 |
|
| $ | 4,392 |
|
| $ | 3,570 |
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Products & Solutions Disaggregated Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Air |
| $ | 262 |
|
| $ | 206 |
|
| $ | 476 |
|
| $ | 397 |
|
Water |
|
| 81 |
|
|
| 89 |
|
|
| 172 |
|
|
| 177 |
|
Energy |
|
| 154 |
|
|
| 140 |
|
|
| 313 |
|
|
| 290 |
|
Security and Safety |
|
| 267 |
|
|
| 163 |
|
|
| 422 |
|
|
| 340 |
|
Total Products & Solutions |
| $ | 764 |
|
| $ | 598 |
|
| $ | 1,383 |
|
| $ | 1,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
ADI Global Distribution Disaggregated Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. and Canada |
|
| 791 |
|
|
| 731 |
|
|
| 1,543 |
|
|
| 1,398 |
|
EMEA (1) |
|
| 123 |
|
|
| 140 |
|
|
| 249 |
|
|
| 274 |
|
APAC (2) |
|
| 8 |
|
|
| 8 |
|
|
| 17 |
|
|
| 20 |
|
Total ADI Global Distribution |
|
| 922 |
|
|
| 879 |
|
|
| 1,809 |
|
|
| 1,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Net revenue |
| $ | 1,686 |
|
| $ | 1,477 |
|
| $ | 3,192 |
|
| $ | 2,896 |
|
(1) EMEA represents Europe, the Middle East and Africa.
(2) APAC represents Asia and Pacific countries.
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. ApproximatelyLess than 3% of the Company’s revenue is satisfied over time. As of OctoberJuly 2, 20212022 and September 26, 2020,July 3, 2021, contract assets and liabilities were not material.
Note 4. Segment Financial Data
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 monitormonitors its business operations through 2 operating segments,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, giveoperating segments follow the same accounting policies used for our consolidated financial statements. We evaluate a clearer view into the operationalsegment's performance of the two segments, and increase accountability for management ofon a U.S. GAAP basis based primarily upon operating income before corporate spending. As a result, the Company recast prior periods to conform with the new presentation.expenses.
Products & Solutions
—The Products & Solutions business is a leading global providerCorporate assets consist primarily of products, software solutionscash, investments, prepaid expenses, current and technologies that help homeowners stay connecteddeferred taxes and in control of their comfort, security,property, plant and energy use.equipment. These items are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, unallocated pension expense, restructuring charges, acquisition-related costs, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology, strategy, communications and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, and other income (expense).
ADI Global Distribution—The ADI Global Distribution business is the leading global distributor of low-voltage security products including intrusion, access control, and video products and participates significantly in the
1110
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
broader related markets of smart home, fire, access control, power, audio, ProAV, networking, communications, wire and cable, and data communications.
Corporate—Corporate includes 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.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Products & Solutions revenue |
| $ | 726 |
|
| $ | 674 |
|
| $ | 2,121 |
|
| $ | 1,715 |
|
Less: Intersegment revenue |
|
| 95 |
|
|
| 102 |
|
|
| 286 |
|
|
| 270 |
|
External Products & Solutions revenue |
|
| 631 |
|
|
| 572 |
|
|
| 1,835 |
|
|
| 1,445 |
|
External ADI Global Distribution revenue |
|
| 865 |
|
|
| 790 |
|
|
| 2,557 |
|
|
| 2,125 |
|
Total revenue |
| $ | 1,496 |
|
| $ | 1,362 |
|
| $ | 4,392 |
|
| $ | 3,570 |
|
The following table represents summary financial data attributable to the segments:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Operating profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Products & Solutions |
| $ | 157 |
|
| $ | 141 |
|
| $ | 416 |
|
| $ | 241 |
|
ADI Global Distribution |
|
| 73 |
|
|
| 56 |
|
|
| 198 |
|
|
| 135 |
|
Corporate |
|
| (63 | ) |
|
| (66 | ) |
|
| (196 | ) |
|
| (217 | ) |
Total |
| $ | 167 |
|
| $ | 131 |
|
| $ | 418 |
|
| $ | 159 |
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Products & Solutions |
|
| 764 |
|
|
| 598 |
|
|
| 1,383 |
|
|
| 1,204 |
|
ADI Global Distribution |
|
| 922 |
|
|
| 879 |
|
|
| 1,809 |
|
|
| 1,692 |
|
Total Net revenue: |
| $ | 1,686 |
|
| $ | 1,477 |
|
| $ | 3,192 |
|
| $ | 2,896 |
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Income from operations: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Products & Solutions |
| $ | 154 |
|
| $ | 129 |
|
| $ | 307 |
|
| $ | 259 |
|
ADI Global Distribution |
|
| 86 |
|
|
| 66 |
|
|
| 166 |
|
|
| 125 |
|
Corporate |
|
| (54 | ) |
|
| (74 | ) |
|
| (115 | ) |
|
| (133 | ) |
Total Income from operations: |
| $ | 186 |
|
| $ | 121 |
|
| $ | 358 |
|
| $ | 251 |
|
The Company’s Chief Operating Decision Maker 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.
Note 5. Stock-Based Compensation Plans
Restricted Stock Units (“RSUs”) and Performance Stock Unit (“PSUs”)
During the ninesix months ended OctoberJuly 2, 2021,2022, as part of the Company’s annual long-term compensation under 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”), it granted 500,227672,453 market-based RSUsPSUs and 1,125,1361,035,043 service-based RSUs to eligible employees. The weighted average grant date fair value per share for market-based RSUsPSUs and service-based RSUs was $42.8936.04 and $27.4124.54, respectively.
Stock OptionsAnnual awards to our key employees generally have a
three or
Duringfour year performance period. The fair value is based on the nine months ended October 2, 2021,Company’s stock price as part of the Company’s annual long-term compensation under the Stock Incentive Plan, 150,000 stock options were granted to eligible employees at a weighted average exercise price per sharedate of $25.48 and weighted average grant date fair value per share of $7.69.grant.
12
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
Note 6. Leases
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.inflation. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company’s operating lease costsexpense for the three and ninesix months ended OctoberJuly 2, 20212022 and September 26, 2020July 3, 2021 consisted of the following:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| October 2, |
|
| September 26, |
| October 2, |
|
| September 26, |
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| |||||||||
Cost of goods sold |
| $ | 5 |
|
| $ | 5 |
|
| $ | 13 |
|
| $ | 13 |
|
| $ | 7 |
|
| $ | 4 |
|
| $ | 10 |
|
| $ | 8 |
|
Selling, general and administrative |
|
| 12 |
|
|
| 13 |
|
|
| 34 |
|
|
| 33 |
|
|
| 13 |
|
|
| 10 |
|
|
| 25 |
|
| $ | 22 |
|
Total operating lease costs |
| $ | 17 |
|
| $ | 18 |
|
| $ | 47 |
|
| $ | 46 |
| ||||||||||||||||
Total operating lease expense |
| $ | 20 |
|
| $ | 14 |
|
| $ | 35 |
|
| $ | 30 |
|
Total operating lease costs includeexpense includes variable lease costsexpense of $5 million and $139 million for the three and ninesix months ended OctoberJuly 2, 2021.2022, respectively. For the three and ninesix months ended September 26, 2020,July 3, 2021, total operating lease costs
11
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
expense include variable lease costsexpense of $54 million and $128 million, respectively. Total operating lease costsexpense also include offsetting sublease income which is immaterial for the three and ninesix months ended OctoberJuly 2, 20212022 and September 26, 2020.July 3, 2021.
The Company recognized the following related to its operating leases:
|
| Financial |
| At October 2, |
|
| At December 31, |
|
| Financial |
| As of July 2, |
|
| As of December 31, |
| ||||
Operating right-of-use assets |
| Other assets |
| $ | 134 |
|
| $ | 133 |
|
| Other assets |
| $ | 172 |
|
| $ | 141 |
|
Operating lease liabilities - current |
| Accrued liabilities |
| $ | 33 |
|
| $ | 33 |
|
| Accrued liabilities |
| $ | 36 |
|
| $ | 32 |
|
Operating lease liabilities - noncurrent |
| Other liabilities |
| $ | 112 |
|
| $ | 107 |
|
| Other long-term liabilities |
| $ | 146 |
|
| $ | 120 |
|
Maturities of the Company’s operatingFuture minimum lease liabilities werepayments under non-cancelable leases are as follows:
|
| At October 2, |
| |
2021 |
| $ | 10 |
|
2022 |
|
| 39 |
|
2023 |
|
| 34 |
|
2024 |
|
| 23 |
|
2025 |
|
| 17 |
|
Thereafter |
|
| 46 |
|
Total lease payments |
|
| 169 |
|
Less: imputed interest |
|
| 24 |
|
Present value of operating lease liabilities |
| $ | 145 |
|
Weighted-average remaining lease term (years) |
|
| 5.75 |
|
Weighted-average incremental borrowing rate |
|
| 5.39 | % |
13
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
|
| As of July 2, |
| |
2022 (excluding the six months ended July 2, 2022) |
| $ | 22 |
|
2023 |
|
| 42 |
|
2024 |
|
| 33 |
|
2025 |
|
| 28 |
|
2026 |
|
| 24 |
|
Thereafter |
|
| 66 |
|
Total future minimum lease payments |
|
| 215 |
|
Less: imputed interest |
|
| 33 |
|
Present value of future minimum lease payments |
| $ | 182 |
|
Weighted-average remaining lease term (years) |
|
| 6.36 |
|
Weighted-average incremental borrowing rate |
|
| 5.28 | % |
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
|
| Nine Months Ended |
| |||||
|
|
|
| October 2, 2021 |
|
| September 26, 2020 |
| ||
Operating cash outflows |
|
|
| $ | 25 |
|
| $ | 22 |
|
Operating right-of-use assets obtained in exchange for operating lease liabilities |
|
|
| $ | 31 |
|
| $ | 22 |
|
|
|
|
| Six Months Ended |
| |||||
|
|
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
| ||
Cash outflows for operating leases |
|
|
| $ | 16 |
|
| $ | 17 |
|
Non-cash activities: |
|
|
|
|
|
|
|
| ||
Right of use assets obtained in exchange for new operating lease liabilities |
|
|
| $ | 56 |
|
| $ | 17 |
|
As of October 2, 2021, 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 three and nine months ended October 2, 2021 and September 26, 2020 was not material.
Note 7. Income Taxes
The Company recorded tax expense of $2937 million and $7671 million for the three and ninesix months ended OctoberJuly 2, 2022, respectively. The Company recorded tax expense of $23 million and $47 million for the three and six months ended July 3, 2021, respectively.
For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by the Company’s forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where the Company expects to report losses for which the Company does not expect to receive tax benefits, the Company is required to applyapplies separate forecasted effective tax rates to those jurisdictions rather than including them in the consolidated forecasted effective tax rate.
12
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
For the three months ended OctoberJuly 2, 20212022, the net tax expense of $2937 million consists primarily of interim period tax expense of $32 million based on year-to-date pretax income multiplied by the Company’s forecasted effective tax rate, partially offset by a tax benefit specific to the period of approximately $3 million consisting primarily of changes in estimates related to prior years.rate. In addition to items specific to the period, the Company’s income tax rate is impacted by the mix of earnings across the jurisdictions in which the Company operates, non-deductible expenses, and U.S. taxation of foreign earnings.
For the ninesix months ended OctoberJuly 2, 2021,2022, the net tax expense of $7671 million consists primarily of interim period tax expense of $80 million based on year-to-date pretax income multiplied by the Company’s forecasted effective tax rate, offset by tax benefits specific to the period of approximately $4 million, consisting primarily of excess deductions for share-based compensation and changes in estimates related to prior years.rate. In addition to items specific to the period, the Company’s income tax rate is impacted by the mix of earnings across the jurisdictions in which the Company operates, non-deductible expenses, and U.S. taxation of foreign earnings.
Note 8. Other Expense, Net
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Reimbursement Agreement expense |
| $ | 39 |
|
| $ | 38 |
|
| $ | 111 |
|
| $ | 107 |
|
Loss on extinguishment of debt |
|
| 18 |
|
|
| - |
|
|
| 41 |
|
|
| - |
|
Other |
|
| 1 |
|
|
| (3 | ) |
|
| (22 | ) |
|
| (1 | ) |
|
| $ | 58 |
|
| $ | 35 |
|
| $ | 130 |
|
| $ | 106 |
|
14
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
Note 9. Earnings (Loss) Per Common 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):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Net income (loss) |
| $ | 68 |
|
| $ | 75 |
|
| $ | 175 |
|
| $ | (22 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Shares used in computing basic earnings per share |
|
| 144,284 |
|
|
| 123,421 |
|
|
| 143,865 |
|
|
| 123,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive effect of common stock equivalents |
|
| 4,275 |
|
|
| 1,814 |
|
|
| 4,395 |
|
|
| - |
|
Shares used in computing diluted earnings per share |
|
| 148,559 |
|
|
| 125,235 |
|
|
| 148,260 |
|
|
| 123,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.47 |
|
| $ | 0.61 |
|
| $ | 1.22 |
|
| $ | (0.18 | ) |
Diluted |
| $ | 0.46 |
|
| $ | 0.60 |
|
| $ | 1.18 |
|
| $ | (0.18 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Numerator for Basic and Diluted Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 94 |
|
| $ | 58 |
|
| $ | 181 |
|
| $ | 107 |
|
Denominator for Basic and Diluted Earnings Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average basic number of shares outstanding |
|
| 145,457 |
|
|
| 143,939 |
|
|
| 145,286 |
|
|
| 143,657 |
|
Add: dilutive effect of stock equivalents |
|
| 3,372 |
|
|
| 4,389 |
|
|
| 3,550 |
|
|
| 4,393 |
|
Weighted average diluted number of shares outstanding |
|
| 148,829 |
|
|
| 148,328 |
|
|
| 148,836 |
|
|
| 148,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.65 |
|
| $ | 0.40 |
|
| $ | 1.25 |
|
| $ | 0.74 |
|
Diluted |
| $ | 0.63 |
|
| $ | 0.39 |
|
| $ | 1.22 |
|
| $ | 0.72 |
|
Diluted earnings per common share is computed based upon the weighted average number of common shares outstanding for the period 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 three and ninesix months ended OctoberJuly 2, 20212022 and September 26, 2020. 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.July 3, 2021. For the three and ninesix months ended OctoberJuly 2, 2021,2022, average options and other rights to purchase approximately 0.20.9 million shares of common stock were outstanding and anti-dilutive, and therefore excluded from the computation of diluted earnings per common share. In addition, an average of approximately 0.81.0 million and 0.70.9 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and ninesix months ended OctoberJuly 2, 20212022, respectively, as the contingency hashad not been satisfied. For the three and ninesix months ended September 26, 2020,July 3, 2021, average options and other rights to purchase approximately 1.1 million and 3.60.1 million shares of common stock respectively, were outstanding and anti-dilutive, and therefore excluded from the computation of diluted income per common share. An average of approximately 0.80.9 million and 0.60.8 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and ninesix months ended September 26, 2020,July 3, 2021, respectively, as the contingency hashad not been satisfied.
13
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
Note 9. Inventories, Net
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||
Raw materials |
| $ | 264 |
|
| $ | 174 |
|
Work in process |
|
| 24 |
|
|
| 17 |
|
Finished products |
|
| 683 |
|
|
| 549 |
|
Total Inventories, Net |
| $ | 971 |
|
| $ | 740 |
|
Note 10. Inventories—Property, Plant, and Equipment, Net
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||
Machinery and equipment |
| $ | 641 |
|
| $ | 602 |
|
Buildings and improvements |
|
| 297 |
|
|
| 292 |
|
Construction in progress |
|
| 60 |
|
|
| 35 |
|
Other |
|
| 8 |
|
|
| 4 |
|
Total Gross Property, Plant, and Equipment |
|
| 1,006 |
|
|
| 933 |
|
Accumulated depreciation |
|
| (643 | ) |
|
| (646 | ) |
Property, Plant, and Equipment, Net |
| $ | 363 |
|
| $ | 287 |
|
Depreciation expense for the three and six months ended July 2, 2022 and July 3, 2021 were $29 million and $15 million, respectively.
Note 11. Acquisitions
|
| October 2, 2021 |
|
| December 31, 2020 |
| ||
Raw materials |
| $ | 161 |
|
| $ | 127 |
|
Work in process |
|
| 18 |
|
|
| 19 |
|
Finished products |
|
| 531 |
|
|
| 526 |
|
|
| $ | 710 |
|
| $ | 672 |
|
On February 6, 2022, the Company announced it had entered into a definitive agreement to purchase 100% of the issued and outstanding capital stock of First Alert, a leading provider of home safety products. The acquisition closed on March 31, 2022 for an aggregate cash purchase price of $614 million (including preliminary post-closing adjustments of $6 million). First Alert is expected to expand and leverage the Company's footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products. The business is included within the Products & Solutions segment.
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the date of the acquisition. The Company preliminarily determined the fair value of the tangible and intangible assets and liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values as follows:
Cash and other current assets |
| $ | 4 |
|
Accounts receivable, net |
|
| 72 |
|
Inventories, net |
|
| 117 |
|
Property, plant and equipment |
|
| 87 |
|
Goodwill (1) |
|
| 72 |
|
Other intangible assets, net |
|
| 349 |
|
Other assets (non-current) |
|
| 37 |
|
Total assets |
|
| 738 |
|
Accounts payable |
|
| 55 |
|
Accrued liabilities |
|
| 33 |
|
Other liabilities |
|
| 36 |
|
Total liabilities |
|
| 124 |
|
Net asset acquired (2) |
| $ | 614 |
|
(1) The $72 million of preliminary goodwill was allocated to the Products & Solutions segment. Goodwill from this acquisition is partially deductible for tax purposes.
14
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
(2) Reflects preliminary purchase price allocation.
First Alert contributed $113 million in net revenue for the three months ended July 2, 2022. The net income for the period was not material. On a pro forma basis, First Alert's net revenue for the three months ended April 2, 2022 and the twelve months ended December 31, 2021 was $110 million and $395 million, respectively. The pro forma net income for both periods was not material.
The Company expensed approximately $10 million of costs related to the acquisition of First Alert during the six months ended July 2, 2022. These costs, which consist primarily of advisory, insurance, and legal fees, are included in Selling, general and administrative expenses in the accompanying unaudited Consolidated Statements of Operations.
On February 14, 2022, the Company acquired 100% of the outstanding equity of Arrow Wire and Cable Inc. (“Arrow”), a leading regional distributor of data communications, connectivity and security products, for an aggregate cash purchase price of $15 million. The business is included within the ADI Global Distribution segment and is expected to strengthen the Company’s global distribution portfolio in the data communications category with an assortment of copper and fiber cabling and connectivity, connectors, racking solutions, and network equipment. The Company is still assessing the final allocation of the purchase price to the assets and liabilities of the business.
Note 12. Goodwill and Other Intangible Assets, Net
The Company's goodwill balance and changes in the carrying amount of goodwill by segment are as follows (in millions):
|
| Products & Solutions |
|
| ADI Global Distribution |
|
| Total |
| |||
Balance as of December 31, 2021 |
| $ | 2,010 |
|
| $ | 651 |
|
| $ | 2,661 |
|
Adjusted Goodwill from acquisitions |
|
| 72 |
|
|
| 7 |
|
|
| 79 |
|
Currency translation |
|
| (34 | ) |
|
| (11 | ) |
|
| (45 | ) |
Balance as of July 2, 2022 |
| $ | 2,048 |
|
| $ | 647 |
|
| $ | 2,695 |
|
The table that follows presents the major components of intangible assets as of July 2, 2022 and December 31, 2021. Intangible assets that are fully amortized have been removed from the disclosures.
15
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
|
| Range of Life (Years) |
| Weighted Average Amortization Period (Years) |
| Cost |
|
| Accumulated |
|
| Net |
| |||
As of July 2, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other intangible assets, net: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Patents and technology |
| 3-10 |
| 10 |
| $ | 64 |
|
| $ | (24 | ) |
| $ | 40 |
|
Customer relationships |
| 7-15 |
| 14 |
|
| 294 |
|
|
| (107 | ) |
|
| 187 |
|
Trademarks (1) |
| 10-Indefinite |
| 10 |
|
| 194 |
|
|
| (8 | ) |
|
| 186 |
|
Software |
| 2-7 |
| 6 |
|
| 164 |
|
|
| (114 | ) |
|
| 50 |
|
Total intangible assets |
|
|
|
|
| $ | 716 |
|
| $ | (253 | ) |
| $ | 463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
As of December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other intangible assets, net: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Patents and technology |
| 3-10 |
| 9 |
| $ | 31 |
|
| $ | (23 | ) |
| $ | 8 |
|
Customer relationships |
| 7-15 |
| 14 |
|
| 162 |
|
|
| (106 | ) |
|
| 56 |
|
Trademarks |
| 10 |
| 10 |
|
| 14 |
|
|
| (8 | ) |
|
| 6 |
|
Software |
| 2-7 |
| 6 |
|
| 162 |
|
|
| (112 | ) |
|
| 50 |
|
Total intangible assets |
|
|
|
|
| $ | 369 |
|
| $ | (249 | ) |
| $ | 120 |
|
The Company uses the straight-line method of amortization and expects to recognize amortization expense over the next five fiscal years as follows (in millions):
2022 (excluding the six months ended July 2, 2022) |
| $ | 19 |
|
2023 |
|
| 44 |
|
2024 |
|
| 32 |
|
2025 |
|
| 31 |
|
2026 |
|
| 27 |
|
Note 11.13. Accrued Liabilities
|
| October 2, 2021 |
|
| December 31, 2020 |
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||||
Obligations payable under Indemnification Agreements |
| $ | 140 |
| $ | 140 |
|
| $ | 140 |
|
| $ | 140 |
| |
Taxes payable |
| 55 |
| 62 |
|
|
| 52 |
|
|
| 54 |
| |||
Compensation, benefit and other employee-related |
| 105 |
| 105 |
|
|
| 88 |
|
|
| 114 |
| |||
Customer rebate reserve |
| 73 |
| 91 |
|
|
| 77 |
|
|
| 94 |
| |||
Litigation reserve |
| 55 |
| 3 |
| |||||||||||
Restructuring reserve |
| 10 |
| 24 |
| |||||||||||
Current operating lease liability |
|
| 36 |
|
|
| 32 |
| ||||||||
Other |
|
| 179 |
|
|
| 170 |
|
|
| 187 |
|
|
| 167 |
|
|
| $ | 617 |
|
| $ | 595 |
| ||||||||
Total Accrued liabilities |
| $ | 580 |
|
| $ | 601 |
|
Refer to Note 12.14. Commitments and Contingencies for further details on Obligations payable under Indemnification Agreements.
Note 12.14. 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 and 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
16
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
expenses for sites owned and operated by Resideo are presented within Cost of goods sold for operating sites. For the three and ninesix months ended OctoberJuly 2, 20212022 and September 26, 2020,July 3, 2021, environmental expenses related to these operating sites were not material. Liabilities for environmental costs were $22 million as of OctoberJuly 2, 20212022 and December 31, 2020.
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 unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.2021.
Obligations Payable Under Indemnification Agreements
The indemnification and reimbursement agreement (the “Reimbursement Agreement”) and the tax matters agreement (the “Tax Matters Agreement”) (collectively, the “Indemnification Agreements”) are described below.
Reimbursement Agreement
On October 29, 2018, inIn connection with the Spin-Off, the Company entered into the Reimbursement Agreement with Honeywell 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. See Note 19.17. Commitments and Contingencies in the Company’s 20202021 Annual Report on Form 10-K for further discussion.
16
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
The following table summarizes information concerning the Company’s Reimbursement Agreement liabilities:
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Beginning balance |
| $ | 591 |
|
| $ | 585 |
|
| $ | 597 |
|
| $ | 591 |
|
Accruals for indemnification liabilities deemed probable and reasonably estimable |
|
| 111 |
|
|
| 107 |
|
|
| 86 |
|
|
| 72 |
|
Indemnification payment |
|
| (105 | ) |
|
| (70 | ) |
|
| (70 | ) |
|
| (70 | ) |
Ending balance (1) |
| $ | 597 |
|
| $ | 622 |
|
| $ | 613 |
|
| $ | 593 |
|
For the three and ninesix months ended OctoberJuly 2, 2022, net expenses related to the Reimbursement Agreement were $45 million and $86 million, respectively, and for the three and six months ended July 3, 2021, net expenses related to the Reimbursement Agreement were $3936 million and $111 million, respectively, and for the three and nine months ended September 26, 2020, net expenses related to the Reimbursement Agreement were $38 million and $10772 million, respectively, and are recorded in Other expense, net.
Reimbursement Agreement liabilities are included in the following balance sheet accounts:
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||
Accrued liabilities |
| $ | 140 |
|
| $ | 140 |
|
Obligations payable under Indemnification Agreements |
|
| 473 |
|
|
| 457 |
|
|
| $ | 613 |
|
| $ | 597 |
|
17
|
| October 2, 2021 |
|
| December 31, 2020 |
| ||
Accrued liabilities |
| $ | 140 |
|
| $ | 140 |
|
Obligations payable under Indemnification Agreements |
|
| 457 |
|
|
| 451 |
|
|
| $ | 597 |
|
| $ | 591 |
|
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
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 such indemnification liability payments can be determined although they could be material to the Company’s unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.
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 certain taxes, including certain 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. As of OctoberJuly 2, 20212022 and December 31, 2020,2021, the Company had an indemnityhas recorded a liability owedin respect to Honeywell for future tax paymentsthe Tax Matters Agreement of $130128 million, and $139 million, respectively, which is included in Obligations payable under Indemnification Agreements.
Trademark Agreement
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 ofwhich is generally equal to 1.5% on net revenue to Honeywell related to such licensed products which is recorded in Selling, general and administrative expenseexpenses on the unaudited Consolidated Interim Statements of Operations. For the three and ninesix months ended OctoberJuly 2, 2021,2022, royalty fees were $5 million and $1411 million, respectively. For the three and ninesix months ended September 26, 2020,July 3, 2021, royalty fees were $74 million and $189 million, respectively.
17
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
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 or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis 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 arewere named defendants ofin a class action securities suit that was filed 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 defendants filed a motion to dismiss theamended complaint on July 10, 2020. On March 30, 2021, United States District Judge Wilhelmina M. Wright issued an orderasserted claims under Section 10(b) and decision denying the motion to dismiss. On April 13, 2021, the Defendants filed an answer inSection 20(a) of the Securities Litigation.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. Following a court-approved settlement resolving the Securities Litigation, on March 25, 2022, the court entered a final judgement, which was amended to provide a dismissal of the Securities Litigation with prejudice on April 14, 2022.
On July 30, 2021, the Company executed a term sheet with plaintiffs’ representatives setting forth an agreement in principle to settle the claims alleged in the complaint, as amended. The total amount to be paid in settlement of the claims as set forth in the agreement in principle is $55 million. Insurance recoveries of approximately $39 million are expected related to the settlement. The claim settlement payment and related insurance recoveries are recorded in Accrued liabilities and Other current assets, respectively. The net expense of $16 million from the claim settlement and related insurance recoveries is recorded in Selling, general and administrative expenses.
On August 18, 2021 the Company and plaintiffs’ representative executed a definitive Stipulation and Agreement of Settlement reflecting the terms of the agreement in principle and other customary terms and conditions (the “Settlement”). That same day, on August 18, 2021, the plaintiffs’ representatives filed a motion with the Court seeking preliminary approval of the Settlement. The motion for preliminary approval was deemed fully submitted by the Court on September 14, 2021. On October 21, 2021, the Court granted preliminary approval of the Settlement and scheduled the Settlement hearing for January 27, 2022. The Company intends to vigorously pursue approval of the Settlement, but there can be no assurance that court approval will be granted.
Certain current or former directors and officers of the Company arewere defendants in a consolidated derivative action pending in the District Court for the District of Delaware under the caption In re Resideo Technologies, Inc. Derivative Litigation 20-cv-00915 (the “Federal Derivative Action”), which has been stayed by agreement of the parties.
. On September 21,23, 2021, the parties filed a stipulation requesting the Federal Derivative Action bewas transferred to the District of Minnesota, where the Securities Litigation is pending, to reserve judicial resources and for the convenience of the parties. The Court ordered the transfer of the Federal Derivative Action on September 23, 2021. The Company intends to defend this action vigorously, but there can be no assurance that the defense will be successful.
was pending. On September 1, 2021, an additional shareholder derivative complaint was filed by Riviera Beach, part of the leadership group in the Federal Derivative Action, and
18
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
City of Hialeah Employees Retirement System against certain current or former directors and officers of the Company in the District of Minnesota, alleging substantially that the same facts and making substantially the same claims against the same defendants as in the Federal Derivative Action, and additionally referencing board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8. The parties intend to seek consolidation of that action, captioned Riviera8 (the “Riviera Beach Police Pension Fund v. Nefkens, 21-cv-1965, andAction”). On December 1, 2021, the Federal Derivative Action and the Riviera Beach Action were consolidated into a single action under the caption: In re Resideo Technologies, Inc. Derivative Litigation (the “Consolidated Federal Derivative Action”) and was stayed pending entry of final judgement in the Minnesota Court. The Company intendsSecurities Litigation. On April 19, 2022, after entry of the final judgement in the Securities Litigation, the court entered the parties’ stipulation suspending all deadlines in the case for sixty days to defend this action vigorously, but there can be no assurance thatfacilitate settlement discussions. On July 8, 2022, the defense will be successful.parties participated in a status conference with the Court, following which, on July 19, 2022, the Court entered a sealed order extending the stay and addressing certain matters in respect of the ongoing settlement discussions.
On June 25, 2021, the Bud & Sue Frashier Family Trust U/A DTD 05/05/98, filed a shareholder derivative complaint against certain current or former directors and officers of the Company in the Court of Chancery of the
18
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
State of Delaware, captioned Bud & Sue Frashier Trust U/A DTD 05/05/98 v. Fradin, 2021-0556 (“Delaware Chancery Derivative Action”). The Delaware Chancery Derivative Action alleges substantially the same facts and makes substantially the same claims as the Federal Derivative Action, and additionally references board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8. The Delaware Chancery Derivative Action remains stayed by agreementorder of the parties. TheCourt.
While the Company is engaged in discussions concerning potential settlement of the Federal Derivative Action and the Delaware Chancery Derivative Action, there can be no guarantees that a settlement will be reached or approved. In the event that no settlement is reached, the Company intends to defend this actionthese actions vigorously, but there can be no assurance that the defense will be successful.
On August 20, 2021, Alice Burstein, a purported shareholder of the Company, sent a letter demanding that the Company’s Board of Directors undertake an independent internal investigation into certain current or former directors of the Company for violations of state and/or federal law related to the same conduct alleged in the Securities Litigation and derivative complaints (the “Demand Letter”). On September 13, 2021, the Company responded to the Demand Letter stating that the Board had reviewed and considered the demand and determined the best interests of the shareholders and the Company would be served by deferring an investigation pending adjudication or resolution of the outstanding derivative actions.
See Note 19.17. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in the Company’s 20202021 Annual Report on Form 10-K for further discussion of these matters.
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:
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Beginning of period |
| $ | 22 |
|
| $ | 25 |
|
| $ | 23 |
|
| $ | 22 |
|
Accruals for warranties/guarantees issued during the year |
|
| 12 |
|
|
| 13 |
|
|
| 11 |
|
|
| 8 |
|
Adjustment of pre-existing warranties/guarantees |
|
| (1 | ) |
|
| - |
| ||||||||
Settlement of warranty/guarantee claims |
|
| (13 | ) |
|
| (12 | ) | ||||||||
Additions from acquisitions |
|
| 14 |
|
|
| - |
| ||||||||
Settlements and adjustments |
|
| (13 | ) |
|
| (10 | ) | ||||||||
End of period |
| $ | 20 |
|
| $ | 26 |
|
| $ | 35 |
|
| $ | 20 |
|
19
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2022
(In millions, unless otherwise noted)
(Unaudited)
Note 13.15. Long-term Debt and Credit Agreement
The Company’s long-term debt as of OctoberJuly 2, 20212022 and December 31, 20202021 consisted of the following:
|
| October 2, 2021 |
|
| December 31, 2020 |
|
| July 2, 2022 |
|
| December 31, 2021 |
| ||||
4.000% notes due 2029 |
| $ | 300 |
|
| $ | 0 |
|
| $ | 300 |
|
| $ | 300 |
|
6.125% notes due 2026 |
| 0 |
|
|
| 400 |
| |||||||||
Five-year variable rate term loan A due 2023 |
| 0 |
|
|
| 315 |
| |||||||||
Seven-year variable rate term loan B due 2025 |
| 0 |
|
|
| 465 |
| |||||||||
Seven-year variable rate term loan B due 2028 |
| 945 |
|
|
| 0 |
| |||||||||
Seven-year variable rate A&R Term B Facility |
|
| 1,137 |
|
|
| 943 |
| ||||||||
Unamortized deferred financing costs |
|
| (13 | ) |
|
| (18 | ) |
|
| (15 | ) |
|
| (13 | ) |
Total outstanding indebtedness |
| 1,232 |
|
|
| 1,162 |
|
|
| 1,422 |
|
|
| 1,230 |
| |
Less: Amounts expected to be paid within one year |
|
| 10 |
|
|
| 7 |
|
|
| 12 |
|
|
| 10 |
|
Total long-term debt due after one year |
| $ | 1,222 |
|
| $ | 1,155 |
|
| $ | 1,410 |
|
| $ | 1,220 |
|
On February 12,As of July 2, 2022 and July 3, 2021, the Company entered into an amendedinterest rate for the Amendment and restated credit agreement (the “A&R Credit Agreement”). The A&R CreditRestatement 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”(“A&R”) and (ii) a five-year senior secured revolving
19
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the A&R Term B Facility the “A&R Senior Credit Facilities”).(defined below) was
The A&R Credit Agreement replaces the five-year variable rate term loan A due 2023, the seven-year variable rate term loan B due 2025 and the five-year senior secured first-lien revolving credit facility.
In addition to paying interest on outstanding borrowings under the A&R Revolving Credit Facility, the Company is 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.
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 0.53.59% and (3) the one month adjusted LIBOR rate, plus 1.002.75% 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), respectively, and1.25% 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.
The A&R Credit Agreement contains certain financial maintenance covenants and affirmative and negative covenants customary for financings of this type. All obligations under the A&R Senior Credit Facilities are unconditionally guaranteed jointly and severally by the Company and substantially all of the direct and indirect wholly owned subsidiaries of the Company that are organized under the laws of the United States (collectively, the “Guarantors”). The A&R Senior Credit Facilities are secured on a first priority basis by the equity interests of each direct subsidiary of the Company, as well as the tangible and intangible personal property and material real property of the Company and each of the Guarantors.
As of October 2, 2021, there were 0 borrowings and 0 letters of credit issued under the A&R Revolving Credit Facility. At October 2, 2021Facility (as defined below). During the interest rate for the A&R Term B Facility was 2.75%
On February 16,six months ended July 3, 2021, the Company redeemed $140 million in principal amount of the 6.125% senior unsecured notes (the “Senior Notes due 2026”) at a redemption price of 106.125% of par plus accrued interest.
As a result of the Senior Notes due 2026 redemption and the execution of the A&R Credit Agreement,incurred debt extinguishment costs of $23 million were incurred duringrelated to the three months ended April 3, 2021execution of the A&R Credit Agreement (as defined below) and were recorded in Other expense, net.
On August 26, 2021,a partial redemption of previously outstanding senior notes. As of July 2, 2022, the Company redeemedwas in compliance with all covenants related to the remaining $260 million in principal amount ofA&R Credit Agreement and the Senior Notes due 2026 at a redemption price2029 (as defined below).
The Company assessed the amounts recorded under the Amendment and Restatement Agreement Term B Facility, the Senior Notes due 2029, and the A&R Revolving Credit Facility. The Company determined that the A&R Revolving Credit Facility approximated fair value. As of 105.594% of par plus accrued interest. As a result, debt extinguishment costsJuly 2, 2022, the A&R Term B Facility and the Senior Notes due 2029 had approximate fair values of $181,100 million were incurred duringand $236 million, respectively. The fair values of the three months ended Octoberdebt are based on the quoted inactive prices and are therefore classified as Level 2 2021.within the valuation hierarchy.
Senior Notes due 2029
On August 26, 2021, the Company issued $300 million in principal amount of 4% senior unsecured notes due in 2029 (the “Senior Notes due 2029”). The Senior Notes due 2029 are senior unsecured obligations of Resideo guaranteed by Resideo’s existing and future domestic subsidiaries and rank equally with all of Resideo’s senior unsecured debt and senior to all of Resideo’s subordinated debt.
Before September 1, 2024
Credit Agreement
On February 12, 2021, the Company may, at its option, redeementered into an Amendment and Restatement Agreement with JP Morgan Chase Bank N.A. as administrative agent (the “A&R Credit Agreement”). This agreement effectively replaced the Senior Notes due 2029Company’s previous senior secured credit facilities.
The A&R Credit Agreement provides for a (i) seven-year senior secured term B loan facility in whole or in part at a redemption price equal to 100% of thean aggregate principal amount of the Senior Notes due 2029 redeemed, plus accrued$950 million (the “A&R Term B Facility”) and unpaid interest, if any, plus(ii) a “make-whole” premium. On or after September 1, 2024 Resideo may, at its option, redeem the Senior Notes due 2029five-year senior secured revolving credit facility in whole or in part at a redemption price equal to 100% of thean aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the A&R Term B Facility, the “A&R Senior Notes due 2029 plus accrued and unpaid interest, plus a fixed redemption percentage onCredit Facilities”).
On March 28, 2022, the A&R Credit Agreement was further amended to include an additional aggregate principal amount of the Senior Notes due 2029 redeemed of (i) $102% if redeemed during the twelve-month period beginning on200 million in the loans.
Refer to Note 18. Long-Term Debt and Credit Agreement in the Company’s 2021 Annual Report on Form 10-K for further discussion regarding the Company’s long-term debt and credit agreement.
20
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
September 1, 2024 (ii) 101% if redeemed during the twelve-month period beginning on September 1, 2025, (iii) 100% if redeemed on or after November 1, 2026.
The Senior Notes due 2029 limit the Company and its restricted subsidiaries’ ability to, among other things, incur additional secured indebtedness and issue preferred stock; enter into certain sale and leaseback transactions; incur liens; and consolidate, merge or sell all or substantially all of their assets. These covenants are subject to a number of limitations and exceptions. Additionally, upon certain events constituting a change of control together with a ratings downgrade, the holders of the Senior Notes due 2029 have the right to require the Company to offer to repurchase the Senior Notes due 2029 at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, to (but not including) the date of purchase.
The Company incurred approximately $4 million in debt issuance costs related to the Senior Notes due 2029. The debt issuance costs associated with the Senior Notes due 2029 are recorded as a reduction of the principal balance of the debt. All issuance costs are being amortized through interest expense for the term of the Senior Notes due 2029.
The Company assessed the amounts recorded under the A&R Term B Facility, the Senior Notes due 2029, and the Revolving Credit Facility. The Company determined that the Revolving Credit Facility approximated fair value. The A&R Term B Facility and the Senior Notes due 2029’s fair values are approximately $948 million and $295 million, respectively. The fair values of the debt are based on the quoted inactive prices and are therefore classified as LevelJuly 2, within the valuation hierarchy.
21
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS2022
(In millions, unless otherwise noted)
(Unaudited)
Note 14.16. Derivative Instruments
The Company uses interest rate swap agreements to manage exposure to interest rate risks. The Company does not use interest rate swap agreements for speculative or trading purposes. The gain or loss on the interest rate swaps that qualify as derivatives is recorded in Accumulated other comprehensive loss and is subsequently recognized as Interest expense in the Interim Consolidated Statements of Operations when the hedged exposure affects earnings. If the related debt or the interest rate swap is terminated prior to maturity, the fair value of the interest rate swap recorded in Accumulated other comprehensive loss may be recognized in the Consolidated Interim Statements of Operations based on an assessment of the agreements at the time of termination.
InOn March 31, 2021, the Company entered into 8 interest rate swap agreements (the “Swap Agreements”) with several financial institutions for a combined notional value of $560 million. The effect of the Swap Agreements is to convert a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over terms ranging from threetwo to fivefour years. The Swap Agreements are adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs primarily including the forward LIBOR curve available to swap dealers. Contract gains recognized in other comprehensive income (loss) totaled $1 million and amounts$24 million for the three and six months ended July 2, 2022, respectively. Contract gains or losses recognized in other comprehensive income (loss) were immaterial for the three and six months ended July 3, 2021, respectively. Amounts reclassified from Accumulated other comprehensive loss into earnings were not material for any of the periods presented. The fair value of the Swap Agreements at Octoberas of July 2, 2022 was $31 million, of which $9 million was recognized in Other current assets and $22 million was recognized in Other assets. The fair value of the Swap Agreements as of July 3, 2021 was not material.immaterial. Amounts expected to be reclassified into earnings in the next 12 months were not material as of OctoberJuly 2, 2021.2022.
Note 15.17. Pension
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. The pension obligations as of OctoberJuly 2, 20212022 and December 31, 20202021 were $166109 million and $168115 million, respectively, and are included in Other liabilities in the unaudited Consolidated Interim Balance Sheets. Net
The service cost component of the net periodic benefit cost recognized in Comprehensive income (loss) for the three and ninesix months ended OctoberJuly 2, 2022 and July 3, 2021 iswas $27 million and $715 million, respectively. Net periodic benefit costrespectively, and is recognized in Comprehensive income (loss) forwhere the three and nine months ended September 26, 2020 was $2 million and $6 million, respectively.
related employee compensation expenses are recognized. The other components of net periodic benefit costs other than the service cost are includedrecognized in Otherother expense, net innet. These costs were not material for any of the unaudited Consolidated Interim Statements of Operations for the three and nine months ended October 2, 2021 and September 26, 2020.periods presented.
2221
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except per share amounts)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand the results of operations and financial condition of Resideo Technologies, Inc. and its consolidated subsidiaries (“Resideo” or “the Company”, “we”, “us” or “our”) for the three and ninesix months ended OctoberJuly 2, 20212022 and should be read in conjunction with the unaudited Consolidated Interim Financial Statements and the notes thereto contained elsewhere in this Form 10-Q. The financial information as of OctoberJuly 2, 20212022 should be read in conjunction with the consolidated and combined financial statements for the year ended December 31, 20202021 contained in our 20202021 Annual Report on Form 10-K (the “2020“2021 Annual Report on Form 10-K”).
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industries and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:
22
23
These and other factors are more fully discussed in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Form 10-Q. There have been no material changes to the risk factors described in our 2021 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
Overview and Business Trends
We are a leading global manufacturer and distributor of technology-driven products and solutions that help homeowners and businesses stay connected and in control of their comfort, security, and energy use. We are a leader in the home heating, ventilation and air conditioning controls markets, smoke and carbon monoxide detection home safety and fire suppression products, and security markets. We have a global footprint serving commercial and residential end-markets. We manage our business operations through two operating segments, Products & Solutions and ADI Global Distribution. Our Products & Solutions segment consists of comfort, security, and residential thermal products and solutions. Our offerings include temperature and humidity control, thermalenergy products and combustion solutions, water and air solutions, as well assmoke and carbon monoxide detection home safety products, security panels, sensors, peripherals, wire and cable, communications devices, video cameras, awareness solutions, cloud infrastructure, installation and maintenance tools, and related software. Our ADI Global Distribution business is the leading wholesale distributor of low-voltage security products including intrusion, access control, fire detection, intrusion, and video products and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, fire, power, audio, ProAV, networking, communications,and wire and cable, and data communications.cable. The Products & Solutions segment, consistent with our industry, has a higher gross and operating profit margin profile in comparison to the ADI Global Distribution segment.
DuringIn March 2022, we completed the fourth quarteracquisition of 2020, we madeFirst Alert, Inc. ("First Alert"), a change to our reportable segments. Previously we allocated corporate costs toleading provider of home safety products. This acquisition was integrated into the Products & Solutions segment as well asportfolio and expands our footprint in 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, our Chief Operating Decision Maker moved towards making financial decisionshome with complementary smoke and allocating resources based on segment Operating profit, rather than Segment Adjusted EBITDA. These changes were designed to better align accountabilitycarbon monoxide detection home safety and authority, give a clearer view into the operational performance of the two segments and increase accountability for management of corporate spending.fire suppression products.
Our financial performance is influenced by several macromacroeconomic factors such as repair and remodeling activity, residential and non-residential construction, employment rates, interest rates, and the overall macromacroeconomic environment. TheWe are experiencing global outbreak ofshortages in key materials and components in certain instances impacting our ability to supply certain products. Additionally, the current inflationary environment has resulted in higher raw materials, freight, and other costs, and unfavorable foreign currency impacts from a novel coronavirus disease (“COVID-19”) created economic disruption. Starting at the end of the first quarter of 2020, we experienced constrained supply and slowed customer demand, as well as temporary closures of several of our ADI Global Distribution branches, that adversely impacted business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, customer demand has improved and ongoing cost actions and transformation efforts contributed to the improvements in the Company’s operations and overall financial performance. We continue to experience constrained supply.stronger U.S. dollar.
ThirdSecond Quarter Highlights
Net revenue increased $134$209 million, or 14%, over the second quarter prior year primarily from $128 million in revenue from the third quarter of 2021 comparedFirst Alert and Arrow acquisitions and higher selling prices for our products in response to the same quartercurrent inflationary environment. Partially offsetting these increases were foreign currency fluctuations of 2020, primarily due to volume and sales price increases. approximately 300 bps or $40 million.
Gross profit as a percent of net revenues increased towas 28% infor the third quarter of 2021 from 27% in the third quarter of 2020. The primary items driving the 100 basis point (“bps”) increase in gross profit percentage were athree months ended July 2, 2022, an approximately 200 bps benefit from salesincrease over the same period last year. The drivers of the increase include favorable price increases and positive sales mix, 100 bps benefitincluding from customer rebate favorability, andrecent acquisitions, of 400 bps. Partially offsetting the increases were higher costs as a 100 bps benefit from reduced obsolete and surplus inventory charges. These favorable changes were partially offset by aresult of the current inflationary environment of 200 bps unfavorable impact from increased material costs and a 100 bps impact from increased freight costs.
23
bps.
Third quarter net incomeResearch and development expenses for the three months ended July 2, 2022 was $68$28 million, an increase of $6 million from $22 million for the three months ended October 2, 2021 compared to net income of $75 million for the three months ended September 26, 2020.July 3, 2021. The increase was driven by acquisitions and new product investments.
24
Selling, general and administrative expenseexpenses for the three months ended OctoberJuly 2, 2021 was $2292022 were $244 million, an increase of $8 million or 3% from $221$236 million for the three months ended September 26, 2020.July 3, 2021. The increase was primarily driven by impairment charges resulting fromincreased costs associated with the relocationFirst Alert acquisition of our Austin, Texas corporate headquarters location to a lower cost site, commercial investments, increased incentives expense, increased stock-based compensation expense,$16 million, labor inflation of $6 million, and labor and other inflation totaling $37 million. These increases were partiallyinvestment of $4 million offset by lower Spin-Offlegal and restructuring related expenses, transformation programs cost savings,foreign currency impacts. As a percentage of net sales, selling, general and other cost reductions totaling $29 million.administrative expense improved 200 bps despite increases incurred as a result of acquisitions, labor inflation, and foreign currency fluctuations.
Research and development expenseNet income for the three months ended OctoberJuly 2, 20212022 was $20$94 million an increasecompared to net income of $2 million from $18$58 million for the three months ended September 26, 2020.July 3, 2021, a 62% increase and $0.25 improvement in earnings per share. The increase was driven by labor and other items totaling $2 million.improvement is a result of the discussion above.
We ended the third quarter with $686Unrestricted cash on hand was approximately $251 million in cash and cash equivalents. Net cash provided by operating activitiesliquidity was $203approximately $751 million for the nine months ended Octoberas of July 2, 2021. At October 2, 2021, accounts receivable were $932 million, inventories were $710 million, accounts payable were $905 million, and2022. Also, there were no borrowings under ourthe $500 million revolving credit facility.
COVID-19 Pandemic
The World Health Organization (“WHO”) declared COVID-19 a pandemic in March 2020. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. During the second half of 2020 and into 2021 customer demand has improved versus the first half of 2020 and on-going cost actions and transformation efforts contributed to the improvements in the Company’s results of operations and overall financial performance. As viruses constantly change through mutation, new variants of the COVID virus have occurred and are expected to continue to occur over time. The CDC and other world health agencies have identified multiple variants which are circulating globally. As new information emerges it may have an impact on potential restrictions globally in areas including travel, freight, shipping, and commercial operations. As there remains uncertainty around the impacts of the COVID-19 pandemic, we address and evaluate the impacts frequently.
U.S. and international government responses to the COVID-19 outbreak have included “shelter in place,” “stay at home”, and similar types of orders. In the United States, Canada, and certain other countries globally, these orders exempt certain products and services needed to maintain continuity of operations of critical infrastructure sectors as determined by the federal government. If additional lockdown orders are put in place or 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. Finally, we are incurring increased costs associated with other employee safety measures.Recent Macroeconomic Environment
Our visibility toward future performance is more limited than is typical due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and its variants, and the mitigation measures that are implemented by governmental authorities. We also expectoverall prevailing macroeconomic environment, including due to COVID-19. For example, recent business conditions to remain challenging, with globalhave been impacted by shortages in key materials and components in certain instances impactingwhich have impacted our ability to supply certain products. We have also experienced various inflationary impacts, such as increased labor rates, materials price inflation, and increased freight costs. In response to these challenges, we will continuehave, among other measures, aggressively managed supplier relationships to focus on those factors that we can control: closely managing and controlling our expenses; aligningmitigate some of these shortages, developed contingency plans for future supply, aligned our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs;manner; and pursuingpursued further improvements in the productivity and effectiveness of our manufacturing, selling, and administrative activities.
24
Current Quarter Developments
Senior Notes
On August 26, 2021, we redeemed the remaining $260 million in principal amount of the Senior Notes due 2026 at a redemption price of 105.594% of par plus accrued interest. As a result, debt extinguishment costs of $18 million were recorded in Other expense, net.
On August 26, 2021, we issued $300 million in principal amount 4% senior unsecured notes due in 2029.
Basis of Presentation
Our financial statements are presented on a consolidated basis (collectively, the “Interim Financial Statements”). The Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassification
The prior year segment information was recast to present Corporate separately as well as present segment Operating profit which replaces Segment Adjusted EBITDA. See Note 4. Segment Financial Data of Notes to Consolidated Interim 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.
The prior year unaudited Consolidated Interim Statements of Operations were reclassified to present Research and development expenses as a separate line item within the statements. Research and development expenses were formerly included within Selling, general and administrative expenses.
Components of Operating Results
Net Revenue
We manage our global business operations through two operating segments, Products & Solutions and ADI Global Distribution:
Products & Solutions: We generate the majority of our Product & 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, and data communications 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 and 2021 approximately two-thirds of ADI Global Distribution’s net revenue was attributed to non-residential end markets and one-third to residential end markets.
25
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.
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.
Other Expense, Net
Other expense, net consists primarily of Reimbursement Agreement expenses for certain Honeywell environmental liability payments. For further information see the “Reimbursement Agreement” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 12. Commitments and Contingencies of Notes to Interim Financial Statements of this Form 10-Q. Other expense, net also includes debt extinguishment costs incurred as a result of the Senior Notes due 2026 redemption and the execution of the A&R Credit Agreement as well as foreign exchange gains and losses and other non-operating related expense or income.
Interest Expense
Interest expense consists of interest on our short and long-term obligations, including our senior notes, term credit facilities, revolving credit facilities, and any realized gains or losses from our interest rate swaps. Interest expense on our obligations includes contractual interest, amortization of the debt discount, and amortization of deferred financing costs.
Tax Expense
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.
Results of Operations
The following table sets forth
We report our selected unaudited consolidated interim statementssegment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of operations forresources in accordance with ASC 280, Segment Reporting. We have determined that we have two reportable segments, organized and managed principally by the periods presented:different services provided. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. We report all other business activities in Corporate and unallocated costs. Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment. These items are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition costs, gain on legal settlements, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategy, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, and other income (expense).
26
Unaudited Consolidated Interim Statements of Operations
25
(In millions, except shareshares in thousands and per share data)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Net revenue |
| $ | 1,496 |
|
| $ | 1,362 |
|
| $ | 4,392 |
|
| $ | 3,570 |
|
Cost of goods sold |
|
| 1,080 |
|
|
| 992 |
|
|
| 3,227 |
|
|
| 2,680 |
|
Gross profit |
|
| 416 |
|
|
| 370 |
|
|
| 1,165 |
|
|
| 890 |
|
Selling, general and administrative expenses |
|
| 229 |
|
|
| 221 |
|
|
| 684 |
|
|
| 676 |
|
Research and development expenses |
|
| 20 |
|
|
| 18 |
|
|
| 63 |
|
|
| 55 |
|
Operating profit |
|
| 167 |
|
|
| 131 |
|
|
| 418 |
|
|
| 159 |
|
Other expense, net |
|
| 58 |
|
|
| 35 |
|
|
| 130 |
|
|
| 106 |
|
Interest expense |
|
| 12 |
|
|
| 14 |
|
|
| 37 |
|
|
| 49 |
|
Income before taxes |
|
| 97 |
|
|
| 82 |
|
|
| 251 |
|
|
| 4 |
|
Tax expense |
|
| 29 |
|
|
| 7 |
|
|
| 76 |
|
|
| 26 |
|
Net income (loss) |
| $ | 68 |
|
| $ | 75 |
|
| $ | 175 |
|
| $ | (22 | ) |
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 144,284 |
|
|
| 123,421 |
|
|
| 143,865 |
|
|
| 123,194 |
|
Diluted |
|
| 148,559 |
|
|
| 125,235 |
|
|
| 148,260 |
|
|
| 123,194 |
|
Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.47 |
|
| $ | 0.61 |
|
| $ | 1.22 |
|
| $ | (0.18 | ) |
Diluted |
| $ | 0.46 |
|
| $ | 0.60 |
|
| $ | 1.18 |
|
| $ | (0.18 | ) |
(Unaudited)
Results of Operations for the Three and Nine Months Ended October 2, 2021 and September 26, 2020
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||
Net revenue |
| $ | 1,686 |
|
| $ | 1,477 |
|
| $ | 3,192 |
|
| $ | 2,896 |
|
Cost of goods sold |
|
| 1,219 |
|
|
| 1,091 |
|
|
| 2,287 |
|
|
| 2,135 |
|
Gross profit |
|
| 467 |
|
|
| 386 |
|
|
| 905 |
|
|
| 761 |
|
Research and development expenses |
|
| 28 |
|
|
| 22 |
|
|
| 52 |
|
|
| 43 |
|
Selling, general and administrative expenses |
|
| 244 |
|
|
| 236 |
|
|
| 479 |
|
|
| 451 |
|
Intangible asset amortization |
|
| 9 |
|
|
| 7 |
|
|
| 16 |
|
|
| 16 |
|
Income from operations |
|
| 186 |
|
|
| 121 |
|
|
| 358 |
|
|
| 251 |
|
Other expense, net |
|
| 41 |
|
|
| 28 |
|
|
| 81 |
|
|
| 72 |
|
Interest expense |
|
| 14 |
|
|
| 12 |
|
|
| 25 |
|
|
| 25 |
|
Income before taxes |
|
| 131 |
|
|
| 81 |
|
|
| 252 |
|
|
| 154 |
|
Provision for income taxes |
|
| 37 |
|
|
| 23 |
|
|
| 71 |
|
|
| 47 |
|
Net income |
| $ | 94 |
|
| $ | 58 |
|
| $ | 181 |
|
| $ | 107 |
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.65 |
|
| $ | 0.40 |
|
| $ | 1.25 |
|
| $ | 0.74 |
|
Diluted |
| $ | 0.63 |
|
| $ | 0.39 |
|
| $ | 1.22 |
|
| $ | 0.72 |
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 145,457 |
|
|
| 143,939 |
|
|
| 145,286 |
|
|
| 143,657 |
|
Diluted |
|
| 148,829 |
|
|
| 148,328 |
|
|
| 148,836 |
|
|
| 148,050 |
|
Net Revenue
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||||||
Net revenue |
| $ | 1,496 |
|
| $ | 1,362 |
|
| $ | 4,392 |
|
| $ | 3,570 |
|
| $ | 1,686 |
|
| $ | 1,477 |
|
| $ | 3,192 |
|
| $ | 2,896 |
|
% change compared with prior period |
| 10 | % |
|
|
|
|
| 23 | % |
|
|
|
|
| 14 | % |
|
|
|
|
| 10 | % |
|
|
|
Three months ended
Net revenue increased $209 million, or 14%, over the second quarter prior year primarily $128 million in revenue from the First Alert and Arrow acquisitions and higher selling prices of $113 million. Partially offsetting these increases were foreign currency fluctuations of approximately 300 bps or $40 million.
Six months ended
Net revenue for the threesix months ended OctoberJuly 2, 20212022 was $1,496$3,192 million, an increase of $134$296 million, or 10%, from $1,362$2,896 million for the threesix months ended September 26, 2020.July 3, 2021. The increase in net revenue was primarily due to volumedriven by price increases and sales price increases.acquisitions revenue, partially offset by foreign exchange fluctuations.
Gross Profit as a Percent of Net Sales
Nine months ended
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Cost of goods sold |
| $ | 1,219 |
|
| $ | 1,091 |
|
| $ | 2,287 |
|
| $ | 2,135 |
|
% change compared with prior period |
|
| 12 | % |
|
|
|
|
| 7 | % |
|
|
| ||
Gross profit percentage |
|
| 28 | % |
|
| 26 | % |
|
| 28 | % |
|
| 26 | % |
Net revenue for the nine months ended October 2, 2021 was $4,392 million, an increase of $822 million, or 23% from $3,570 for the nine months ended September 26 2020, which was negatively impacted by the emergence of COVID-19. The increase is mainly due to volume increases.
A 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.
27
Cost of Goods Sold
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Cost of goods sold |
| $ | 1,080 |
|
| $ | 992 |
|
| $ | 3,227 |
|
| $ | 2,680 |
|
% change compared with prior period |
|
| 9 | % |
|
|
|
|
| 20 | % |
|
|
| ||
Gross profit percentage |
|
| 28 | % |
|
| 27 | % |
|
| 27 | % |
|
| 25 | % |
Three months ended
Cost of goods sold for the three months ended October 2, 2021 was $1,080 million, an increase of $88 million, or 9%, from $992 million for the three months ended September 26, 2020.
This increase in cost of goods sold was driven by higher revenue volumes, increased material costs, increased freight costs, foreign currency translation, and labor inflation totaling $128 million. These increased costs were partially offset by favorable changes in sales mix, lower charges related to obsolete and surplus inventory, transformation programs cost savings, and other cost savings totaling $40 million.
Gross profit as a percentage of net sales was 28% for the three months ended OctoberJuly 2, 2021,2022, compared to 27%a 200 bps increase over the same period last year. The drivers of the increase include favorable price and positive sales mix, including from recent acquisitions, of 400 bps. Partially offsetting the increases were unfavorable impacts from higher costs as a result of the current inflationary environment of 200 bps.
Six months ended
Gross profit as a percentage of net sales was 28% for the threesix months ended September 26, 2020.July 2, 2022, compared to 26% for the six months ended July 3, 2021. The primary items driving the increase in gross profit percentage were a 200300 bps impact from sales price increases and favorable sales mix, a 100 bpsmix. This impact from customer rebate favorability, and a 100 bps impact from reduced obsolete and surplus inventory charges. These favorable changes were partially offset by a 200 bps impact from increased material costs and a 100 bps impact from increased freight costs.
Nine months ended
Cost of goods sold for the nine months ended October 2, 2021 was $3,227 million, an increase of $547 million, or 20%, from $2,680 for the nine months ended September 26, 2020.
This increase in cost of goods sold was driven by higher revenue volumes, increased freight costs, foreign currency translation, increased material costs, foreign currency translation and labor inflation totaling $656 million. These increased costs were partially offset by favorable changes in sales mix, lower charges related to obsolete and surplus inventory, decreased restructuring related costs, transformation programs cost savings, and other cost savings totaling $109 million.
Gross profit percentage was 27% for the nine months ended October 2, 2021, compared to 25% for the nine months ended September 26, 2020. The primary items driving the increase in gross profit percentage were a 100 bps benefit from sales price increases and sales mix, a 100 bps benefit resulting from higher revenue volume, a 100 bps benefit from lower charges related to obsolete and surplus inventory, and a 100 bps benefit from sourcing productivity. These benefits were partially offset by a 100 bps unfavorable impact from increased freight costs and a 100 bps unfavorable impact from increased material costs.
Research and Development Expenses
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Research and development expenses |
| $ | 28 |
|
| $ | 22 |
|
| $ | 52 |
|
| $ | 43 |
|
% of revenue |
|
| 2 | % |
|
| 1 | % |
|
| 2 | % |
|
| 1 | % |
Three months ended
Research and development expenses for the three months ended July 2, 2022 was $28 million, an increase of $6 million from $22 million for the three months ended July 3, 2021. The increase was driven by acquisitions and new product investments.
Six months ended
Research and development expenses for the six months ended July 2, 2022 was $52 million, an increase of $9 million from $43 million for the six months ended July 3, 2021. The increase was driven by planned investment to support new product launches and the inclusion of acquisitions.
Selling, General and Administrative Expenses
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||
Selling, general and administrative expenses |
| $ | 229 |
| $ | 221 |
| $ | 684 |
| $ | 676 |
| |||||||||||||||||||
Selling, general and administrative |
| $ | 244 |
|
| $ | 236 |
|
| $ | 479 |
|
| $ | 451 |
| ||||||||||||||||
% of revenue |
| 15 | % |
| 16 | % |
| 16 | % |
| 19 | % |
|
| 14 | % |
|
| 16 | % |
|
| 15 | % |
|
| 16 | % |
28
Three months ended
Selling, general and administrative expenseexpenses for the three months ended OctoberJuly 2, 20212022 was $229$244 million, an increase of $8 million, or 3%, from $221$236 million for the three months ended September 26, 2020.July 3, 2021. The increase was primarily driven by impairment charges resulting fromincreased costs associated with the relocationFirst Alert acquisition of our Austin, Texas corporate headquarters location to a lower cost site, commercial investments, increased incentives expense, increased stock-based compensation expense, and$16 million, labor inflation of $6 million, and other items totaling $37 million. These increases were partiallyinvestment of $4 million offset by lower Spin-Off and restructuring relatedlegal expenses transformation programs cost savings, and other cost reductions totaling $29 million.
Nine months ended
Selling, general and administrative expense foras a result of the nine months ended October 2, 2021 was $684 million, an increase of $8 million from $676 million for the nine months ended September 26, 2020. The increase was driven by commercial investments, the pending securities class action litigation settlement net of insurance recoveries increased incentives expense,of $16 million, and foreign currency translation, impairment charges resultingimpacts. As a percentage of net sales, selling, general and administrative expenses improved 200 bps despite increases incurred as a result of acquisitions, labor inflation, and foreign currency fluctuations.
Six months ended
27
Selling, general and administrative expenses for the six months ended July 2, 2022 was $479 million, an increase of $28 million from $451 million for the relocation of our Austin, Texas corporate headquarters locationsix months ended July 3, 2021. The increase was driven by expenses related to a lower cost site,acquisitions, transaction costs associated with the First Alert acquisition, increased stock-based compensation expense,investment, and labor inflation and other items totaling $109$56 million. These increases were partially offset by lower Spin-Off and restructuring relatedlegal expenses transformation programs cost savings,as a result of the 2021 securities class action litigation settlement net of insurance recoveries of $16 million, foreign currency translation and other cost reductions totaling $101$28 million.
Research and Development Expenses
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Research and development expenses |
| $ | 20 |
|
| $ | 18 |
|
| $ | 63 |
|
| $ | 55 |
|
% of revenue |
|
| 1 | % |
|
| 1 | % |
|
| 1 | % |
|
| 2 | % |
Three months ended
Research and development expense for the three months ended October 2, 2021 was $20 million, an increase of $2 million from $18 million for the three months ended September 26, 2020. The increase was driven by labor and other items totaling $2 million.
Nine months ended
Research and development expense for the nine months ended October 2, 2021 was $63 million, an increase of $8 million from $55 million for the nine months ended September 26, 2020. The increase was driven by investments to support new product launches, labor inflation and other items totaling $15 million. These increases were partially offset by transformation programs cost savings, lower restructuring related expenses, and other cost reductions totaling $7 million.
Other Expense, Net
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Other expense, net |
| $ | 58 |
|
| $ | 35 |
|
| $ | 130 |
|
| $ | 106 |
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Other expense, net |
| $ | 41 |
|
| $ | 28 |
|
| $ | 81 |
|
| $ | 72 |
|
Three months ended
Other expense, net for the three months ended OctoberJuly 2, 20212022 was $58$41 million, an increase of $23$13 million from $35$28 million for the three months ended September 26, 2020.July 3, 2021. Other expense, net increased $18 million from debt extinguishment costs incurred as a result offor the redemption of the remaining Senior Notes due 2026, $2three months ended July 2, 2022 included $45 million in foreign exchange impact, and $3expenses related to the Honeywell Reimbursement Agreement partially offset by $4 million of other non-operating income. Other expense, net for the three months ended July 3, 2021, included $36 million in increasedexpenses related to the Honeywell Reimbursement Agreement, partially offset by $8 million of other non-operating expense.income.
29
NineSix months ended
Other expense, net for the ninesix months ended OctoberJuly 2, 20212022 was $130$81 million, an increase of $24$9 million from $106$72 million for the ninesix months ended September 26, 2020.July 3, 2021. Other expense, net increased $41for the six months ended July 2, 2022 included $86 million from debt extinguishment costs incurred as a result ofin expenses related to the Senior Notes due 2026 redemption and the execution of the A&R CreditHoneywell Reimbursement Agreement partially offset by $6$5 million of other non-operating income. Other expense, net for the six months ended July 3, 2021 included $72 million in favorable foreign exchange impact, a $9 million reduction in the accrualsexpenses related to the Tax Matters Agreement, and a $2 million decrease in other non-operating expense.Honeywell Reimbursement Agreement.
Tax Expense
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
|
| July 2, |
|
| July 3, |
|
| July 2, |
|
| July 3, |
| ||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||
Tax expense |
| $ | 29 |
|
| $ | 7 |
|
| $ | 76 |
|
| $ | 26 |
| ||||||||||||||||
Provision for income taxes |
| $ | 37 |
|
| $ | 23 |
|
| $ | 71 |
|
| $ | 47 |
| ||||||||||||||||
Effective tax rate |
| 30 | % |
| 8 | % |
| 30 | % |
| 729 | % |
|
| 28 | % |
|
| 29 | % |
|
| 28 | % |
|
| 31 | % |
The Company recordedThree months ended
For the three months ended July 2, 2022, the net tax expense of $29$37 million and $76 million for the three and nine months ended October 2, 2021.
For interim periods, income tax is equal to the totalconsists primarily of (1) year-to-date pretax income multiplied by our forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where we expect to report losses for which we do not expect to receive tax benefits, we are required to apply separate forecasted effective tax rates to those jurisdictions rather than including them in the consolidated forecasted effective tax rate.
Three months ended
For the three months ended October 2, 2021 the net tax expense of $29 million consists primarily of interim period tax expense of $32 million based on year-to-date pretax income multiplied by our forecasted effective tax rate partially offset by a tax benefit specific to the period of approximately $3 million consisting primarily of changes in estimates related to prior years. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
NineSix months ended
For the ninesix months ended OctoberJuly 2, 20212022, the net tax expense of $76$71 million consists primarily of interim period tax expense of $80 million based on year-to-date pretax income multiplied by our forecasted effective tax rate, offset by tax benefits specific to the period of approximately $4 million, consisting primarily of excess deductions for share-based compensation and changes in estimates related to prior years.rate. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
Review28
Segment Results of Business SegmentsOperations
Products & Solutions Segment
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||||||||||||||||||
|
| October 2, |
|
| September 26, |
|
|
|
|
| October 2, |
|
| September 26, |
|
|
|
|
| July 2, |
|
| July 3, |
|
|
|
| July 2, |
|
| July 3, |
|
|
|
| |||||||||||||
|
| 2021 |
|
| 2020 |
|
| % Change |
|
| 2021 |
|
| 2020 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
| ||||||||||||
Total revenue |
| $ | 726 |
| $ | 674 |
|
|
|
| $ | 2,121 |
| $ | 1,715 |
|
|
|
| $ | 852 |
|
| $ | 695 |
|
|
|
|
| $ | 1,566 |
|
| $ | 1,395 |
|
|
|
| ||||||||
Less: Intersegment revenue |
|
| 95 |
|
|
| 102 |
|
|
|
|
|
| 286 |
|
|
| 270 |
|
|
|
| ||||||||||||||||||||||||||
External revenue |
| $ | 631 |
|
| $ | 572 |
|
|
| 10 | % |
| $ | 1,835 |
|
| $ | 1,445 |
|
|
| 27 | % | ||||||||||||||||||||||||
Operating profit |
| $ | 157 |
|
| $ | 141 |
|
|
| 11 | % |
| $ | 416 |
|
| $ | 241 |
|
|
| 73 | % |
| $ | 154 |
|
| $ | 129 |
|
|
| 19 | % |
| $ | 307 |
|
| $ | 259 |
|
|
| 19 | % |
Operating profit percentage |
|
| 20 | % |
|
| 22 | % |
|
|
|
|
| 22 | % |
|
| 22 | % |
|
|
|
On March 31, 2022, we completed the acquisition of First Alert, a leading provider of home safety products. This acquisition was integrated into the Products & Solutions portfolio and expands our footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products.
30
Three months ended
Products & Solutions revenue increased 10%28%, mainly due to increased volumeFirst Alert acquisition revenue and sales price increases.increases, partially offset by foreign exchange fluctuations. Operating profit increased from $141$129 million to $157$154 million, or 11%19% primarily from positive price, net of inflationary cost increases of $7 million, higher demand of $11 million, and the contribution from the First Alert acquisition of $7 million.
Six months ended
Products & Solutions revenue increased 15%, mainly due to price increases and First Alert acquisition revenue, partially offset by foreign exchange fluctuations. Operating profit increased from $259 million to $307 million, or 19%. Operating profit was positively impacted by increased volume, sales price increases, customer rebate favorability, a decrease in restructuring related expenses, lower charges related to obsolete and surplus inventory, transformation programs cost savings,contributions from the First Alert acquisition, and other cost reduction effortsreductions totaling $66$166 million. These impacts were partially offset by increased material costs, increased freight costs, increased incentives expense, and labor inflation totaling $50 million.
Nine months ended
Products & Solutions revenue increased 27%, mainly due to increased volume. Operating profit increased from $241 million to $416 million, or 73%. Operating profit was positively impacted byunfavorable changes in sales mix, higher revenue, a decrease in Spin-Off and restructuring related expenses, lower charges related to obsolete and surplus inventory, sales price increases, transformation programs cost savings, favorable changes in sales mix, and other cost reduction efforts totaling $295 million. These impacts were partially offset by increased freight costs, increased material costs, investments to support new product launches, increased incentives expense, and labor inflationinvestment totaling $120$118 million.
ADI Global Distribution Segment
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||||||||||||||||||
|
| October 2, |
|
| September 26, |
|
|
|
|
| October 2, |
|
| September 26, |
|
|
|
|
| July 2, |
|
| July 3, |
|
|
|
|
| July 2, |
|
| July 3, |
|
|
|
| ||||||||||||
|
| 2021 |
|
| 2020 |
|
| % Change |
|
| 2021 |
|
| 2020 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
|
| 2022 |
|
| 2021 |
|
| % Change |
| ||||||||||||
External revenue |
| $ | 865 |
|
| $ | 790 |
|
|
| 9 | % |
| $ | 2,557 |
|
| $ | 2,125 |
|
|
| 20 | % |
| $ | 922 |
|
| $ | 879 |
|
|
| 5 | % |
| $ | 1,809 |
|
| $ | 1,692 |
|
|
| 7 | % |
Operating profit |
| $ | 73 |
|
| $ | 56 |
|
|
| 30 | % |
| $ | 198 |
|
| $ | 135 |
|
|
| 47 | % |
| $ | 86 |
|
| $ | 66 |
|
|
| 30 | % |
| $ | 166 |
|
| $ | 125 |
|
|
| 33 | % |
Operating profit percentage |
|
| 9 | % |
|
| 8 | % |
|
|
|
|
| 9 | % |
|
| 7 | % |
|
|
|
During 2021, ADI Global Distribution completed the acquisition of Norfolk Wire & Electronics, a regional distributor of data communications products and Shoreview Distribution, a U.S. distributor of Pro AV products. Both acquisitions are an example of our strategy to utilize M&A to accelerate expansion in attractive adjacent categories.
Three months ended
ADI Global Distribution revenue increased 9%,5% highlighted by strong growth in the U.S. and Canada primarily driven by volumeprice increases, and sales price increases.the impact of acquisitions, partially offset by foreign exchange fluctuations. Operating profit increased from $56$66 million to $73$86 million, or 30%. Operating profit was favorably impacted primarily by favorable changes in sales mix, higher revenue,price increases, impact of acquisitions, and other expense productivity totaling $28$31 million. These positive impacts were partially offset by commercial investments, increased freight costs, and increased incentives expense, as well as labor inflation totaling $11 million.
NineSix months ended
ADI Global Distribution revenue increased 20%, highlighted7% driven by strong growth inprice increases and the U.S. and Canada, as well as EMEA.impact of acquisitions, partially offset by foreign exchange fluctuations. Operating profit increased from $135$125 million to $198$166 million, or 47%33%. Operating profit was favorably impacted primarily by higher revenue, favorable changes in sales mix, price increases, impact of acquisitions, and other expense productivity totaling $90$60 million. These positive impacts were partially offset by commercial investments, increased freight costs, and increased incentives expenses, as well as labor inflation totaling $27$19 million.
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Corporate
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Corporate costs |
| $ | (63 | ) |
| $ | (66 | ) |
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| (5 | )% |
| $ | (196 | ) |
| $ | (217 | ) |
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Corporate costs |
| $ | 54 |
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| $ | 74 |
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| (27 | )% |
| $ | 115 |
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| $ | 133 |
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| (14 | )% |
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Three months ended
Corporate costs for the three months ended OctoberJuly 2, 20212022 were $63$54 million, a decrease from $66$74 million for the three months ended September 26, 2020,July 3, 2021, or 5%27%. The decrease was driven by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $19 million. These decreases were partially offset by impairment charges resulting fromdue primarily to the relocation of our Austin, Texas corporate headquarters location to a lower cost site, increased consulting expense, increased incentives expense, and labor inflation totaling $16 million.
Nine months ended
Corporate costs for the nine months ended October 2, 2021 were $196 million, a decrease from $217 million for the nine months ended September 26, 2020, or 10%. The decrease was driven by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $74 million. These decreases were partially offset by the pending securities class action litigation settlement net of insurance recoveries increased consulting expense, impairment charges resulting from the relocation of our Austin, Texas corporate headquarters location to a lower$16 million, and other cost site, increased incentives expense, foreign currency translation, and labor inflationreductions totaling $53$20 million.
Six months ended
Corporate costs for the six months ended July 2, 2022 were $115 million, a decrease from $133 million for the six months ended July 3, 2021, or 14%. The decrease was due primarily to the 2021 securities class action litigation settlement net of insurance recoveries of $16 million, lower consulting spend of $7 million, and other cost reductions. These positive impacts were partially offset by transaction costs associated with the First Alert acquisition of $10 million.
Capital Resources and Liquidity
Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations, supplemented by external sources of capital as needed. 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:
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies, and the expansion of our sales and marketing activities. While we may elect to seek additionadditional funding at any time, we believe our existing cash, cash equivalents, and availability under our credit facilities are sufficient to meet our capital requirements through at least the next 12 months.months and the longer term. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.
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 cap of $140 million.
The amount paid during the ninesix months ended OctoberJuly 2, 20212022 was $105$70 million. See Note 12.14. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of thethis Form 10-Q and Note 19.17. Commitments and
30
Contingencies of Notes to Consolidated and Combined Financial Statements in our 20202021 Annual Report on Form 10-K for further discussion.
32
Cash Flow Summary for the ninesix months ended OctoberJuly 2, 20212022 and September 26, 2020July 3, 2021
Our cash flows from operating, investing and financing activities for the ninesix months ended OctoberJuly 2, 20212022 and September 26, 2020,July 3, 2021, as reflected in the unaudited Interim FinancialConsolidated Statements of Cash Flows, are summarized as follows:
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Operating activities |
| $ | 203 |
| $ | 92 |
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| $ | (24 | ) |
| $ | 99 |
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Investing activities |
| (56 | ) |
| (85 | ) |
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| (670 | ) |
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| (42 | ) | ||
Financing activities |
| 28 |
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| 135 |
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| 183 |
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| 7 |
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Effect of exchange rate changes on cash and cash equivalents |
|
| (6 | ) |
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| (4 | ) |
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| (13 | ) |
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| (2 | ) |
Net increase in cash and cash equivalents |
| $ | 169 |
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| $ | 138 |
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Net decrease in cash, cash equivalents and restricted cash |
| $ | (524 | ) |
| $ | 62 |
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Cash provided byused for operating activities for the ninesix months ended OctoberJuly 2, 20212022 increased by $111$123 million, primarily due to increased profitability, offset by an increase in working capital balances as a resultnet income of revenue growth.$74 million, and an increase in current liabilities of $23 million. These increases were offset by increases in account receivable and inventory totaling $231 million. The increase in accounts receivable and inventory were necessary to support the increased sales activity.
Cash used for investing activities decreasedincreased by $29$628 million, primarily due to $24$623 million of additional cash paid for acquisitions in the ninesix months ended September 26, 2020.July 2, 2022.
Net cash provided by financing activities decreasedincreased by $107$176 million. The decrease in cash provided by financing activitiesincrease was primarily due to a decrease of $150$196 million of net proceeds from our revolving credit facility that was usedthe March 2022 Amended A&R Credit Agreement, as compared to increase our cash position in 2020 in light of the economic uncertainty surrounding the COVID-19 pandemic, partially offset by $31$6 million of net proceeds resulting from the 2021 execution of the A&R Credit Agreement, debt issuance and redemptionmodification costs, and repayments of the Senior Notes due 2026, $6 million of decreasedlong-term debt repayments, and, $6 million ofcash used for other financing activities.activities totaling $1 million.
Capital Expenditures
We believe our capital spending has been sufficient to support the requirements of the business. We expect to continue investing to expand and modernize our existing facilities and to create capacity for new product development.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, net revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Critical Accounting Policies
The preparation of our unaudited Interim Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed in our 20202021 Annual Report on Form 10-K to be critical to the understanding of our unaudited Interim Financial Statements included in this Form 10-Q. There have been no material changes in our critical accounting policies as compared to what was disclosed in the 20202021 Annual Report on Form 10-K. We adopted ASU 2021-08 effective April 1, 2022, on a prospective basis. The impact of adoption of this standard on our consolidated financial statements, including accounting policies, processes, and systems, was not material. Actual results could differ from our estimates and assumptions, and any such differences could be material to our unaudited Interim Financial Statements. As there remains uncertainty around the impacts of the COVID-19 pandemic, we intend to address and evaluate the impacts frequently.
Other Matters
Litigation, Environmental Matters and Reimbursement Agreement
See Note 12.14. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of environmental and other litigation matters.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.
Interest Rate Risk
As of OctoberJuly 2, 2021, $9452022, $1,137 million of our total debt, excluding unamortized deferred financing costs, of $1,245 million carried variable interest rates. In March 2021, eight interest rate swap agreements were entered into with various financial institutions for a combined notional amount of $560 million (the “Swap Agreements”). The Swap Agreements effectively converted a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over a term of threetwo to fivefour years. For more information on the Swap Agreements, see Note 14.16. Derivative Instruments of Notes to Consolidated Interim Financial Statements of this Form 10-Q. The fair market values of our fixed-rate financial instruments and Swap Agreements are sensitive to changes in interest rates. At OctoberAs of July 2, 2021,2022, an increase or decrease in the interest rate by 100 basis points would have an approximate $4$6 million impact on our annual interest expense, while a decrease in interest rate is not possible due to the interest rate floor on our variable rate debt.expense.
Foreign Currency Exchange Rate Risk
We are exposed to market risks from changes in currency exchange rates. While we primarily transact with customers in the U.S. Dollar, we also transact in foreign currencies, primarily including the Canadian Dollar, Euro, Mexican Peso, Indian Rupee, British Pound, Indian Rupee, Canadian Dollar, and Mexican Peso.Czech Koruna. These exposures may impact total assets, liabilities, future earnings and/or operating cash flows. Our 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. We rely primarily on natural offsets to address our exposures and may supplement this approach from time to time by entering into forward and option hedging contracts. As of OctoberJuly 2, 20212022 and December 31, 2020,2021, we have no outstanding foreign currency hedging arrangements.
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Commodity Price Risk
While we are exposed to commodity price risk, we attempt to pass through significant changes in component and raw material costs to our customers based on the contractual terms of our arrangements. In limited situations, we may not be fully compensated for such changes in costs.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, including our Chief Accounting Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended OctoberJuly 2, 20212022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
3533
PART II
Item 1. Legal Proceedings
See Note 12.14. Commitments and Contingencies — Other Matters of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion on legal proceedings.
Item 1A. Risk Factors
We face a variety of risks that are inherent in our business and our industry, including operational, legal, and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations, and historical trends. There have been no material changes to the risk factors described in our 20202021 Annual Report on Form 10-K.
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Item 6. Exhibits
The Exhibits listed below on the Exhibit Index are filed or incorporated by reference as part of this Form 10-Q.
EXHIBIT INDEX
Exhibit Number |
| Exhibit Description |
| ||
10.1 | Resideo Technologies, Inc. Bonus Plan, amended as of April 28, 2022 (filed herewith) | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document (filed herewith) | |
101.SCH | Inline XBRL Taxonomy Extension Schema (filed herewith) | |
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) | |
† | Schedules omitted pursuant to item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon its request. |
3735
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Resideo Technologies, Inc. | ||
Date: | By: | /s/ Anthony L. Trunzo |
Anthony L. Trunzo Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as the Registrant’s Principal Financial Officer) |
Date: | By: | /s/ |
| ||
Vice President Officer (Principal Accounting Officer) |
3836