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 September 30, 201926, 2020

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.)

 

 

 

901 E 6th Street

Austin, Texas

 

78702

(Address of principal executive offices)

 

(Zip Code)

(763) 954-5204(512) 726-3500

(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 November 1st, 20192, 2020 was 122,818,158123,494,919 shares.

 

 

 

 


 

TABLE OF CONTENTS

 

Item

 

Page

Item

 

Page

 

 

 

 

 

 

Part I.

 

Item 1. Financial Statements

5

 

Item 1. Financial Statements

5

 

 

 

 

 

 

1.

Financial Statements

5

1.

Financial Statements

5

 

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Operations (unaudited) – Three and Nine Months Ended September 30, 2019 and 2018

5

 

Consolidated Interim Statements of Operations (unaudited) – Three and Nine Months Ended September 26, 2020 and September 28, 2019

5

 

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Comprehensive (Loss) Income (unaudited) – Three and Nine Months Ended September 30, 2019 and 2018

6

 

Consolidated Interim Statements of Comprehensive Income (Loss) (unaudited) – Three and Nine Months Ended September 26, 2020 and September 28, 2019

6

 

 

 

 

 

 

 

Consolidated Interim Balance Sheet (unaudited) – September 30, 2019 and December 31, 2018

7

 

Consolidated Interim Balance Sheets (unaudited) – September 26, 2020 and December 31, 2019

7

 

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Cash Flows (unaudited) – Nine Months Ended September 30, 2019 and 2018

8

 

Consolidated Interim Statements of Cash Flows (unaudited) – Nine Months Ended September 26, 2020 and September 28, 2019

8

 

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Equity (unaudited) – Three and Nine Months Ended September 30, 2019 and 2018

9

 

Consolidated Interim Statements of Equity (unaudited) – Three and Nine Months Ended September 26, 2020 and September 28, 2019

9

 

 

 

 

 

 

 

Notes to Consolidated and Combined Interim Financial Statements (unaudited)

10

 

Notes to Consolidated Interim Financial Statements (unaudited)

10

 

 

 

 

 

 

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

40

3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

 

 

 

4.

Controls and Procedures

41

4.

Controls and Procedures

35

 

 

 

 

 

 

Part II.

1.

Legal Proceedings

42

1.

Legal Proceedings

36

 

 

 

 

 

 

1A.

Risk Factors

42

1A.

Risk Factors

36

 

 

 

 

 

 

6.

Exhibits

45

6.

Exhibits

39

 

 

 

 

 

 

 

Signatures

46

 

Signatures

40

 

 

 

 

 

 


2


RESIDEO TECHNOLOGIES, INC.

 

Cautionary Statement about Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” that involve risks and uncertainties. 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:

 

lack of operating history as an independent publicly traded company and unreliability of historical combined financial information as an indicator of our future results;

the level of competition from other companies in our markets and segments, as well as in new markets and emerging markets;

the level of competition from other companies;

ability to successfully develop new technologies and introduce new products;

ability to successfully develop new technologies and introduce new products;

integration and retention of new leadership personnel, including the CEO and CFO;

changes in prevailing global and regional economic conditions;

inability to recruit and retain qualified personnel;

natural disasters or inclement or hazardous weather conditions, including, but not limited to cold weather, flooding, tornadoes and the physical impacts of climate change;

changes in prevailing global and regional economic conditions;

failure to achieve and maintain a high level of product and service quality;

natural disasters or inclement or hazardous weather conditions, including, but not limited to cold weather, flooding, tornadoes and the physical impacts of climate change;

ability to operate as an independent publicly traded company without certain benefits available to us as a part of Honeywell;

the impact of pandemics, epidemics and other public health emergencies, such as COVID-19;

dependence upon investment in information technology;

fluctuation in financial results due to seasonal nature of portions of our business;

failure or inability to comply with relevant data privacy legislation or regulations, including the European Union’s General Data Protection Regulation;

failure to achieve and maintain a high level of product and service quality;

technical difficulties or failures;

dependence upon investment in information technology;

work stoppages, other disruptions, or the need to relocate any of our facilities;

failure or inability to comply with relevant data privacy legislation or regulations, including the European Unions General Data Protection Regulation and the California Consumer Privacy Act;

economic, political, regulatory, foreign exchange and other risks of international operations, including the impact of tariffs and the recently negotiated USMCA, which, when legislatively approved by each of the US, Mexico and Canada, will serve to replace NAFTA;

technical difficulties or failures;

changes in legislation or government regulations or policies;

work stoppages, other disruptions, or the need to relocate any of our facilities;

our growth strategy is dependent on expanding our distribution business;

economic, political, regulatory, foreign exchange and other risks of international operations, including the impact of tariffs;

inability to obtain necessary production equipment or replacement parts;

changes in legislation or government regulations or policies;

the significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturers (“OEMs”) customers;

our growth strategy is dependent on expanding our distribution business;

inability to identify and implement actions to achieve the expected results from our operational and financial review;

inability to obtain necessary product components, production equipment or replacement parts;

the possibility that our goodwill or intangible assets become impaired;

the significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturers (“OEMs”) customers;

increases or decreases to the inventory levels maintained by our customers;

inability to implement and execute actions to achieve the expected results from our financial and operational review initially disclosed in connection with our 2019 third-quarter results;

difficulty collecting receivables;

the possibility that our goodwill or intangible assets become impaired;

the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

increases or decreases to the inventory levels maintained by our customers;

our inability to maintain intellectual property agreements;

difficulty collecting receivables;

the failure to increase productivity through sustainable operational improvements;

the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

inability to grow successfully through future acquisitions;

our inability to maintain intellectual property agreements;

inability to recruit and retain qualified personnel;

our inability to service our indebtedness;

the operational constraints and financial distress of third parties;

the failure to increase productivity through sustainable operational improvements;

changes in the price and availability of raw materials that we use to produce our products;

inability to grow successfully through future acquisitions;

labor disputes;

the operational constraints and financial distress of third parties;

changes in the price and availability of raw materials that we use to produce our products;

our ability to borrow funds and access capital markets;3



RESIDEO TECHNOLOGIES, INC.

 

the amount of our obligations pursuant to the Honeywell Reimbursement Agreement;

labor disputes;

potential material environmental liabilities;

our ability to borrow funds and access capital markets;

potential material losses and costs as a result of warranty claims, including product recalls, and product liability actions that may be brought against us;

the amount of our obligations and nature of our contractual restrictions pursuant to, and disputes that have or may hereafter arise under, the Reimbursement Agreement and the other agreements we entered into with Honeywell in connection with the Spin-Off;

potential material litigation matters;

our reliance on Honeywell for the Honeywell Home trademark;

unforeseen U.S. federal income tax and foreign tax liabilities;

potential material environmental liabilities;

U.S. federal income tax reform;

our inability to fully comply with data privacy laws and regulations;

the inception or suspension in the future of any dividend program; and

potential material losses and costs as a result of warranty claims, including product recalls, and product liability actions that may be brought against us;

potential business and other disruption due to cyber security threats or concerns;

certain factors discussed elsewhere in this Form 10-Q.

potential material litigation matters;

unforeseen U.S. federal income tax and foreign tax liabilities;

U.S. federal income tax reform;

the inception or suspension in the future of any dividend program; and

certain factors discussed elsewhere in this Form 10-Q.

 

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 20182019 Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 (the “2018“2019 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 20182019 Annual Report on Form 10-K, except as reflected in the “Risk Factors” section in this Form 10-Q. 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 industryindustries 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 September 30, 201926, 2020 should be read in conjunction with the financial statements for the year ended December 31, 20182019 contained in our 20182019 Annual Report on Form 10-K.


4


RESIDEO TECHNOLOGIES, INC.

 

Item 1.

FinancialFinancial Statements

CONSOLIDATED AND COMBINED INTERIM STATEMENTSTATEMENTS OF OPERATIONS

(Dollars in millions except share and per share data)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

1,226

 

 

$

1,200

 

 

$

3,684

 

 

$

3,561

 

 

$

1,362

 

 

$

1,226

 

 

$

3,570

 

 

$

3,684

 

Cost of goods sold

 

 

937

 

 

 

853

 

 

 

2,786

 

 

 

2,525

 

 

 

992

 

 

 

917

 

 

 

2,680

 

 

 

2,720

 

Gross profit

 

 

289

 

 

 

347

 

 

 

898

 

 

 

1,036

 

 

 

370

 

 

 

309

 

 

 

890

 

 

 

964

 

Selling, general and administrative expenses

 

 

230

 

 

 

219

 

 

 

712

 

 

 

648

 

 

 

239

 

 

 

250

 

 

 

731

 

 

 

778

 

Operating profit

 

 

59

 

 

 

128

 

 

 

186

 

 

 

388

 

 

 

131

 

 

 

59

 

 

 

159

 

 

 

186

 

Other expense, net

 

 

35

 

 

 

144

 

 

 

54

 

 

 

320

 

 

 

35

 

 

 

35

 

 

 

106

 

 

 

54

 

Interest expense

 

 

16

 

 

 

2

 

 

 

51

 

 

 

2

 

 

 

14

 

 

 

16

 

 

 

49

 

 

 

51

 

Income (loss) before taxes

 

 

8

 

 

 

(18

)

 

 

81

 

 

 

66

 

Tax expense (benefit)

 

 

-

 

 

 

(329

)

 

 

36

 

 

 

(323

)

Net income

 

$

8

 

 

$

311

 

 

$

45

 

 

$

389

 

Income before taxes

 

 

82

 

 

 

8

 

 

 

4

 

 

 

81

 

Tax expense

 

 

7

 

 

 

-

 

 

 

26

 

 

 

36

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

Weighted Average Number of Common Shares Outstanding (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

122,770

 

 

 

122,967

 

 

 

122,681

 

 

 

122,967

 

 

 

123,421

 

 

 

122,770

 

 

 

123,194

 

 

 

122,681

 

Diluted

 

 

123,244

 

 

 

122,967

 

 

 

123,404

 

 

 

122,967

 

 

 

125,235

 

 

 

123,244

 

 

 

123,194

 

 

 

123,404

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

2.53

 

 

$

0.37

 

 

$

3.16

 

 

$

0.61

 

 

$

0.07

 

 

$

(0.18

)

 

$

0.37

 

Diluted

 

$

0.06

 

 

$

2.53

 

 

$

0.36

 

 

$

3.16

 

 

$

0.60

 

 

$

0.06

 

 

$

(0.18

)

 

$

0.36

 

 

The unaudited Notes to unaudited Consolidated and Combined Interim Financial Statements are an integral part of this statement.these statements.

5



RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED AND COMBINED

INTERIM STATEMENTSTATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

8

 

 

$

311

 

 

$

45

 

 

$

389

 

   Other comprehensive (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

(35

)

 

 

(5

)

 

 

(33

)

 

 

(23

)

Changes in fair value of effective cash flow

   hedges

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Total other comprehensive (loss), net of

   tax

 

 

(35

)

 

 

(5

)

 

 

(33

)

 

 

(24

)

Comprehensive (loss) income

 

$

(27

)

 

$

306

 

 

$

12

 

 

$

365

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

28

 

 

 

(35

)

 

 

6

 

 

 

(33

)

Total other comprehensive income (loss), net of tax

 

 

28

 

 

 

(35

)

 

 

6

 

 

 

(33

)

Comprehensive income (loss)

 

$

103

 

 

$

(27

)

 

$

(16

)

 

$

12

 

 

The unaudited Notes to unaudited Consolidated and Combined Interim Financial Statements are an integral part of this statement.these statements.

6



RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED INTERIMINTERIM BALANCE SHEETSHEETS

(Dollars in millions, shares in thousands)

(Unaudited)

 

 

September 30,

 

 

December 31,

 

 

September 26,

 

 

December 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

132

 

 

$

265

 

 

$

260

 

 

$

122

 

Accounts receivable

 

 

845

 

 

 

821

 

Inventories

 

 

729

 

 

 

628

 

Accounts receivable – net

 

 

884

 

 

 

817

 

Inventories – net

 

 

618

 

 

 

671

 

Other current assets

 

 

134

 

 

 

95

 

 

 

161

 

 

 

175

 

Total current assets

 

 

1,840

 

 

 

1,809

 

 

 

1,923

 

 

 

1,785

 

Property, plant and equipment – net

 

 

306

 

 

 

300

 

 

 

311

 

 

 

316

 

Goodwill

 

 

2,632

 

 

 

2,634

 

 

 

2,657

 

 

 

2,642

 

Other intangible assets – net

 

 

125

 

 

 

133

 

Other assets

 

 

230

 

 

 

96

 

 

 

378

 

 

 

385

 

Total assets

 

$

5,133

 

 

$

4,972

 

 

$

5,269

 

 

$

5,128

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

932

 

 

$

964

 

 

$

858

 

 

$

920

 

Short-term portion of debt

 

 

88

 

 

 

22

 

Current maturities of debt

 

 

181

 

 

 

22

 

Accrued liabilities

 

 

531

 

 

 

503

 

 

 

606

 

 

 

552

 

Total current liabilities

 

 

1,551

 

 

 

1,489

 

 

 

1,645

 

 

 

1,494

 

Long-term debt

 

 

1,165

 

 

 

1,179

 

 

 

1,141

 

 

 

1,158

 

Obligations payable to Honeywell

 

 

580

 

 

 

629

 

Obligations payable under Indemnification Agreements

 

 

586

 

 

 

594

 

Other liabilities

 

 

264

 

 

 

142

 

 

 

292

 

 

 

280

 

COMMITMENTS AND CONTINGENCIES (Note 15)

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 13)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 700,000 shares authorized,

123,382 and 122,967 shares issued and 122,786

and 122,499 shares outstanding as of September 30, 2019

and December 31, 2018, respectively

 

 

-

 

 

 

-

 

Common stock, $0.001 par value, 700,000 shares authorized,

124,324 and 123,443 shares issued and outstanding as of September 26, 2020, 123,488 and 122,873 shares issued and outstanding as of December 31, 2019, respectively

 

 

0

 

 

 

0

 

Additional paid-in capital

 

 

1,751

 

 

 

1,720

 

 

 

1,782

 

 

 

1,761

 

Treasury stock, at cost

 

 

(3

)

 

 

-

 

 

 

(5

)

 

 

(3

)

Retained earnings

 

 

47

 

 

 

2

 

 

 

16

 

 

 

38

 

Accumulated other comprehensive loss

 

 

(222

)

 

 

(189

)

Accumulated other comprehensive (loss)

 

 

(188

)

 

 

(194

)

Total equity

 

 

1,573

 

 

 

1,533

 

 

 

1,605

 

 

 

1,602

 

Total liabilities and equity

 

$

5,133

 

 

$

4,972

 

 

$

5,269

 

 

$

5,128

 

 

The unaudited Notes to unaudited Consolidated and Combined Interim Financial Statements are an integral part of this statement.these statements.

7



RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED AND COMBINED INTERIM STATEMENTINTERIM STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Cash flows (used for) provided by operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

45

 

 

$

389

 

Adjustments to reconcile net income to net cash (used for) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

55

 

 

 

49

 

Repositioning charges, net of payments

 

 

12

 

 

 

(4

)

Stock compensation expense

 

 

22

 

 

 

15

 

Deferred income taxes

 

 

(3

)

 

 

(275

)

Other noncash expense

 

 

13

 

 

 

17

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(27

)

 

 

(11

)

Inventories

 

 

(109

)

 

 

(142

)

Other current assets

 

 

(13

)

 

 

(4

)

Other assets

 

 

(6

)

 

 

(6

)

Accounts payable

 

 

(23

)

 

 

151

 

Accrued liabilities

 

 

(6

)

 

 

(15

)

Obligations payable to Honeywell

 

 

(49

)

 

 

-

 

Other liabilities

 

 

19

 

 

 

211

 

Net cash (used for) provided by operating activities

 

 

(70

)

 

 

375

 

Cash flows used for investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant, equipment and software

 

 

(66

)

 

 

(63

)

Cash paid for acquisitions, net of cash acquired

 

 

(17

)

 

 

-

 

Proceeds received related to amounts due from related parties

 

 

-

 

 

 

7

 

Net cash used for investing activities

 

 

(83

)

 

 

(56

)

Cash flows provided by (used for) financing activities:

 

 

 

 

 

 

 

 

Net proceeds from revolving credit facility

 

 

60

 

 

 

-

 

Repayment of long-term debt

 

 

(11

)

 

 

-

 

Non-operating obligations paid to Honeywell, net

 

 

(24

)

 

 

-

 

Payments related to amounts due to related parties, net

 

 

-

 

 

 

(1

)

Tax payments related to stock vestings

 

 

(3

)

 

 

-

 

Net decrease in invested equity

 

 

-

 

 

 

(300

)

Cashflow provided by cash pooling

 

 

-

 

 

 

115

 

Net cash provided by (used for) financing activities

 

 

22

 

 

 

(186

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(2

)

 

 

(5

)

Net (decrease) increase in cash and cash equivalents

 

 

(133

)

 

 

128

 

Cash and cash equivalents at beginning of period

 

 

265

 

 

 

56

 

Cash and cash equivalents at end of period

 

$

132

 

 

$

184

 

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

Cash flows provided by (used for) operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(22

)

 

$

45

 

Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

64

 

 

 

55

 

Restructuring charges, net of payments

 

 

4

 

 

 

12

 

Stock compensation expense

 

 

21

 

 

 

22

 

Other

 

 

20

 

 

 

10

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(64

)

 

 

(27

)

Inventories – net

 

 

64

 

 

 

(109

)

Other current assets

 

 

15

 

 

 

(13

)

Accounts payable

 

 

(62

)

 

 

(23

)

Accrued liabilities

 

 

48

 

 

 

(6

)

Obligations payable under Indemnification Agreements

 

 

(8

)

 

 

(49

)

Other

 

 

12

 

 

 

13

 

Net cash provided by (used for) operating activities

 

 

92

 

 

 

(70

)

Cash flows used for investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant, equipment and other intangibles

 

 

(50

)

 

 

(66

)

Cash paid for acquisitions, net of cash acquired

 

 

(35

)

 

 

(17

)

Net cash used for investing activities

 

 

(85

)

 

 

(83

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Net proceeds from revolving credit facility

 

 

150

 

 

 

60

 

Repayment of long-term debt

 

 

(11

)

 

 

(11

)

Non-operating obligations paid to Honeywell, net

 

 

(2

)

 

 

(24

)

Tax payments related to stock vestings

 

 

(2

)

 

 

(3

)

Net cash provided by financing activities

 

 

135

 

 

 

22

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(4

)

 

 

(2

)

Net increase (decrease) in cash and cash equivalents

 

 

138

 

 

 

(133

)

Cash and cash equivalents at beginning of period

 

 

122

 

 

 

265

 

Cash and cash equivalents at end of period

 

$

260

 

 

$

132

 

 

The unaudited Notes to unaudited Consolidated and Combined Interim Financial Statements are an integral part of this statement.these statements.

 

 


8


RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED AND COMBINED INTERIM STATEMENTINTERIM STATEMENTS OF EQUITY

(Dollars in millions, shares in thousands)

(Unaudited)

 

 

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Invested

Equity

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at December 31, 2017

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,703

 

 

$

(100

)

 

$

2,603

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

45

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30

 

 

 

30

 

Change in invested equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(89

)

 

 

-

 

 

 

(89

)

Balance at March 31, 2018

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,659

 

 

$

(70

)

 

$

2,589

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33

 

 

 

-

 

 

 

33

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(49

)

 

 

(49

)

Change in invested equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(93

)

 

 

-

 

 

 

(93

)

Balance at June 30, 2018

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,599

 

 

$

(119

)

 

$

2,480

 

Net income

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

311

 

 

-

 

 

 

311

 

Other comprehensive loss, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

$

(5

)

 

 

(5

)

Change in invested equity

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

(101

)

 

-

 

 

 

(101

)

Balance at September 30, 2018

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,809

 

 

$

(124

)

 

$

2,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

122,499

 

 

 

468

 

 

$

-

 

 

$

-

 

 

$

1,720

 

 

$

2

 

 

$

-

 

 

$

(189

)

 

$

1,533

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

48

 

 

-

 

 

 

-

 

 

 

48

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

-

 

 

 

6

 

 

 

6

 

Shares issued for employee stock plans

 

 

271

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

-

 

 

 

7

 

Shares withheld for employees' taxes

 

 

(84

)

 

 

84

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

Balance at March 31, 2019

 

 

122,686

 

 

 

552

 

 

$

-

 

 

$

(2

)

 

$

1,727

 

 

$

50

 

 

$

-

 

 

$

(183

)

 

$

1,592

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

(11

)

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4

)

 

 

(4

)

Shares issued for employee stock plans

 

 

30

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

Shares withheld for employees' taxes

 

 

(6

)

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Adjustments due to the Spin-Off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

-

 

 

 

9

 

Balance at June 30, 2019

 

 

122,710

 

 

 

558

 

 

$

-

 

 

$

(2

)

 

$

1,743

 

 

$

39

 

 

$

-

 

 

$

(187

)

 

$

1,593

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

8

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(35

)

 

 

(35

)

Shares issued for employee stock plans

 

 

114

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

Shares withheld for employees' taxes

 

 

(38

)

 

 

38

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Balance at September 30, 2019

 

 

122,786

 

 

 

596

 

 

$

-

 

 

$

(3

)

 

$

1,751

 

 

$

47

 

 

$

-

 

 

$

(222

)

 

$

1,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 26, 2020

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings (Deficit)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

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

 

Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes

 

 

65

 

 

 

29

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

7

 

Balance at September 26, 2020

 

 

123,443

 

 

 

881

 

 

$

-

 

 

$

(5

)

 

$

1,782

 

 

$

16

 

 

$

(188

)

 

$

1,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 28, 2019

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at June 29, 2019

 

 

122,710

 

 

 

558

 

 

$

-

 

 

$

(2

)

 

$

1,743

 

 

$

39

 

 

$

(187

)

 

$

1,593

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

8

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(35

)

 

 

(35

)

Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes

 

 

76

 

 

 

38

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

8

 

Balance at September 28, 2019

 

 

122,786

 

 

 

596

 

 

$

-

 

 

$

(3

)

 

$

1,751

 

 

$

47

 

 

$

(222

)

 

$

1,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 26, 2020

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at December 31, 2019

 

 

122,873

 

 

 

615

 

 

$

-

 

 

$

(3

)

 

$

1,761

 

 

$

38

 

 

$

(194

)

 

$

1,602

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22

)

 

 

-

 

 

 

(22

)

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

6

 

Issuance of common stock under stock-based compensation plans, net of shares withheld for employee 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 28, 2019

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at December 31, 2018

 

 

122,499

 

 

 

468

 

 

$

-

 

 

$

-

 

 

$

1,720

 

 

$

2

 

 

$

(189

)

 

$

1,533

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

45

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(33

)

 

 

(33

)

Issuance of common stock under stock-based compensation plans, net of shares withheld for employee taxes

 

 

287

 

 

 

128

 

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3

)

Stock-based compensation

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22

 

 

 

-

 

 

-

 

 

 

22

 

Adjustments due to Spin-Off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

 

9

 

Balance at September 28, 2019

 

 

122,786

 

 

 

596

 

 

$

-

 

 

$

(3

)

 

$

1,751

 

 

$

47

 

 

$

(222

)

 

$

1,573

 

 

The unaudited Notes to unaudited Consolidated and Combined Interim Financial Statements are an integral part of this statement.these statements.

 


RESIDEO TECHNOLOGIES, INC.9


NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

Note 1. Organization,Organization, Operations and Basis of Presentation

Business Description

Resideo Technologies, Inc. (“Resideo” or “the Company”), is a global provider of products, software, solutions and technologies that help homeowners stay connected and in control of their comfort, security and energy use. The Company is a leader in the home heating, ventilation and air conditioning controls and security markets, and a leading global distributor of low-voltage electronic and security products.

Separation from Honeywell

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”). On October 3, 2018, Exhibit 99.1 to Amendment No. 2 to the Company’s Registration Statement on Form 10 as filed with the Securities and Exchange Commission (“SEC”) on October 2, 2018 was declared effective by the SEC. On October 29, 2018, Honeywell’s shareholders of record as of October 16, 2018 (“Record Date”) received one share of the Company’s common stock, par value $0.001 per share, for every six shares of Honeywell’s common stock, par value $1.00 per share, held as of the Record Date, and cash for any fractional shares of the Company’s common stock. The Company began trading “regular way” under the ticker symbol “REZI” on the New York Stock Exchange on October 29, 2018.

In connection with the separation, Resideo and Honeywell entered into a Honeywell Reimbursement Agreement (as defined in Note 15. Commitments and Contingencies), a Separation and Distribution Agreement, an Employee Matters Agreement, a Tax Matters Agreement, a Transition Services Agreement, a Trademark License Agreement and a Patent Cross-License Agreement. The agreements govern the relationship between Resideo and Honeywell following the separation and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be provided by Honeywell to Resideo and by Resideo to Honeywell.

Basis of Presentation

Prior to the Spin-Off on October 29, 2018, theThe Company’s historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 29, 2018, these financial statements are presented on a combined basis and for the periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Interim“Interim Financial Statements”). The Consolidated and Combined Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions have been eliminated for all periods presented. The Consolidated and Combined Interim Financial Statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods.

All intracompany transactions have been eliminated for all periods presented. As described in “Note 5. Related Party Transactions with Honeywell” of Notes to unaudited Consolidated and Combined Interim Financial Statements of this Form 10-Q, all significant transactions between the Company and Honeywell occurring prior to the Spin-Off have been included in the unaudited Combined Interim Financial Statements for the period ended September 30, 2018.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

Prior to the Spin-Off, transactions between the Company and Honeywell were reflected in the Combined Balance Sheet as Due from related parties, current or Due to related parties, current. In the unaudited Combined Interim Statement of Cash Flows, the cash flows related to related party notes receivables presented in the Combined Balance Sheet in Due from related parties, current are reflected as investing activities since these balances represent amounts loaned to Honeywell. The cash flows related to related party notes payables presented in the Combined Balance Sheet in Due to related parties, current are reflected as financing activities since these balances represent amounts financed by Honeywell.

While the Company was owned by Honeywell, a centralized approach to cash management and financing was used. Prior to the consummation of the Spin-Off, the majority of the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed. Cash transfers to and from Honeywell’s cash management accounts are reflected in the Combined Balance Sheet as Due to and Due from related parties, current and in the unaudited Combined Interim Statement of Cash Flows as net financing activities.

The unaudited Combined Interim Financial Statements prior to the Spin-Off include certain assets and liabilities that have historically been held at the Honeywell corporate level but were specifically identifiable or otherwise attributable to the Company. The cash and cash equivalents held by Honeywell at the corporate level were not specifically identifiable to the Company and therefore were not attributed for any of the periods presented. Honeywell third-party debt and the related interest expense were not allocated for any of the periods presented as Honeywell’s borrowings were not directly attributable to the Company. In periods subsequent to the Spin-Off, we may have made and may continue to make adjustments to balances transferred at the Spin-Off, including adjustments to the classification of assets or liabilities transferred. Any such adjustments are recorded directly to equity in Adjustments due to the Spin-Off and are considered immaterial.

Prior to the Spin-Off, Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The cost of these services has been allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider these allocations to be a reasonable reflection of the benefits received by the Company. However, the financial information presented in these unaudited Consolidated and Combined Interim Financial Statements may not reflect the consolidated and combined financial position, operating results and cash flows of the Company had the Company been a separate stand-alone entity during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both Resideo and Honeywell consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefits received by the Company during the periods presented. After the Spin-Off, a number of the above services have continued under a Transition Services Agreement with Honeywell, which the Company expenses as incurred based on the contractual pricing terms.

 

The Company reports its quarterly financial information on a fiscal quarter basis using a modified 4-4-5 calendar convention;(modified in that the first, secondfiscal year always begins on January 1 and third quarters are consistently reported as endingends on March 31, June 30 and September 30. It is the Company’s practice to establish actual quarterly closing dates using a predetermined fiscal calendar, whichDecember 31) that requires its businesses to close their first, second and third quarter books on the lasta Saturday of the month in order to minimize the potentially disruptive effects of quarterly closing on business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, the Company will provide appropriate disclosures. Actual closing dates

Reclassification

On January 1, 2020, the Company changed its classification of research and development expenses in the Consolidated Interim Statements of Operations from Cost of goods sold to Selling, general and administrative expenses, such that research and development expenses are excluded from the calculation of Gross profit. The impact on the September 28, 2019 Consolidated Interim Statement of Operations is a reduction of Cost of goods sold, an increase in Gross profit and an increase in Selling, general and administrative expenses for the three and nine months ended September 30,28, 2019 of $20 million and 2018 were$66 million, respectively. The impact of the reclassification for the three and nine months ended September 28, 2019 is also reflected in “Note 6. Restructuring and September 29, 2018, respectively.


RESIDEO TECHNOLOGIES, INC.Other Charges”. This reclassification had no effect on the previously reported Net income (loss) or the Company’s Consolidated Interim Statements of Comprehensive Income (Loss), Consolidated Interim Statements of Cash Flows, or Consolidated Interim Balance Sheets.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)10

(Unaudited)


 

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 20182019 Annual Report on Form 10-K. Included herein are certain updates to those policies.

Leases—Effective January 1, 2019, arrangements containing leases are evaluated as an operating or finance leaseThe World Health Organization (“WHO”) declared the novel coronavirus disease ("COVID-19") a pandemic in March 2020. Starting at lease inception. For operating leases,the end of the first quarter and throughout the second quarter, the Company recognizes an operating right-of-use assetexperienced constrained supply and operating lease liabilityslowed customer demand that adversely impacted the Company’s business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, during the third quarter customer demand improved and cost actions taken during the first half of the year contributed to improvements in the Company’s results of operations and overall financial performance. As there remains uncertainty around the impacts of the COVID-19 pandemic, the Company addresses and evaluates the impacts frequently. At September 26, 2020, the Company believes that the accounting policies most likely to be affected by the COVID-19 pandemic are the following:

Use of Estimates—The preparation of the Company’s Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and related disclosures in the accompanying Notes to Consolidated Financial Statements. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed, and the effects of changes are reflected in the Consolidated Financial Statements in the period they are determined to be necessary. Estimates are used when accounting for stock-based compensation, pension benefits, contingent consideration, indemnification liabilities, goodwill and intangible assets, and valuation allowances for accounts receivable, inventory, deferred tax assets, and the amounts of revenue and expenses reported during the period. The Company has used information available to identify potential impacts caused by the COVID-19 pandemic at lease commencement based onSeptember 26, 2020 in these estimates.

Goodwill— The Company has determined that it is likely that the presentcarrying value of lease payments overgoodwill exceeds the lease term.

Sincefair value at September 26, 2020. However, the extent to which COVID-19 may adversely impact our business depends on future developments, which are uncertain and unpredictable, depending upon the severity and duration of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time but may adversely affect our business and financial results. It is likely that, during the remainder of 2020 and into 2021, macroeconomic conditions will be volatile and could impact our business. If there is an implicit rate of return is not readily determinable foradverse change in facts and circumstances, then animpairment charge may be necessary in the Company's leases, an incremental borrowing rate is used in determiningfuture. Specifically, the presentfair value of lease payments,our Products & Solutions reporting unit, with goodwill of approximately $2,012 million at September 26, 2020, exceeded its' carrying value by 10% in the 2019 annual impairment test and therefore is calculated based on information available athighly sensitive to adverse changes in the lease commencement date.  The incremental borrowingfacts and circumstances that could result in a possible future impairment. Should the fair value of the Company’s reporting units fall below its' carrying amount because of reduced operating performance, market declines, changes in the discount rate, is determined using a portfolio approach based onmore significant impact than expected from the rate of interest the Company would have to pay to borrow funds on a collateralized basis over a similar term.COVID-19 pandemic, or other conditions, charges for impairment may be necessary. The Company references a market yield curve consistent with the Company's credit rating whichregularly monitors its reporting units to determine if there is risk-adjusted to approximate a collateralized rate in the currencyan indicator of the lease. These rates are updated on a quarterly basis for measurement of new lease obligations. Most leases include renewal options; however, generally it is not reasonably certain that these options will be exercised at lease commencement. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recognized on the Company’s balance sheet.potential impairment. The Company does not separate lease and non-lease components forwill perform its real estate and automobile leases.annual goodwill impairment assessment during the fourth quarter.

Recent Accounting Pronouncements—The Company considers the applicability and impact of all recent accounting standardsupdates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed below were assessed anddetermined to be either not applicable or are expected to have an immaterial impact on the Company’s consolidated and combined financial position or results ofoperations.

The Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, and applied the changes prospectively, recognizing a cumulative-effect adjustment to the beginning balance of retained earnings as of the adoption date. As permitted by the new guidance, the Company elected the package of practical expedients, which among other things, allowed historical lease classification to be carried forward.

Upon adoption of ASU No. 2016-02, the Company recognized an aggregate lease liability of $115 million, calculated based on the present value of the remaining minimum lease payments for qualifying leases as of January 1, 2019, with a corresponding right-of-use asset of $112 million. The cumulative-effect adjustment recognized to opening retained earnings was not material. The adoption of the new guidance did not impact the Company’s unaudited consolidated interim statement of operations or cash flows.

In February 2018, the FASB issued guidance that allows for an entity to elect to reclassify the income tax effects on items within accumulated other comprehensive income resulting from the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. The Company adopted the standard on January 1, 2019 and has not reclassified the income tax effects of U.S. Tax Reform from accumulated other comprehensive income to retained earnings. The Company has adopted the aggregate portfolio accounting policy for recognizing the disproportionate income tax effects in accumulated other comprehensive income.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. From November 2018 to May 2019, amendments to Topic 326 were issued to clarify numerous accounting topics. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

supportable information to inform credit loss estimates. The amendment is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2018. The Company does not expect adoption of this pronouncement to have a material financial statement impact.

In August 2018, the FASB issued guidance that amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans and allows for the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020 and allows for early adoption. The Company will adopt on January 1, 2021 and does not expect this new standard to have a significant impact to its disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in

11


the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combinations that result in a step-up in the tax basis of goodwill. The transition requirements are primarily prospective and the effective date for Resideo is January 1, 2021, with early adoption permitted. The Company early adopted the provisions of this guidance on January 1, 2020. Adoption of this guidance did not have a material financial statement impact.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is optional guidance related to reference rate reform that provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our Term Loans and Revolving Credit Facility, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. Refer to “Note 10. Long-term Debt and Credit Agreement” for further details on our Term Loans and Revolving Credit Facility. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

Note 3. Earnings (Loss) Per Share

On October 29, 2018,

The following table sets forth the date of consummation of the Spin-Off, 122,498,794 shares of the Company’s Common Stock, par value $0.001 per share, were distributed to Honeywell shareholders of record as of October 16, 2018. This share amount is being utilized for the calculationcomputation of basic and diluted earnings per share for all periods presented prior to the Spin-Off as no common stock was outstanding prior to the date of the Spin-Off. For the 2018 year to date calculation, these(dollars in millions except shares are treated as issuedin thousands and outstanding from January 1, 2018 for purposes of calculating historical basic earnings per share. For September 30, 2019 and September 30, 2018, this calculation excludes 596,300 and 467,764 of treasury shares, respectively.

The details of the earnings per share calculations for the three and nine months ended September 30, 2019 and 2018 are as follows:data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

Basic:

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

8

 

 

$

311

 

 

$

45

 

 

$

389

 

Weighted average common shares outstanding (in thousands)

 

 

122,770

 

 

 

122,967

 

 

 

122,681

 

 

 

122,967

 

Earnings per share - Basic

 

$

0.07

 

 

$

2.53

 

 

$

0.37

 

 

$

3.16

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

 

123,421

 

 

 

122,770

 

 

 

123,194

 

 

 

122,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents

 

 

1,814

 

 

 

474

 

 

 

-

 

 

 

723

 

Shares used in computing diluted earnings per share

 

 

125,235

 

 

 

123,244

 

 

 

123,194

 

 

 

123,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

 

$

0.07

 

 

$

(0.18

)

 

$

0.37

 

Diluted

 

$

0.60

 

 

$

0.06

 

 

$

(0.18

)

 

$

0.36

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

Diluted:

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

8

 

 

$

311

 

 

$

45

 

 

$

389

 

Weighted average common shares outstanding - Basic (in thousands)

 

 

122,770

 

 

 

122,967

 

 

 

122,681

 

 

 

122,967

 

Dilutive effect of common stock equivalents

 

 

474

 

 

 

-

 

 

 

723

 

 

 

-

 

Weighted average common shares outstanding - Diluted (in thousands)

 

 

123,244

 

 

 

122,967

 

 

 

123,404

 

 

 

122,967

 

Earnings per share - Diluted

 

$

0.06

 

 

$

2.53

 

 

$

0.36

 

 

$

3.16

 


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

Diluted earnings per 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 our common stock for the three and nine months ended September 30,26, 2020 and September 28, 2019. In periods where the Company has a net loss, no0 dilutive common shares are included in the calculation for diluted shares as they are considered anti-dilutive.For the three and nine months ended September 30,26, 2020, average options and other rights to purchase approximately 1.1 million and 3.6 million shares of common stock, respectively, were outstanding, all of which were anti-dilutive during the three and nine months ended September 26, 2020, and therefore excluded from the computation of diluted earnings per common share. In addition, an average of approximately 0.8 million and 0.6 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and nine months ended September 26, 2020 as the contingency has not been satisfied. For the three and nine months ended September 28, 2019, average options and other rights to purchase approximately 3.8 million and 1.5 million shares of common stock, respectively, were outstanding, respectively, all of which were anti-dilutive during the three and nine months ended September 30,28, 2019, and therefore excluded from the computation of diluted earningsincome per common share. Additionally, anAn average of approximately 0.3 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and nine months ended September 30,28, 2019, as the contingency has not been satisfied at September 30, 2019.satisfied.

12


 

Note 4. Acquisitions

On March 28, 2019,February 10, 2020, the Company acquired allcompleted the acquisition of privately held Herman ProAV, a leading provider and distributer of professional audio-visual products, procurement services and labor resources to systems integrators in the capital stock of Buoy Labs,commercial audio-visual industry. The purchase price paid for $6 million, which has been integrated into our Products & Solutions segment. Buoy Labs provides innovative Wi-Fi enabled solutions that track the amount of water used in a home, integrating smart software and hardware that can help consumers identify potential leaks and allow consumers to act to prevent them through its subscription-based app services.this acquisition was approximately $36 million. In connection with thethis acquisition, the Company recognized preliminary goodwill and intangible assets of $6 million.$4 million and $18 million, respectively. This acquisition was integrated into and builds upon ADI Global Distribution’s product portfolio and expands its presence in the pro-AV market. The Herman ProAV acquisition agreement includesagreements include deferred payments for certain individuals that are contingent upon employment as well as financial performance. The Company determined that these deferred payments are accounted for as compensation expense over the requisite service period. The Company is still assessingsubstantially complete with the final allocation of the purchase price, however, amounts are still subject to the assets and liabilities of the business.

On May 21, 2019, the Company acquired certain assets relating to innovative energy efficiency from Whisker Labs, for $5 million, which has been integrated into our Products & Solutions segment. The acquired technology creates a thermodynamic model of a home to accurately predict home heating and air conditioning run time and energy use to enable a homeowner to use less energy while maintaining comfort. In connection withfinalization. Pro-forma disclosures are not provided as the acquisition the Company recognized preliminary goodwill and intangible assets of $5 million. The Company is still assessing the final allocation of the purchase price to the assets and liabilities of the business.

On June 27, 2019, the Company acquired all of the membership interests of LifeWhere for $6 million, which has been integrated into our Products & Solutions segment. LifeWhere uses machine learning and analytics to predict potential failure on critical home appliances, such as water heaters, furnaces and air conditioners. This service provides the detailed analytics required for professional contractors to dispatch technicians with the right skills to quickly repair the appliance before it causes a catastrophic failure. In connection with the acquisition, the Company recognized preliminary goodwill and intangible assets of $6 million. The Company is still assessing the final allocation of the purchase price to the assets and liabilities of the business.

These acquisitions have an immaterial financial statement impact on both an individual basis and when considered in the aggregate.impact.

Note 5. Related Party Transactions with Honeywell

Prior to the Spin-Off, the unaudited Combined Interim Financial Statements were derived from the unaudited Consolidated Interim Financial Statements and accounting records of Honeywell. Prior to the Spin-Off, Honeywell was a related party that provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The costs of these services were allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider the allocations to be a reasonable reflection of the benefits received by the Company.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

During the three and nine months ended September 30, 2018, the Company was allocated $66 million and $203 million, respectively, of general corporate expenses incurred by Honeywell and such amounts are included within Selling, general and administrative expenses in the unaudited Combined Interim Statement of Operations for the nine months ended September 30, 2018.  As certain expenses reflected in the unaudited Combined Interim Financial Statements include allocations of corporate expenses from Honeywell, these statements could differ from those that would have been prepared had the Company operated on a stand-alone basis.

All significant intercompany transactions between the Company and Honeywell have been included in these unaudited Combined Interim Financial Statements. Sales to Honeywell during the three and nine months ended September 30, 2018 were $8 million and $23 million, respectively.  Costs of goods sold to Honeywell during the three and nine months ended September 30, 2018 were $5 million and $18 million, respectively. Purchases from Honeywell during the three and nine months ended September 30, 2018 were $32 million and $149 million, respectively. The total net effect of the settlement of these intercompany transactions is reflected in the unaudited Combined Interim Statement of Cash Flows as a financing activity.

While the Company was owned by Honeywell, a centralized approach to cash management and financing of operations was used. Prior to consummation of the Spin-Off, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed.

Subsequent to the Spin-Off on October 29, 2018, transactions with Honeywell were not considered related party transactions. Accordingly, no related party transactions with Honeywell were recorded for the three and nine months ended September 30, 2019.

Note 6. Repositioning and Other Charges

During the second quarter of 2019, management began a repositioning plan to reduce operating costs and better align the Company’s workforce with the needs of the business going forward. Repositioning and related expenses were $9 million and $34 million for the three and nine months ended September 30, 2019, respectively, and primarily related to severance.

A summary of repositioning charges follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Severance

 

$

9

 

 

$

-

 

 

$

35

 

 

$

4

 

Asset impairments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

Reserve adjustments

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

Total net repositioning charges

 

$

9

 

 

$

-

 

 

$

34

 

 

$

5

 

The following table summarizes the pretax distribution of total net repositioning charges by unaudited Consolidated and Combined Statement of Operations classification:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of goods sold

 

$

5

 

 

$

-

 

 

$

18

 

 

$

4

 

Selling, general and administrative expenses

 

 

4

 

 

 

-

 

 

 

16

 

 

 

1

 

 

 

$

9

 

 

$

-

 

 

$

34

 

 

$

5

 


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

The following table summarizes the pretax impact of total net repositioning charges by segment:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Products & Solutions

 

$

9

 

 

$

-

 

 

$

28

 

 

$

5

 

ADI Global Distribution

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

$

9

 

 

$

-

 

 

$

34

 

 

$

5

 

The following table summarizes the status of total repositioning reserves related to severance cost included in Accrued liabilities in the unaudited Consolidated Balance Sheet: 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

Beginning of period

 

$

13

 

Charges

 

 

35

 

Usage – cash

 

 

(22

)

Adjustments

 

 

(1

)

End of period

 

$

25

 

 

Note 7.5. Revenue Recognition

Disaggregated Revenue

Revenues by channelgeography and business line are as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018 (3)

 

 

2019

 

 

2018 (3)

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Comfort

 

$

297

 

 

$

256

 

 

$

725

 

 

$

799

 

Security

 

 

142

 

 

 

128

 

 

 

379

 

 

 

397

 

Residential Thermal Solutions

 

 

133

 

 

 

128

 

 

 

341

 

 

 

404

 

Products & Solutions

 

 

572

 

 

 

512

 

 

 

1,445

 

 

 

1,600

 

U.S. and Canada

 

$

590

 

 

$

555

 

 

$

1,705

 

 

$

1,614

 

 

 

650

 

 

 

590

 

 

 

1,758

 

 

 

1,705

 

EMEA (1)

 

 

109

 

 

 

107

 

 

 

336

 

 

 

338

 

 

 

129

 

 

 

109

 

 

 

338

 

 

 

336

 

India

 

 

15

 

 

 

12

 

 

 

43

 

 

 

42

 

APAC (2)

 

 

11

 

 

 

15

 

 

 

29

 

 

 

43

 

ADI Global Distribution

 

 

714

 

 

 

674

 

 

 

2,084

 

 

 

1,994

 

 

 

790

 

 

 

714

 

 

 

2,125

 

 

 

2,084

 

Comfort

 

 

256

 

 

 

271

 

 

 

799

 

 

 

787

 

Security

 

 

128

 

 

 

119

 

 

 

397

 

 

 

358

 

RTS

 

 

128

 

 

 

136

 

 

 

404

 

 

 

422

 

Products & Solutions (2)

 

 

512

 

 

 

526

 

 

 

1,600

 

 

 

1,567

 

Net revenue

 

$

1,226

 

 

$

1,200

 

 

$

3,684

 

 

$

3,561

 

 

$

1,362

 

 

$

1,226

 

 

$

3,570

 

 

$

3,684

 

 

(1)

EMEA represents Europe, the Middle East and Africa.

(2)

Products & Solutions sales channel naming convention changed from what was disclosed in our quarterly report for the quarter ended September 30, 2018. Comfort & Care was broken out into ComfortAPAC represents Asia and Residential Thermal Solutions (“RTS”).

(3)

The unaudited disaggregated revenue disclosure for the three and nine month periods ended September 30, 2018 contained misallocated revenue between the ADI Global Distribution geographies U.S. and Canada and India.  Correcting this allocation increased U.S. and Canada revenue and reduced India revenue for the three and nine month periods ended September 30, 2018 by $30 million and $35 million, respectively. There is no other impact


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

to the unaudited Consolidated and Combined Interim Financial Statements for the three and nine month periods ended September 30, 2018.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. Less than 2%Approximately 3% of the Company’s revenue is satisfied over time. As of September 30,26, 2020 and September 28, 2019, contract assets and liabilities arewere not material.

 

Note 8.6. Restructuring and Other Charges

During the fourth quarter of 2019, the Company announced commencement of a comprehensive financial and operational review focused on product cost, gross margin improvement, and general and administrative expense simplification. The review is being overseen by the Strategic and Operational Committee of the board, comprised of independent directors. The Company retained industry-recognized experts in supply chain optimization and organizational excellence to assist in the review. Certain restructuring actions have been and are continuing to be implemented under this program as well as previous programs. Products & Solutions segment restructuring and related expenses for the three and nine months ended September 26, 2020 were $7 million and $24 million, respectively, and for the three and nine months ended September 28, 2019, restructuring and related expense were $9 million and $28 million, respectively. ADI Global Distribution segment restructuring and related expenses for the three and nine months ended September 26, 2020 were $0 million and $3 million, respectively, and for the three and nine months ended September 28, 2019, restructuring and related expenses were $0 million and $6 million, respectively. Restructuring and related expenses for all periods are primarily related to severance.

13


The Company's restructuring expenses for the three and nine months ended September 26, 2020 and September 28, 2019:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of goods sold

 

$

2

 

 

$

4

 

 

$

7

 

 

$

11

 

Selling, general and administrative expenses

 

 

5

 

 

 

5

 

 

 

20

 

 

 

23

 

 

 

$

7

 

 

$

9

 

 

$

27

 

 

$

34

 

The following table summarizes the status of total restructuring reserves related to severance cost included in Accrued liabilities in the unaudited Consolidated Balance Sheets:

 

 

Nine Months Ended

 

 

 

September 26,

 

 

 

2020

 

Beginning of period

 

$

19

 

Charges

 

 

27

 

Usage – cash payments

 

 

(23

)

End of period

 

$

23

 

Note 7. Income Taxes

 

The Company recorded a tax benefitexpense of $329$7 million and $26 million for the three and nine months ended September 26, 2020, respectively.

For interim periods, income tax is equal to the total 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.

For the three months ended September 30, 2018 as compared to nil for26, 2020, the three months ended September 30, 2019.  The decrease in thenet tax benefit is primarily the resultexpense of $7 million was driven by interim period tax benefits generated in 2018 relatedexpense of $7 million based on year-to-date actual amounts. Tax expense specific to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings, and adjustmentsperiod was $0. In addition to items specific to the provisional tax amount related to U.S. Tax Reform.

The effectiveperiod, our income tax rate foris impacted by the three months ended September 30, 2019 was lower thanmix of earnings across the U.S. federal statutory rate of 21% primarily due to a decreasejurisdictions in the forecast of full-year non-deductible expenses and a decrease in the forecast of full-year U.S. taxation of foreign earnings.

The effective tax rate for the nine months ended September 30, 2019 was higher than the U.S. federal statutory rate of 21% primarily attributable towhich we operate, non-deductible expenses, and U.S. taxation of foreign earnings.

 

The effective tax rate for the three months ended September 30, 2018 was higher than the U.S. federal statutory rate of 21% primarily due to tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings, and adjustments to the provisional tax amount related to U.S. Tax Reform.  The combined effect of the tax benefits recorded in the quarter ended September 30, 2018 resulted in a tax benefit (negative tax expense).  As a result of the tax benefits and in conjunction with a net loss in the quarter ended September 30, 2018, the effective tax rate for the quarter is a positive percentage and significantly more than the US statutory rate. 

The effective tax rate forFor the nine months ended September 30, 2018 was lower than26, 2020, net tax expense of $26 million consisted primarily of interim period tax expense of $11 million based on year-to-date actual amounts, and tax expense specific to the U.S. federal statutory rateperiod of 21%approximately $15 million, consisting primarily from tax benefitsof $15 million for valuation allowances in foreign jurisdictions, $2 million related to the internal restructuringestimated tax impact of Resideo’s businessthe CARES Act on prior years, and share-based excess cost of $1 million, partially offset by a $3 million tax benefit for changes in advance of its anticipated Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings and adjustmentsestimates related to prior years. In addition to items specific to the provisionalperiod, our income tax amount related torate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. Tax Reform.taxation of foreign earnings.

 

 

Note 9. Inventories8. Inventories—Net

 

 

September 30,

 

 

December 31,

 

 

September 26,

 

 

December 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Raw materials

 

$

143

 

 

$

167

 

 

$

156

 

 

$

154

 

Work in process

 

 

19

 

 

 

34

 

 

 

20

 

 

 

18

 

Finished products

 

 

567

 

 

 

427

 

 

 

521

 

 

 

568

 

Inventory reserves

 

 

(79

)

 

 

(69

)

 

$

729

 

 

$

628

 

 

$

618

 

 

$

671

 

 


RESIDEO TECHNOLOGIES, INC.14

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)


 

Note 10.9. Accrued Liabilities

 

 

September 30,

 

 

December 31,

 

 

September 26,

 

 

December 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Obligations payable to Honeywell

 

$

140

 

 

$

140

 

Obligations payable under Indemnification Agreements

 

$

175

 

 

$

140

 

Taxes payable

 

 

41

 

 

 

76

 

 

 

53

 

 

 

66

 

Compensation, benefit and other employee related

 

 

73

 

 

 

73

 

Compensation, benefit and other employee-related

 

 

82

 

 

 

66

 

Customer rebate reserve

 

 

71

 

 

 

78

 

Other

 

 

277

 

 

 

214

 

 

 

225

 

 

 

202

 

 

$

531

 

 

$

503

 

 

$

606

 

 

$

552

 

 

Refer to “Note 15.13. Commitments and Contingencies” of this Form 10-Q for further details on Obligations payable to Honeywell.under Indemnification Agreements.

 

Note 11.10. Long-term Debt and Credit Agreement

 

The Company’s debt at September 30, 201926, 2020 and December 31, 20182019 consisted of the following:

 

 

September 30,

 

 

December 31,

 

 

September 26,

 

 

December 31,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

6.125% notes due 2026

 

$

400

 

 

$

400

 

 

$

400

 

 

$

400

 

Five-year variable rate term loan A due 2023

 

 

341

 

 

 

350

 

 

 

324

 

 

 

333

 

Seven-year variable rate term loan B due 2025

 

 

473

 

 

 

475

 

 

 

468

 

 

 

470

 

Revolving Credit Facility

 

 

60

 

 

 

-

 

 

 

150

 

 

 

-

 

Unamortized debt issuance costs

 

 

(21

)

 

 

(24

)

Unamortized deferred financing costs and debt discounts

 

 

(20

)

 

 

(23

)

Total outstanding indebtedness

 

 

1,253

 

 

 

1,201

 

 

 

1,322

 

 

 

1,180

 

Less: amounts due within one year

 

 

88

 

 

 

22

 

 

 

181

 

 

 

22

 

Total long-term debt due after one year

 

$

1,165

 

 

$

1,179

 

 

$

1,141

 

 

$

1,158

 

 

In October of 2018,On November 26, 2019, the Company issued $400 million in principal amount of its 6.125% senior unsecured notes (the “Senior Notes”), entered into a First Amendment to the Credit Agreement (the “Credit Agreement Amendment”). The Credit Agreement Amendment amended the five-year variable rate term loan facilities inA due 2023 (the “Term A Loan Facility”), the form of a seven-year LIBOR plus 2.00% senior secured first-lienvariable rate term loan B loan facility in an aggregate principal amount of $475 milliondue 2025 (the “Term B Loan Facility” and a five-year LIBOR plus 2.00% senior secured first-lien term A loan facility in an aggregate principal amount of $350 million (together, the “Term Loans”) and established athe five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility”) credit agreement (the “Credit Agreement”) to, among other things: (i) increase the levels of the maximum consolidated total leverage ratio under the Credit Agreement, to not greater than 5.25 to 1.00 for the quarter ended December 31, 2019, with step-downs to 4.75 to 1.00 starting in an aggregate principal amount of $350 million (the "Revolving Credit Facility"). Thethe quarter ending December 31, 2020, 4.25 to 1.00 starting in the quarter ending December 31, 2021, and 3.75 to 1.00 starting in the quarter ending December 31, 2022; (ii) increase each applicable interest rate margin on loans outstanding after the Credit Agreement Amendment effective date by 25 basis points per annum, 2.25% per annum (for LIBOR loans) and 1.25% per annum (for ABR loans) in respect of the Term B Loan Facility, and based on our leverage ratio, from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for ABR loans) for the Term A Loan Facility and the Revolving Credit Facility borrowings are based on, atFacility; and (iii) modify the option of the Company, either (i) the rate of interest last quoted by The Wall Street Journal as the “prime rate”defined terms “Consolidated EBITDA” and “Pro Forma Basis” set forth in the United States, (ii) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5% and (iii) the one month adjusted LIBOR rate, plus 1.00% per annum.Credit Agreement.

As of September 30, 2019,26, 2020, there were $60$150 million of borrowings and no of0 letters of credit issued under the $350 million Revolving Credit Facility. The Company assessed the amount recorded under the Term Loans, the Senior Notes,6.125% senior unsecured notes (the “Senior Notes”), and the Revolving Credit Facility andFacility. The Company determined the Term Loans andthat the Revolving Credit Facility approximated fair value,value. The Term A Loan Facility, Term B Loan Facility and the Senior Notes’ fair value isvalues are approximately $422 million.$307, $460 and $395 million, respectively. The fair values of the debt are based on the quoted inactive prices and are therefore classified as Level 2 within the valuation hierarchy.

At September 30, 2019,26, 2020, the interest rate for the Term Loans was 4.11%2.56% and the weighted average interest rate for the Revolving Credit Facility was 4.09%2.41%.The interest expense for the Revolving Credit Facility, Term Loans and Senior Notes during the three and nine months ended September 30, 2019 was $16 million and $51 million, respectively, which includes the amortization of debt issuance cost and debt discounts.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS15

(Dollars in millions, unless otherwise noted)

(Unaudited)


 

For more information, please refer to “Note 15. Long-term Debt”Debt and Credit Agreement” in our 20182019 Annual Report on Form 10-K.

 

Note 12.11. Leases

As discussed in Note 2, the Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019. The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment.Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation, and certain automobile lease agreements include rental payments which fluctuate based on mileage. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company’s operating lease costs for the three and nine months ended September 30,26, 2020 and September 28, 2019 consisted of the following:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating Lease Costs

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

5

 

 

$

4

 

 

$

13

 

 

$

12

 

Selling, general & administrative

 

$

10

 

 

$

27

 

 

 

13

 

 

 

10

 

 

 

33

 

 

 

27

 

Cost of goods sold

 

 

4

 

 

 

12

 

Total operating lease costs

 

$

14

 

 

$

39

 

 

$

18

 

 

$

14

 

 

$

46

 

 

$

39

 

 

 

 

 

 

 

 

 

 

Total operating lease costs include variable lease costs of $3$5 million and $8$12 million, respectively, for the three and nine months ended September 30, 2019.26, 2020. For the three and nine months ended September 28, 2019, total operating lease costs included variable lease costs of $3 million and $8 million, respectively. Total operating lease costs also include offsetting sublease income which is immaterial for the three and nine months ended September 30,26, 2020 and September 28, 2019.

 

The Company recognized the following related to its operating leases:

 

 

Financial

Statement

Line Item

 

At September 30,

2019

 

 

Financial

Statement

Line Item

 

At September 26,

2020

 

 

At December 31,

2019

 

Operating right-of-use assets

 

Other assets

 

$

130

 

 

Other assets

 

$

134

 

 

$

137

 

Operating lease liabilities - current

 

Accrued liabilities

 

$

29

 

 

Accrued liabilities

 

$

33

 

 

$

31

 

Operating lease liabilities - noncurrent

 

Other liabilities

 

$

106

 

 

Other liabilities

 

$

109

 

 

$

111

 


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

Maturities of the Company’s operating lease liabilities were as follows:

 

 

At September 30,

2019

 

 

At September 26,

2020

 

2019

 

$

9

 

2020

 

 

35

 

 

$

10

 

2021

 

 

32

 

 

 

39

 

2022

 

 

27

 

 

 

35

 

2023

 

 

20

 

 

 

28

 

2024

 

 

16

 

Thereafter

 

 

36

 

 

 

39

 

Total lease payments

 

 

159

 

 

 

167

 

Less: imputed interest

 

 

24

 

 

 

25

 

Present value of operating lease liabilities

 

$

135

 

 

$

142

 

Weighted-average remaining lease term (years)

 

 

5.64

 

 

 

5.44

 

Weighted-average incremental borrowing rate

 

 

6.00

%

 

 

6.00

%

 

16

Future minimum lease payments under operating leases having initial or remaining non-cancellable lease terms in excess of one year as of December 31, 2018 were as follows:

 

 

At December 31,

2018

 

2019

 

$

39

 

2020

 

 

33

 

2021

 

 

28

 

2022

 

 

22

 

2023

 

 

15

 

Thereafter

 

 

17

 

 

 

$

154

 


 

Supplemental cash flow information related to the Company’s operating leases was as follows:

 

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 26,

 

 

September 28,

 

 

 

September 30, 2019

 

 

 

 

2020

 

 

2019

 

Operating cash outflows

 

 

$

28

 

 

 

 

$

22

 

 

$

28

 

Operating right-of-use assets obtained in exchange for operating lease liabilities

 

 

$

47

 

 

 

 

$

22

 

 

$

47

 

 

As of September 30, 2019,26, 2020, the Company has additional operating leases that have not yet commenced. Obligations under these leases are not material. Additionally, as a lessor, the Company leases all or a portion of certain owned properties. Rental income for the three and nine months ended September 30,26, 2020 and September 28, 2019 was not material.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

Note 13. Accumulated Other Comprehensive Loss

The changes in Accumulated other comprehensive loss are provided in the tables below.

Changes in Accumulated Other Comprehensive Loss by Component

 

 

Foreign

Exchange

Translation

Adjustment

 

 

Pension

Adjustments

 

 

Changes in

Fair Value of

Effective

Cash Flow

Hedges

 

 

Accumulated

Other

Comprehensive

Loss

 

Balance at December 31, 2017

 

$

(100

)

 

$

-

 

 

$

-

 

 

$

(100

)

Other comprehensive income before

   reclassifications

 

 

31

 

 

 

-

 

 

 

-

 

 

 

31

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(1

)

Net current period other comprehensive income

 

 

31

 

 

 

-

 

 

 

(1

)

 

 

30

 

Balance at March 31, 2018

 

$

(69

)

 

$

-

 

 

$

(1

)

 

$

(70

)

Other comprehensive loss before reclassifications

 

 

(49

)

 

 

-

 

 

 

-

 

 

 

(49

)

Balance at June 30, 2018

 

$

(118

)

 

$

-

 

 

$

(1

)

 

$

(119

)

Other comprehensive loss before reclassifications

 

 

(5

)

 

-

 

 

 

(2

)

 

 

(7

)

Amounts reclassified from accumulated other

   comprehensive income

 

-

 

 

-

 

 

$

2

 

 

$

2

 

Balance at September 30, 2018

 

$

(123

)

 

$

-

 

 

$

(1

)

 

$

(124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

(177

)

 

$

(12

)

 

$

-

 

 

$

(189

)

Other comprehensive income before

   reclassifications

 

 

6

 

 

 

-

 

 

 

-

 

 

 

6

 

Balance at March 31, 2019

 

$

(171

)

 

$

(12

)

 

$

-

 

 

$

(183

)

Other comprehensive loss before

   reclassifications

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

(4

)

Balance at June 30, 2019

 

$

(175

)

 

$

(12

)

 

$

-

 

 

$

(187

)

Other comprehensive loss before reclassifications

 

 

(35

)

 

 

-

 

 

 

-

 

 

 

(35

)

Balance at September 30, 2019

 

$

(210

)

 

$

(12

)

 

$

-

 

 

$

(222

)

 

Note 14.12. Stock-Based Compensation Plans

Restricted Stock Units (“RSUs”)

 

During the nine months ended September 30, 2019,26, 2020, as part of the Company’s annual long-term compensation under the 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates (theand 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 319,771795,099 performance-based RSUs and 1,255,4402,168,943 time-based RSUs to eligible employees. The weighted average grant date fair value per share for these shares was $22.06.$9.18.

 

Stock Options

 

During the nine months ended September 30, 2019,26, 2020, as part of the Company’s annual long-term compensation under the Stock Incentive Plan, 1,155,5661,083,665 stock options were granted to eligible employees at a weighted average exercise price per share of $24.37$9.17 and weighted average grant date fair value per share of $6.71.$2.61.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

Note 15.13. 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 expenses for sites owned and operated by Resideo are presented within Cost of goods sold for operating sites, which are the Company’s owned sites. For the three and nine months ended September 30,26, 2020 and September 28, 2019 and September 30, 2018, , environmental expenses related to these operating sites were not material. On October 29, 2018, upon consummation of the Spin-Off, certain environmental liabilities became subject to the Honeywell Reimbursement Agreement (defined below) and were reclassified to Obligations payable to Honeywell.  The expenses related to these sites were recorded within Other expense, net in the unaudited Consolidated and Combined Interim Statement of Operations.  For the three and nine months ended September 30, 2018, environmental expense within Other expense, net was$146 million and $322 million, respectively.  Liabilities for environmental costcosts were $21 million and $735$22 million as of September 30, 201926, 2020 and September 30, 2018, respectively. For additional information, see Honeywell Reimbursement Agreement below.December 31, 2019.

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 our unaudited consolidated and combined results of operations and operating cash flows in the periods recognized or paid.

17


Obligations Payable Under Indemnification Agreements

In connection with the Spin-Off, the Company entered into an indemnification and reimbursement agreement with Honeywell (the "Reimbursement Agreement") and a tax matters agreement (the "Tax Matters Agreement") (collectively, the "Indemnification Agreements") which are further described below.

Reimbursement Agreement

On October 29, 2018, in connection with the Spin-Off, the Company entered into an indemnification and reimbursement agreementthe Reimbursement Agreement with Honeywell (the “Honeywell Reimbursement Agreement”)pursuant to which the Company has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed (“payments”), less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the “recoveries”). The amount payable by the Company in respect of such liabilities arising in respect of any given year will beis subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). The scope of the Company’s current environmental remediation obligations subject to the Honeywell Reimbursement Agreement relates to approximately 230 sites or groups of sites that are undergoing environmental remediation under U.S. federal or state law and agency oversight for contamination associated with Honeywell legacyhistorical business operations. The ongoing environmental remediation is designed to address contaminants at upland and sediment sites, which include, among others, metals, organic compounds and polychlorinated biphenyls, through a variety of methods, which include, among others, excavation, capping, in-situ stabilization, groundwater treatment and dredging. In addition, the Company obligations subject to the Honeywell Reimbursement Agreement will include certain liabilities with respect to (i) hazardous exposure or toxic tort claims associated with the specified sites that arise after the Spin-Off, if any, (ii) currently unidentified releases of hazardous substances at or associated with the specified sites, (iii) other environmental claims associated with the specified sites and (iv) consequential damages.

Payments in respect of the liabilities arising in a given year will be made quarterly throughout such year on the basis of an estimate of the liabilities and recoveries provided by Honeywell. Following the end of any such year, Honeywell will provide the Company with a calculation of the amount of payments and the recoveries actually received.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

Payment amounts under the Honeywell Reimbursement Agreement will be deferred to the extent that a specified event of default has occurred and is continuing under certain indebtedness, including under the Company’s principal credit agreement,Credit Agreement, or the payment thereof causes the Company to not be compliant with certain financial covenants in certain indebtedness, including the Company’s principal credit agreementCredit Agreement, on a pro forma basis, including the maximum total leverage ratio (ratio of consolidated debt to consolidated EBITDA, which excludes any amounts owed to Honeywell under the Honeywell Reimbursement Agreement), and the minimum interest coverage ratio. A 5% late payment fee will accrue on all amounts that are not otherwise entitled to be deferred under the terms of the Honeywell Reimbursement Agreement, without prejudice to any other rights that Honeywell may have for late payments.

The obligations under the Honeywell Reimbursement Agreement will continue until the earlier of: (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.

On April 21, 2020, the Company and Honeywell entered into an amendment to the Reimbursement Agreement (the "Reimbursement Agreement Amendment"). Pursuant to the Reimbursement Agreement Amendment, certain covenants in Exhibit G of the Reimbursement Agreement were modified to conform, if applicable, to the amended covenants included in the Credit Agreement Amendment. In addition, under the Reimbursement Agreement Amendment, the parties agreed to defer until no later than July 30, 2020 (which was further amended as described below) the $35 million quarterly payment otherwise payable to Honeywell on April 30, 2020. The Reimbursement Agreement Amendment expressly reserves all rights of the parties thereto and their respective affiliates in respect of the Reimbursement Agreement and each other contract or agreement between such parties or their affiliates (the “Other Agreements”), and provides that the execution of the amendment does not constitute a waiver of any claims, rights, remedies, defenses, arguments, interpretations or obligations of such parties or their affiliates under or related to the Reimbursement Agreement or any Other Agreement.

18


On July 28, 2020, the Company and Honeywell entered into the Second Reimbursement Agreement Amendment. Pursuant to the Second Reimbursement Agreement Amendment, the parties agreed to further defer until no later than October 30, 2020 the $35 million quarterly payment that was originally due thirty days following the start of the second quarter of 2020 and was previously deferred until no later than July 30, 2020 pursuant to the Reimbursement Agreement Amendment. The deferred payment was made on October 30, 2020.

The following table summarizes information concerning our Honeywell Reimbursement Agreement liabilities:

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2020

 

 

2019

 

Beginning of period

 

$

616

 

Beginning balance

 

$

585

 

 

$

616

 

Accruals for indemnification liabilities deemed probable and reasonably estimable

 

 

138

 

 

 

107

 

 

 

138

 

Reduction (1)

 

 

(81

)

 

 

-

 

 

 

(81

)

Indemnification payment

 

 

(105

)

 

 

(70

)

 

 

(105

)

End of period

 

$

568

 

Ending balance (2)

 

$

622

 

 

$

568

 

 

(1)

Reduction in indemnification liabilities relates to a provision in the Honeywell Reimbursement Agreement that reduces the obligation due to Honeywell for any proceeds received by Honeywell from a property sale of a site under the agreement.

(2)

Reimbursement Agreement liabilities deemed probable and reasonably estimable, however, it is possible the Company could pay $140 million per year (exclusive of any late payment fees up to 5% per annum) until the earlier of (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.

For the three and nine months ended September 30,26, 2020, net expenses related to the Reimbursement Agreement were $38 million and $107 million, respectively, and for the three and nine months ended September 28, 2019, expenses related to the Honeywell Reimbursement Agreement were $35 million and $57 million, respectively, and are recorded in Other expense, net. Honeywell Reimbursement Agreement liabilities are included in the following balance sheet accounts:

 

 

September 30,

 

 

2019

 

 

September 26, 2020

 

 

December 31, 2019

 

Accrued liabilities

 

$

140

 

 

$

175

 

 

$

140

 

Obligations payable to Honeywell

 

 

428

 

Obligations payable under Indemnification Agreements

 

 

447

 

 

 

445

 

 

$

568

 

 

$

622

 

 

$

585

 

 

 

The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to our unaudited consolidated and combined results of operations and operating cash flows in the periods recognized or paid.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

Tax Matters Agreement

In connection with the Spin-Off, the Company entered into a tax matters agreement (the “Taxthe Tax Matters Agreement”)Agreement with Honeywell pursuant to which it is responsible and will indemnify Honeywell for all taxes, including income taxes, sales taxes, VAT and payroll taxes, relating to the business for all periods, including periods prior to the consummation of the Spin-Off. As of September 30,26, 2020 and December 31, 2019, the Company has indemnifiedhad an indemnity outstanding to Honeywell for $152future tax payments of $139 million and $149 million, respectively, which is included in Obligations payable to Honeywell.under Indemnification Agreements.

19


Trademark AgreementsAgreement

The

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 will paypays a royalty fee of 1.5% on net revenue to Honeywell related to such licensed products which is recorded in Selling, general and administrative expense on the unaudited Consolidated and Combined Interim StatementStatements of Operations. For the three and nine months ended September 30,26, 2020, royalty fees were $7 million and $18 million, respectively. For the three and nine months ended September 28, 2019, royalty fees were $6 million and $20 million, respectively.

Other Matters

The Company is subject to other lawsuits, investigations and disputes arising out of the conduct of its business, including matters relating to commercial transactions, settlement agreements, government contracts, product liability, prior acquisitions and divestitures, employee matters, intellectual property, antitrust 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 ofor outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a carefulanalysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. No such matters are material to the Company's unaudited financial statements.

The Company, recorded legal expensethe Company’s former CEO Michael Nefkens, the Company’s former CFO Joseph Ragan, and the Company’s former CIO Niccolo de Masi are named defendants of $1 million and $20 milliona class action securities suit in the District court for the threeDistrict of Minnesota styled In re Resideo Technologies, Inc. Securities Litigation, 19-cv-02863 (the “Securities Litigation”). The Securities Litigation is a class action securities suit with the class defined as all persons or entities who purchased or otherwise acquired common stock of Resideo during the class period of October 29, 2018 to November 6, 2019. The complaint asserts claims under Section 10(b) and nine months ended September 30,Section 20(a) of the Securities Exchange Act of 1934, broadly alleging, among other things, that the defendants (or some of them) made false and misleading statements regarding, among other things, Resideo’s business, performance, the efficiency of its supply chain, operational and administrative issues resulting from the spin-off from Honeywell, certain business initiatives, and financial guidance in 2019. The defendants filed a motion to dismiss the complaint on July 10, 2020. We expect the motion to dismiss to be fully briefed in November 2020. A hearing on the motion to dismiss is currently scheduled for December 1, 2020. See “Note 19. Commitments and Contingencies” of Notes to Consolidated and Combined Financial Statements in our 2019 respectively. PriorAnnual Report on Form 10-K for further discussion. The Company intends to vigorously defend against the Spin-off, legal expenses were paid by Honeywellallegations in the Securities Litigation, but there can be no assurance that the defense will be successful.

20


On July 7, 2020, Jawad A. Ayaz as Trustee of the Shiv Venkatasetty 2016 Trust (“Derivative Plaintiff”) filed a shareholder derivative complaint (the “Derivative Complaint”) against certain current or former directors and then allocatedofficers of the Company (“Derivative Defendants”) in the District Court for the District of Delaware, captioned Ayaz v. Nefkens, 20-cv-00915. Derivative Plaintiff alleges generally that Derivative Defendants breached fiduciary duties owed to the Company by allegedly causing or allowing the Company to make materially false and misleading statements to the public regarding the Company’s business operations and financial prospects. Derivative Plaintiff also alleges that the Company’s 2019 proxy statement was materially false and misleading, in violation of Section 14(a) of the Securities Exchange Act of 1934, and asserts claims of corporate waste and unjust enrichment, among other allegations, and relies on a similar set of facts as partalleged in the Securities Litigation. The Derivative Complaint seeks declaratory relief and unspecified money damages on behalf of the Company. On July 28, 2020, certain of the Derivative Defendants filed a corporate expense allocation that did not separately identifystipulation to stay the specific expenses.proceedings pending the resolution of the motion to dismiss in the Securities Litigation. An additional shareholder derivative complaint was filed on August 12, 2020, by Plaintiff Daniel Sanclemente (the “Sanclemente Action”) on behalf of the Company in the District Court for the District of Delaware, captioned Sanclemente v. Nefkens, 20-cv-1062, alleging substantially the same facts and making substantially the same claims against the same defendants as in the Derivative Complaint. The District Court has consolidated the Derivative Complaint and the Sanclemente Action. The consolidated action is styled In re Resideo Technologies, Inc. Derivative Litigation, 20-cv-00915 (the “Derivative Action”), and lead counsel has been appointed.Additionally, the pending stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation was granted and is applicable to the consolidated action. On August 28, 2020, Riviera Beach Police Pension Fund (“Riviera Beach”) filed a motion to intervene in the Derivative Action, noticing its intent to file a complaint at some point in the future against some or all of the Derivative Defendants. As of September 30, 201918, 2020, Riviera Beach and December 31, 2018, the existing plaintiffs reached an agreement regarding the leadership structure of the Derivative Action in the event that Riviera Beach files its own complaint in the future. The Company has a legal reserve of $18 million and $7 million, respectively.intends to defend this action vigorously, but there can be no assurance that the defense will be successful.

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Beginning of period

 

$

26

 

 

$

17

 

 

$

25

 

 

$

26

 

Accruals for warranties/guarantees issued during the year

 

 

10

 

 

 

12

 

 

 

13

 

 

 

10

 

Adjustment of pre-existing warranties/guarantees

 

 

(1

)

 

 

(2

)

 

 

-

 

 

 

(1

)

Settlement of warranty/guarantee claims

 

 

(12

)

 

 

(12

)

 

 

(12

)

 

 

(12

)

End of period

 

$

23

 

 

$

15

 

 

$

26

 

 

$

23

 

 


RESIDEO TECHNOLOGIES, INC.21


NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)Note 14. Pension

 

Note 16. Pension

Prior to the Spin-Off, certain of Resideo’s employees participated in multiple U.S. and non-U.S. defined benefit pension plans (the “Shared Plans”) sponsored by Honeywell which includes participants from other Honeywell subsidiaries and operations. The Company accounted for participation in the Shared Plans as a multiemployer benefit plan. Accordingly, it did not record an asset or liability to recognize the funded status of the Shared Plans. The related pension expense was allocated based on annual service cost of active participants and reported within Costs of goods sold and Selling, general and administrative expenses in the unaudited Combined Interim Statement of Operations. The pension expense related to participation in the Shared Plan for the three and nine months ended September 30, 2018 was $3 million and $10 million, respectively.

As of the date of separation from Honeywell, these employees’ and certain former Honeywell employees’ entitlement to benefits in Honeywell’s plans were transferred to Resideo sponsored plans.

The Resideo defined benefit pension plans have substantially similar benefit formulas as the Honeywell defined benefit pension plans. Moreover, vesting service, benefit accrual service and compensation credited under the Honeywell defined benefit pension plans apply to the determination of pension benefits under the Resideo defined benefit pension plan.

The Company sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of its U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit plans. It also sponsors defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in certain jurisdictions, principally Germany, Austria, Belgium, France, India, Switzerland, and the Netherlands.The pension obligations as of September 30, 201926, 2020 and December 31, 20182019 were $93$135 million and $88$124 million, respectively, and are included in Other liabilities in the unaudited Consolidated Interim Balance Sheet.Sheets. Net periodic benefit cost recognized in Comprehensive income (loss) for the three and nine months ended September 30,26, 2020 is $2 million and $6 million, respectively. Net periodic benefit cost recognized in Comprehensive income (loss) for the three and nine months ended September 28, 2019 iswas $2 million and $5 million, respectively.

The components of net periodic benefit costs other than the service cost are included in Other expense, net in the unaudited Consolidated and Combined Interim StatementStatements of Operations for the three and nine months ended September 30, 201926, 2020 and 2018.September 28, 2019.

 

Note 17.15. Segment Financial Data

The Company globally manages its business operations through two2 reportable operating segments, Products & Solutions and ADI Global Distribution:

Products & Solutions—The Products & Solutions business is a leading global provider of products, software solutions and technologies that help homeowners stay connected and in control of their comfort, security and energy use.

ADI Global Distribution—The ADI Global Distribution business is a leading global distributor of low-voltage electronic and security products.

Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance.


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

Prior to the first quarter of 2019, the The Company’s Chief Operating Decision Maker (“CODM”) managed and evaluated itsevaluates segment performance based on segment profit defined as segment income (loss) before taxes excluding Other expense, net (primarily environmental cost now subject to the Honeywell Reimbursement Agreement), interest expense, pension expense, environmental expense related to Resideo’s owned sites and repositioning charges. Beginning in the first quarter of 2019, the Company’s CODM changed the way segment performance is evaluated by making financial decisions and allocating resourcesbased on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as segment net income (loss) before income taxes, net interest expense (income) expense,, depreciation and amortization plus environmental expense, Honeywell Reimbursement Agreement expense, stock compensation expense, repositioningrestructuring charges and other adjustments.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Products & Solutions revenue

 

$

595

 

 

$

603

 

 

$

1,828

 

 

$

1,803

 

 

$

674

 

 

$

595

 

 

$

1,715

 

 

$

1,828

 

Less: Intersegment revenue

 

 

83

 

 

 

77

 

 

 

228

 

 

 

236

 

 

 

102

 

 

 

83

 

 

 

270

 

 

 

228

 

External Products & Solutions revenue

 

 

512

 

 

 

526

 

 

 

1,600

 

 

 

1,567

 

 

 

572

 

 

 

512

 

 

 

1,445

 

 

 

1,600

 

External ADI Global Distribution revenue

 

 

714

 

 

 

674

 

 

 

2,084

 

 

 

1,994

 

 

 

790

 

 

 

714

 

 

 

2,125

 

 

 

2,084

 

Total revenue

 

$

1,226

 

 

$

1,200

 

 

$

3,684

 

 

$

3,561

 

 

$

1,362

 

 

$

1,226

 

 

$

3,570

 

 

$

3,684

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Segment adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products & Solutions

 

$

66

 

 

$

107

 

 

$

222

 

 

$

333

 

 

$

136

 

 

$

66

 

 

$

224

 

 

$

222

 

ADI Global Distribution

 

 

48

 

 

 

43

 

 

 

141

 

 

 

124

 

 

 

52

 

 

 

48

 

 

 

126

 

 

 

141

 

Segment Adjusted EBITDA

 

$

114

 

 

$

150

 

 

$

363

 

 

$

457

 

 

$

188

 

 

$

114

 

 

$

350

 

 

$

363

 

 

22


RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)


 

The table below provides a reconciliation of net income (loss) to Segment Adjusted EBITDA:

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

8

 

 

$

311

 

 

$

45

 

 

$

389

 

Net interest expense (income)

 

 

16

 

 

 

-

 

 

 

49

 

 

 

(1

)

Tax expense (benefit)

 

 

-

 

 

 

(329

)

 

 

36

 

 

 

(323

)

Depreciation and amortization

 

 

19

 

 

 

16

 

 

 

55

 

 

 

49

 

Environmental expense (1)

 

 

-

 

 

 

146

 

 

 

-

 

 

 

322

 

Honeywell reimbursement agreement expense (2)

 

 

35

 

 

 

-

 

 

 

57

 

 

 

-

 

Stock compensation expense (3)

 

 

8

 

 

 

6

 

 

 

22

 

 

 

15

 

Repositioning charges

 

 

9

 

 

 

-

 

 

 

34

 

 

 

5

 

Other (4)

 

 

19

 

 

 

-

 

 

 

65

 

 

 

1

 

Segment Adjusted EBITDA

 

$

114

 

 

$

150

 

 

$

363

 

 

$

457

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

Net interest expense (1)

 

 

14

 

 

 

16

 

 

 

48

 

 

 

49

 

Tax expense

 

 

7

 

 

 

-

 

 

 

26

 

 

 

36

 

Depreciation and amortization

 

 

22

 

 

 

19

 

 

 

64

 

 

 

55

 

Reimbursement Agreement expense (2)

 

 

38

 

 

 

35

 

 

 

107

 

 

 

57

 

Stock compensation expense (3)

 

 

7

 

 

 

8

 

 

 

21

 

 

 

22

 

Restructuring charges

 

 

7

 

 

 

9

 

 

 

27

 

 

 

34

 

Other (4)

 

 

18

 

 

 

19

 

 

 

79

 

 

 

65

 

Segment Adjusted EBITDA

 

$

188

 

 

$

114

 

 

$

350

 

 

$

363

 

 

(1)

Represents historical environmental expenses as reported under 100% carryover basis.For the three and nine months ended September 26, 2020 net interest expense consists of interest expense of $14 million and $49 million net of interest income of $0 million and $1 million, respectively. For the three and nine months ended September 28, 2019 net interest expense consists of interest expense of $16 million and $51 million net of interest income of $0 million and $2 million, respectively.

(2)

Represents recorded net expenses related to the Honeywell Reimbursement Agreement. 

(3)

Stock compensation expense adjustment includes only non-cash expenses.

(4)

RepresentsFor the three and nine months ended September 26, 2020, Other represents $9 million and $36 million of items related to the Spin-Off, $12 million and $41 million of consulting and other fees related to transformation programs, ($3) million and $1 million of non-operating (income) expense adjustment which excludes net interest (income), and $0 million and $1 million of acquisition-related expenses, respectively. For the three and nine months ended September 28, 2019, Other represents $19 million and $53 million in costsof cost directly related to the Spin-Off, $0 million and $13 million related to developments on legal claims that arose prior to the Spin-Off, and ($0)$0 million and ($1) million in non-operating (income) expense adjustment which excludes net interest (income) for the three and nine months ended September 30, 2019,, respectively. For the three and nine months ended September 30, 2018 Other represents other non-operating (income) expense.

 

The Company’s CODM does not use segment assets information to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.

 

 

 


23


Item 2.

Management’s Discussion and AnalysisAnalysis of Financial Condition and Results of Operations

(Dollars 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 nine months ended September 30, 201926, 2020 and should be read in conjunction with the unaudited Consolidated and Combined Interim Financial Statements and the notes thereto contained elsewhere in this Form 10-Q. The financial information as of September 30, 201926, 2020 should be read in conjunction with the consolidated and combined financial statements for the year ended December 31, 20182019 contained in our 20182019 Annual Report on Form 10-K (the “2018“2019 Annual Report on Form 10-K”).

Overview and Business Trends

We are a leading global provider of products, software solutions and technologies that help homeowners stay connected and in control of their comfort, security and energy use. We are a leader in the home heating, ventilation and air conditioning controls and security markets. We manage our business operations through two segments, Products & Solutions and ADI Global Distribution. Our productsProducts & Solutions segment consist of solutions in Comfort, Residential Thermal Solutions (“RTS”) and Security categories and includeincludes temperature and humidity control, thermal, water and air solutions and remote patient monitoring software solutions as well as 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 electronic and security products which include intrusion and smart home, fire, video surveillance, intrusion, access control, firepower, audio and life safety,video, ProAV, networking, communications, wire networking and professional audio visual systems. We manage our business operations through two segments,cable, enterprise connectivity and structured wiring. The Products & Solutions and ADI Global Distribution. The Products & Solutions segment, offerings include our Comfort, RTS and Security products, which, consistent with our industry, havehas a higher gross and operating margin profile in comparison to the ADI Global Distribution segment.

Our Chief Operating Decision Maker evaluates segment performance based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as segment net income (loss) before income taxes, net interest expense (income), depreciation and amortization plus or minus environmental expense, expenses related to the indemnification and reimbursement agreement with Honeywell (the “Reimbursement Agreement”), stock compensation expense, restructuring charges, other expense, net and other costs not directly related to future ongoing business of the segments, such as costs related to becoming an independent publicly traded company (“the Spin-Off”) on October 29, 2018 and costs related to restructuring programs.

Our financial performance is influenced by several macro factors such as repair and remodeling activity, residential and non-residential construction, employment rates, and overall macro environment. The global outbreak of a novel coronavirus disease (“COVID-19”) created economic disruption. Starting at the end of the first quarter and throughout the second quarter, we experienced constrained supply and slowed customer demand that adversely impacted business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, during third quarter customer demand has improved and cost actions taken during the first half of the year contributed to the improvements in the Company’s results of operations and overall financial performance.

Recent Developments

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. Starting at the end of the first quarter and throughout the second quarter, we experienced constrained supply and slowed customer demand that adversely impacted business, results of operations and overall financial performance in future periods. See “Item 1A. Risk Factors” of this Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business. As there remains uncertainty around the impacts of the COVID-19 pandemic, we address and evaluate the impacts regularly.

24


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 third quarter 2019,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. Although certain of the Company’s operations are currently considered essential and exempt in the United States, Canada and certain other countries globally, there remain certain jurisdictions where there have been and may continue to be restrictions on manufacturing or operations or other government lockdown mandates or recommendations, under which we have temporarily closed certain manufacturing and sales facilities, and restricted operations in others, including manufacturing in Mexico and restricted operations in certain ADI sales branches, although certain of these facilities have since reopened or remained opened with restricted sales activities. If any of the applicable exemptions are curtailed or revoked in the future, that could adversely impact our business, operating results and financial condition. Furthermore, to the extent these exemptions do not extend to our key suppliers and customers, this could also adversely impact our business, operating results and financial condition. We have also implemented work-from-home policies for a significant percentage of our employees, which could negatively impact productivity, disrupt conduct of our business in the ordinary course and delay our production timelines. Due to the significant remote workforce populations, we may also face informational technology infrastructure and connectivity issues from the vendors that we rely on for certain information technologies to administer, store and support the Company’s multiple business activities. Finally, we are incurring increased costs associated with cleaning and other employee safety measures.

Our visibility toward future performance is more limited than is typical due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and the mitigation measures that are implemented by governmental authorities. We also expect business conditions to remain challenging. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of our manufacturing, selling and administrative activities.

2020 Acquisition

On February 10, 2020, we completed the acquisition of privately held Herman ProAV (“Herman"), a leading provider and distributer of professional audio-visual products, procurement services and labor resources to systems integrators in the commercial audio-visual industry. This acquisition was integrated into and builds upon ADI Global Distribution business continuedDistribution’s product portfolio and expands its strong performance, enhanced by an ongoing focus on digital transformation, designed to create a seamless experience for professionals online andpresence in the 200 stocking locations around the world. ADI continued to expand its footprint, including recent opening and remodeling of branches in Eastern Europe.

In the third quarter 2019, the Products & Solutions segment experienced revenue declines in the Comfort and RTS businesses. Segment adjusted EBITDA declined due to revenue decline, negative product and channel mix, inventory write-downs, and high product rebates from a pre-spin contract. The RTS business experienced a slowdown across large original equipment manufacturers (“OEMs”) customers, which included impacts by recent regulatory changes. The Comfort business revenue declines were primarily due to lower thermostat sales. We expect the third-quarter headwinds to continue into the peak winter demand period.pro-AV market.

 

Third Quarter Highlights

 

Net revenuesrevenue increased $26$136 million in the recent quarter compared to the third quarter of fiscal 2018, primarily due2020 compared to the same quarter of 2019, with increased volumesales growth in both Products & Solutions and price partially offset by foreign exchange translation.ADI Global Distribution. Gross profit as a percent of net revenues decreasedincreased to 24%, or $58 million, in the recent quarter compared to 29%27% in the third quarter of fiscal 2018.2020 from 25% in the third quarter of 2019. The primary drivers to the decreaseincrease in gross profit percentage were a 300100 bps favorable impact as a result of higher revenue volumes in Products & Solutions and ADI Global Distribution, 100 bps favorable impact from transformation programs cost savings, and a 100 bps favorable impact from sourcing productivity. These impacts were partially offset by a 100 bps unfavorable impact from sales mix changes 100 bps impact from material and labor inflation and fixed productionincreased factory costs which include inventory write-downs, and 100 bps impact from headquarter allocations previously classified in selling, general and administrative expense in the carve-out financials.  Third-quarterrelated to COVID-19 employee safety measures. Third quarter net income was $75 million for the three months ended September 26, 2020 compared to net income of $8 million for the three months ended September 30, 2019 compared to $311 million for the three months ended September 30, 2018, which included an income tax benefit of $329 million.28, 2019.

 


Selling, general, and administrative expenses increaseddecreased by $11 million in the recent quarter compared to the third quarter of fiscal 2018.2019.The increasedecrease was driven by spintransformation programs cost savings, decrease in Spin-Off related expense, cost reduction actions including COVID-19 related cost management efforts, and other cost reductions totaling $47 million. These decreases were partially offset by restructuring related costs, license fees associated with the Trademark License Agreement, repositioning costs,labor and other cost inflation, foreign currency translation, impact of acquisitions, and labor cost inflationcommercial investments totaling $43$36 million. These increases were partially offset by the impact of headquarter cost allocations previously classified in selling, general and administrative expense in the carve-out financials, foreign currency translation, and miscellaneous cost reductions totaling $32 million.

We ended the third quarter with $132$260 million in cash and cash equivalents. Net cash used inprovided by operating activities was $70$92 million for the nine months ended September 30, 2019.26, 2020. At September 30, 2019, Accounts26, 2020, accounts receivable were $845$884 million, inventories were $618 million and Inventories were $729 million.$150 million was drawn under our revolving credit facility.    

25


 

Recent Developments

Separation from Honeywell

The Company was incorporated in Delaware on April 24, 2018. We 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 our common stock to shareholders of Honeywell (the “Spin-Off”). On October 29, 2018, Honeywell’s shareholders of record as of October 16, 2018 (the “Record Date”) received one share of our common stock, par value $0.001 per share, for every six shares of Honeywell’s common stock, par value $1.00 per share, held as of the Record Date. We began trading “regular way” under the ticker symbol “REZI” on the New York Stock Exchange on October 29, 2018.

In connection with the Spin-Off, we entered into certain agreements with Honeywell, such as the Honeywell Reimbursement Agreement, the Trademark License Agreement, Tax Matters Agreement, Employee Matters Agreement, Patent Cross-License Agreement and Transition Services Agreement, which caused us to incur new costs. See our 2018 Annual Report on Form 10-K for a description of the material terms thereof.

Operational and Financial Review

On October 22, 2019, we announced the commencement of a comprehensive operational and financial review focused on product cost and gross margin improvement, and general and administrative expenses simplification. The review will be overseen by the independent directors of our board. We have retained industry-recognized experts in supply chain optimization and organizational excellence to assist in the review.

Basis of Presentation

Prior to the Spin-Off on October 29, 2018, our historicalOur financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 29, 2018, our financial statements are presented on a combined basis and for the periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Interim“Interim Financial Statements”). The Consolidated and Combined Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The historical combined financial information prior to

Reclassification

On January 1, 2020, we changed the Spin-Off may not be indicativeclassification of our future performanceresearch and does not necessarily reflect what our consolidated and combined results of operations, financial condition and cash flows would have been had we operated as a separate, publicly traded company during the periods presented, particularly because of changes that we have experienced and may continue to experience as a result of our separation from Honeywell, including changesdevelopment expenses in the financing, cash management, operations, cost structureConsolidated Interim Statements of Operations from Cost of goods sold to Selling, general and personnel needsadministrative expenses, such that research and development expenses are excluded from the calculation of our Company.

Gross profit. The unaudited Combined Interim Financial Statements prior to the Spin-Off include certain assets and liabilities that were held at the Honeywell corporate level but were specifically identifiable or otherwise attributable to us. Additionally, Honeywell historically provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on our behalf. The costs of these services were allocated to usimpact on the basis of the proportion of net revenue. Actual costs that would have been incurred if we had been a stand-alone company for the entire period being presented would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both we and Honeywell consider the basis on which the expenses were allocated during the period before the Spin-Off to be a reasonable reflection of the utilization of services provided to or the benefits received by us during the periods presented.


Since the completion of the Spin-Off, we have incurred and expect to continue to incur expenditures consisting of employee-related costs, costs to start up certain stand-alone functions and information technology systems and other one-time transaction related costs. Recurring stand-alone costs include establishing the internal audit, treasury, investor relations, tax and corporate secretary functions as well as the annual expenses associated with running an independent publicly traded company including listing fees, compensation of non-employee directors, related board of director fees and other fees and expenses related to insurance, legal and external audit.

Our environmental expenses prior to Spin-Off and our Honeywell reimbursement expenses are reported within Other expense, net in our unauditedSeptember 28, 2019 Consolidated and Combined Interim Statement of Operations which reflectis a reduction of Cost of goods sold, an estimated liabilityincrease in Gross profit and an increase in Selling, general and administrative expenses for resolutionthe three and nine months ended September 28, 2019 of pending$20 million and future environmental-related liabilities. Prior to$66 million, respectively. This reclassification had no effect on the Spin-Off, this estimated liability was calculated as if we were responsible for 100%previously reported Net income (loss) or the Company’s Consolidated Interim Statements of the environmental-liability payments associated with certain sites. See our 2018 Annual Report on Form 10-K for additional information. In connection with our separation from Honeywell, we became a party to the Honeywell Reimbursement Agreement, which was entered into on October 14, 2018, pursuant to which we agreed to indemnify Honeywell in amounts equal to 90%Comprehensive Income (Loss), Consolidated Interim Statements of payments which include amounts billed with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposureCash Flows, or toxic tort claims, in each case including consequential damages (the “liabilities”), in respect of specified properties contaminated through historical business operations, including the legal and other costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. Pursuant to the Honeywell Reimbursement Agreement, we are responsible for paying to Honeywell such amounts, up to a cap of $140 million in respect of liabilities arising in any given calendar year (exclusive of any late payment fees up to 5% per annum).Consolidated Interim Balance sheets.

Components of Operating Results

Our fiscal quarter ended on September 30. The key elements of our operating results include:

Net Revenue

We globally manage our business operations through two reportable 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 distributors (e.g. HVAC, Plumbing,plumbing, Security, Electrical), OEMs, and service providers such as HVAC contractors, Securitysecurity dealers and Plumbersplumbers including our ADI Global Distribution business. 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 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 including Assa Abloy, Axis Communications, Honeywell and Nortek Security & Control, and ADI Global Distribution also carries a line of private label products. We sell these products to contractors that service non-residential and residential end-users. 13%15% of ADI’sADI Global Distribution’s net revenue is supplied by our Products & Solutions Segment.segment. Management estimates that in 20182019 and 2020 approximately two-thirds of ADI’sADI Global Distribution’s net revenue was attributed to non-residential end markets and one-third to residential end markets.

Cost of Goods Sold

Products & Solutions:Cost of goods sold includes costs associated with raw materials, assembly, shipping and handling of those products; costs of personnel-related expenses, including pension benefits, and equipment associated with manufacturing support, logistics and quality assurance; and costs of certain intangible assets; and costs of research and development. Research and development expense consists primarily of development of new products and product applications.assets.

ADI GlobalDistribution: Cost of goods sold consists primarily of inventory-related costs and includes labor and personnel-related expenses.


26


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, and personnel-related expenses, including stock compensation expense and pension benefits. In addition, prior to the Spin-Off our selling, generalbenefits, and administrative expense included an allocated portion of general corporateresearch and development expenses.

Other Expense, Net

Other expense, net consists primarily of Honeywell reimbursementReimbursement Agreement expenses (partially offset by certain reductions)(gains) for certain environmental claims related to approximately 230 sites or groups of sites that are undergoing environmental remediation under U.S. federal or state law and agency oversight for contamination associated with Honeywell legacyhistorical business operations. Prior to the Spin-Off other expenses also included the environmental expenses related to these same sites. For further information see “Item 2.the “Reimbursement Agreement” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations Honeywell Reimbursement Agreement” and “Note 15.13. Commitments and Contingencies” of Notes to unaudited Consolidated and Combined Interim Financial Statements of this Form 10-Q. Other expense, net also includes foreign exchange gains and losses.

Interest Expense

Interest expense consists of interest on our short and long-term obligations, including our senior notes, term credit facility, and revolving credit facility. Interest expense on our obligations includes contractual interest, amortization of the debt discount and amortization of debt issuancedeferred financing costs.

Tax Expense (Benefit)

Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory tax rates, adjusted for U.S. taxation of foreign earnings and other non-deductible expenses.

Results of Operations

The following table sets forth our selected unaudited consolidated interim statementstatements of operations for the periods presented:


Unaudited Consolidated Interim StatementStatements of Operations

(Dollars in millions except share and per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

1,226

 

 

$

1,200

 

 

$

3,684

 

 

$

3,561

 

 

$

1,362

 

 

$

1,226

 

 

$

3,570

 

 

$

3,684

 

Cost of goods sold

 

 

937

 

 

 

853

 

 

 

2,786

 

 

 

2,525

 

 

 

992

 

 

 

917

 

 

 

2,680

 

 

 

2,720

 

Gross profit

 

 

289

 

 

 

347

 

 

 

898

 

 

 

1,036

 

 

 

370

 

 

 

309

 

 

 

890

 

 

 

964

 

Selling, general and administrative expenses

 

 

230

 

 

 

219

 

 

 

712

 

 

 

648

 

 

 

239

 

 

 

250

 

 

 

731

 

 

 

778

 

Operating profit

 

 

59

 

 

 

128

 

 

 

186

 

 

 

388

 

 

 

131

 

 

 

59

 

 

 

159

 

 

 

186

 

Other expense, net

 

 

35

 

 

 

144

 

 

 

54

 

 

 

320

 

 

 

35

 

 

 

35

 

 

 

106

 

 

 

54

 

Interest expense

 

 

16

 

 

 

2

 

 

 

51

 

 

 

2

 

 

 

14

 

 

 

16

 

 

 

49

 

 

 

51

 

Income (loss) before taxes

 

 

8

 

 

 

(18

)

 

 

81

 

 

 

66

 

Tax expense (benefit)

 

 

-

 

 

 

(329

)

 

 

36

 

 

 

(323

)

Net income

 

$

8

 

 

$

311

 

 

$

45

 

 

$

389

 

Income before taxes

 

 

82

 

 

 

8

 

 

 

4

 

 

 

81

 

Tax expense

 

 

7

 

 

 

-

 

 

 

26

 

 

 

36

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

Weighted Average Number of Common Shares Outstanding (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

122,770

 

 

 

122,967

 

 

 

122,681

 

 

 

122,967

 

 

 

123,421

 

 

 

122,770

 

 

 

123,194

 

 

 

122,681

 

Diluted

 

 

123,244

 

 

 

122,967

 

 

 

123,404

 

 

 

122,967

 

 

 

125,235

 

 

 

123,244

 

 

 

123,194

 

 

 

123,404

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

2.53

 

 

$

0.37

 

 

$

3.16

 

 

$

0.61

 

 

$

0.07

 

 

$

(0.18

)

 

$

0.37

 

Diluted

 

$

0.06

 

 

$

2.53

 

 

$

0.36

 

 

$

3.16

 

 

$

0.60

 

 

$

0.06

 

 

$

(0.18

)

 

$

0.36

 

27


 

Results of Operations for the Three and Nine Months endedEnded September 30,26, 2020 and September 28, 2019 and 2018

Net Revenue

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

1,226

 

 

$

1,200

 

 

$

3,684

 

 

$

3,561

 

 

$

1,362

 

 

$

1,226

 

 

$

3,570

 

 

$

3,684

 

% change compared with prior period

 

 

2

%

 

 

 

 

 

 

3

%

 

 

 

 

 

 

11

%

 

 

 

 

 

 

(3

)%

 

 

 

 

 

 

The change in net revenue compared to prior year period is attributable to the following:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2019

 

September 30, 2019

 

Three Months Ended

September 26, 2020

 

Nine Months Ended

September 26, 2020

Volume

 

1 %

 

3 %

 

7 %

 

(5)%

Price

 

2 %

 

2 %

 

1 %

 

1 %

Acquisitions

 

2 %

 

1 %

Foreign currency translation

 

(1)%

 

(2)%

 

1 %

 

0 %

% change compared with prior period

 

2 %

 

3 %

 

11 %

 

(3)%

 

A discussion of net revenue by segment can be found in the Review“Review of Business SegmentsSegments” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Cost of Goods Sold

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of goods sold

 

$

937

 

 

$

853

 

 

$

2,786

 

 

$

2,525

 

 

$

992

 

 

$

917

 

 

$

2,680

 

 

$

2,720

 

% change compared with prior period

 

 

10

%

 

 

 

 

 

 

10

%

 

 

 

 

 

 

8

 

%

 

 

 

 

 

(1

)

%

 

 

 

Gross profit percentage

 

 

24

%

 

 

29

%

 

 

24

%

 

 

29

%

 

 

27

 

%

 

25

%

 

 

25

 

%

 

26

%

 

Three months ended

 

Cost of goods sold for the three months ended September 30, 201926, 2020 was $937$992 million, an increase of $84$75 million, or 10%8%, from $853$917 million for the three months ended September 30, 2018.28, 2019.

This increase in cost of goods sold was primarily driven by thehigher revenue volumes in Products & Solutions segmentand ADI Global Distribution, impact of expenses related to revenue that are attributable to the operations of Herman, unfavorable changes in sales mix, foreign currency translation, increased factory costs related to COVID-19 employee safety measures, and material and labor inflation and increased production costs including inventory write-downs, headquarter allocations previously classified in selling, general and administrative expense in the carve-out financials. In addition, higher revenue in the ADI Global Distribution segment also increased cost of goods sold. Both segments had repositioning costs and spin related costs. The total impact of these increases was $94totaling $97 million. The increased costs were partially offset by foreign currency translationsourcing productivity and transformation programs cost savings in other miscellaneous costs of goods sold totaling $10$22 million.

The primary drivers to the decreaseincrease in gross profit percentage were a 300100 bps favorable impact as a result of higher revenue volumes in Products & Solutions and ADI Global Distribution, 100 bps favorable impact from transformation programs cost savings, and a 100 bps favorable impact from sourcing productivity. These impacts were partially offset by a 100 bps unfavorable impact from sales mix changes 100 bps impact from material and labor inflation and fixed productionincreased factory costs and 100 bps impact from headquarter allocations previously classified in selling, general and administrative expense in the carve-out financials.related to COVID-19 employee safety measures.

Nine months ended

 

Cost of goods sold for the nine months ended September 30, 201926, 2020 was $2,786$2,680 million, an increasea decrease of $261$40 million, or 10%1%, from $2,525$2,720 million for the nine months ended September 30, 2018.28, 2019.

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This increasedecrease in cost of goods sold was primarily driven by higherlower revenue volumes in both the ADI Global Distribution andprimarily Products & Solutions, segments, materialsourcing productivity, transformation programs cost savings, foreign currency translation, and labor inflation and increased production costs including inventory write-downs, changes in sales mix, headquarter allocations previously classified in selling, general and administrative expense in the carve-out financials, repositioning costs and spinreduced Spin-Off related costs totaling $306$163 million. The increaseddecreased costs were partially offset by foreign currency translationthe impact of expenses related to revenue that are attributable to the operations of Herman, changes in sales mix, increased factory costs related to COVID-19 employee safety measures, material and savings inlabor inflation, restructuring related costs, and other miscellaneous costs of goods sold totaling $45$123 million.

The primary drivers to the decrease in gross profit percentage were a 200100 bps unfavorable impact from materialas a result of lower revenue volumes primarily in Products & Solutions, and labor inflation and fixed production costs, 200a 100 bps unfavorable impact from sales mix changes andchanges. These impacts were partially offset by 100 bps favorable impact from headquarter allocations previously classified in selling, general and administrative expense in the carve-out financials.transformation programs cost savings.

Selling, General and Administrative Expense

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Selling, general and administrative expense

 

$

230

 

 

$

219

 

 

$

712

 

 

$

648

 

 

$

239

 

 

$

250

 

 

$

731

 

 

$

778

 

% of revenue

 

 

19

%

 

 

18

%

 

 

19

%

 

 

18

%

 

 

18

%

 

 

20

%

 

 

20

%

 

 

21

%

 

 


Three months ended

 

Selling, general and administrative expense for the three months ended September 30, 201926, 2020 was $230$239 million, an increasea decrease of $11 million, from $219$250 million for the three months ended September 30, 2018.28, 2019. The increasedecrease was driven by spintransformation programs cost savings, decrease in Spin-Off related expense, cost reduction actions including COVID-19 related cost management efforts, and other cost reductions totaling $47 million. These decreases were partially offset by restructuring related costs, license fees associated with the Trademark License Agreement, repositioning costs,labor and other cost inflation, foreign currency translation, impact of acquisitions, and labor cost inflationcommercial investments totaling $43$36 million. These increases were partially offset by headquarter cost allocation now partially classified in cost of goods sold, foreign currency translation, and miscellaneous cost reductions totaling $32 million.

Nine months ended

Selling, general and administrative expense for the nine months ended September 30, 201926, 2020 was $712$731 million, an increasea decrease of $64$47 million, from $648$778 million for the nine months ended September 30, 2018.28, 2019. The increasedecrease was driven by spintransformation programs cost savings, cost reduction actions including COVID-19 related costs, license fees associated with the Trademark License Agreement, legal expenses, impact of acquisitions, repositioning costs,cost management efforts, decrease in Spin-Off related expense, and laborother cost inflationreductions totaling $126$135 million. These increasesdecreases were partially offset by headquarterrestructuring related costs, labor and other cost allocation now partially classified in costinflation, impact of goods sold, foreign currency translation,acquisitions, and miscellaneous cost reductionscommercial investments totaling $62$88 million.

Other Expense, Net

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Other expense, net

 

$

35

 

 

$

144

 

 

$

54

 

 

$

320

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Other expense, net

 

$

35

 

 

$

35

 

 

$

106

 

 

$

54

 

 

Three months ended

Other expense, net for the three months ended September 30, 2019, was $35 million, a decrease of $109 million from $144 million for26, 2020 and the three months ended September 30, 2018. The decrease is due to lower remediation expenses in28, 2019 resultingwas expense of $35 million. Other expense, net increased $3 million from the Honeywell Reimbursement Agreement as compared to environmental expense prior to the Spin-Off. Following the Spin-Off, these environmental expenses are now subject to the Honeywell Reimbursement Agreement where cash payments are capped at $140offset by $2 million per year.  in favorable foreign exchange impact and a $1 million decrease in other non-operating expense.

29


Nine months ended

Other expense, net for the nine months ended September 30, 2019,26, 2020, was $54expense of $106 million, a decreasean increase of $266$52 million from $320$54 million for the nine months ended September 30, 2018.28, 2019. In the nine months ended September 26, 2020, we recognized $107 million in expense from the Reimbursement Agreement compared to $57 million for the nine months ended September 28, 2019. The decreasemajor driver for the increase over the prior period is due to lower remediation expense during the period as well as an $81 million reduction in indemnification liabilities related to a provisiongain recorded in the Honeywell Reimbursement Agreement that reduces the obligation duefirst quarter of 2019 related to Honeywell for any proceeds received from a property sale of a site under the agreement. Total increases also include $4 million from unfavorable foreign exchange impact, partially offset by a $2 million decrease in other non-operating expenses.

Tax Expense (Benefit)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Tax expense (benefit)

 

$

-

 

 

$

(329

)

 

$

36

 

 

$

(323

)

Tax expense

 

$

7

 

 

$

-

 

 

$

26

 

 

$

36

 

Effective tax rate

 

 

0

%

 

 

1,828

%

 

 

44

%

 

 

(489

)%

 

 

8

%

 

 

0

%

 

 

729

%

 

 

44

%

 


The Company recorded a tax expense of $7million and $26 million for the three and nine months ended September 26, 2020, respectively.

For interim periods, income tax is equal to the total 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

 

We recognized a $329 million tax benefit forFor the three months ended September 30, 2018 as compared to26, 2020, the net tax expense of nil in the three months ended September 30, 2019.  The decrease in the$7 million was driven by interim period tax benefit is primarily the resultexpense of tax benefits generated in 2018 related$7 million based on year-to-date actual amounts. Tax expense specific to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings and adjustmentsperiod was $0. In addition to items specific to the provisional tax amount related to U.S. Tax Reform.

The effectiveperiod, our income tax rate foris impacted by the three months ended September 30, 2019 was lower thanmix of earnings across the U.S. federal statutory rate of 21% primarily due to a decreasejurisdictions in the forecast of full-yearwhich we operate, non-deductible expenses, and a decrease in the forecast of full-year U.S. taxation of foreign earnings.

The effective tax rate for the three months ended September 30, 2018 was higher than the U.S. federal statutory rate of 21% primarily due to tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings, and adjustments to the provisional tax amount related to U.S. Tax Reform.  The combined effect of the tax benefits recorded in the quarter ended September 30, 2018 resulted in a tax benefit (negative tax expense).  As a result of the tax benefits and in conjunction with a net loss in the quarter ended September 30, 2018, the effective tax rate for the quarter is a positive percentage and significantly more than the US statutory rate.

Nine months ended

 

The effective tax rate forFor the nine months ended September 30, 201926, 2020, the net tax expense of $26 million was higher thandriven by the U.S. federal statutory rateyear-to-date tax expense of 21%$11 million based on year-to-date actual amounts, and tax expense specific to the period of approximately $15 million, consisting primarily of $15 million for valuation allowances in foreign jurisdictions, $2 million related to the estimated tax impact of the CARES Act on prior years, and share-based excess cost of $1 million, partially offset by a $3 million tax benefit for changes in estimates related to prior years. In addition to items specific to the period our income tax rate/expense are impacted by the mix of earnings across the jurisdictions in which is primarily attributable towe operate, non-deductible expenses, and U.S. taxation of foreign earnings.

 

The effective tax rate for the nine months ended September 30, 2018 was lower than the U.S. federal statutory rate of 21% primarily from tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off, currency impacts on withholding taxes on undistributed foreign earnings and adjustments to the provisional tax amount related to U.S. Tax Reform.

The effective tax rate can vary from quarter to quarter for unusual or infrequently occurring items, such as the tax impacts from the resolution of income tax audits, changes in tax laws, revisions to the amounts from U.S. Tax Reform, or internal restructurings.

Review of Business Segments

We operate two segments: Products & Solutions and ADI Global Distribution. Our Chief Operating Decision Maker evaluates segment performance based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as segment net income before income taxes, net interest (income) expense, depreciation and amortization plus or minus, environmental expense, Honeywell Reimbursement Agreement expense, stock compensation expense, repositioning charges and other adjustments.

Products & Solutions

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

September 26,

 

 

September 28,

 

 

 

 

 

 

September 26,

 

 

September 28,

 

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

 

2020

 

 

2019

 

 

% Change

 

 

2020

 

 

2019

 

 

% Change

 

 

Total revenue

 

$

595

 

 

$

603

 

 

 

 

 

 

$

1,828

 

 

$

1,803

 

 

 

 

 

 

$

674

 

 

$

595

 

 

 

 

 

 

$

1,715

 

 

$

1,828

 

 

 

 

 

 

Less: Intersegment revenue

 

 

83

 

 

 

77

 

 

 

 

 

 

 

228

 

 

 

236

 

 

 

 

 

 

 

102

 

 

 

83

 

 

 

 

 

 

 

270

 

 

 

228

 

 

 

 

 

 

External revenue

 

$

512

 

 

$

526

 

 

 

(3

)%

 

$

1,600

 

 

$

1,567

 

 

 

2

%

 

$

572

 

 

$

512

 

 

 

12

%

 

$

1,445

 

 

$

1,600

 

 

 

(10

)%

 

Segment Adjusted EBITDA

 

$

66

 

 

$

107

 

 

 

(38

)%

 

$

222

 

 

$

333

 

 

 

(33

)%

 

$

136

 

 

$

66

 

 

 

106

%

 

$

224

 

 

$

222

 

 

 

1

%

 


30


 

 

 

2019 vs. 2018

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Factors Contributing to Year-Over-Year Change

 

Revenue

(%)

 

 

Segment

Adjusted

EBITDA

(%)

 

 

Revenue

(%)

 

 

Segment

Adjusted

EBITDA

(%)

 

Constant Currency Growth (Decline)

 

 

(1

)%

 

 

(36

)%

 

 

5

%

 

 

(30

)%

Foreign currency translation

 

 

(2

)%

 

 

(2

)%

 

 

(3

)%

 

 

(3

)%

Total % Change

 

 

(3

)%

 

 

(38

)%

 

 

2

%

 

 

(33

)%

 

Three months ended

 

Products & Solutions revenue declined 3% primarily in the Comfort and RTS businesses, partially offset byincreased 12%, with increased revenue in the Security business.  The RTS business experienced a slowdownvolumes across large OEM customers, which included impacts by recent regulatory changes.  The Comfort business revenue declines were primarily due to lower thermostats sales.all businesses. Segment Adjusted EBITDA declinedincreased from $107$66 million to $66$136 million, or 38%106%. Segment Adjusted EBITDA was negativelypositively impacted $48 millionby higher revenue, cost savings from unfavorabletransformation programs, COVID-19 related cost management actions, reduced inventory reserve costs, and other cost reduction efforts including product mix, volume, production cost increases including inventory write-downs, high product rebates from a pre-spin contract, impact of acquisitions and the license fee paid to Honeywell associated with the Trademark License Agreement.reduction programs totaling $95 million. These negative impacts were partially offset by $7 million of profit fromunfavorable changes in sales mix, increased selling pricesfactory costs related to COVID-19 employee safety measures, investments to support new product launches and labor and material productivity.

inflation totaling $25 million.

Nine months ended

Products & Solutions revenue increased 2% driven primarily by the Security business and the first quarter launch of a new residential intrusion security platform.declined 10%, yet Segment Adjusted EBITDA declinedincreased from $333$222 million to $222$224 million, or 33%1%. Despite sales declines largely driven by second quarter COVID-19 impacts, Segment Adjusted EBITDA was negativelypositively impacted $150 millionby cost savings from transformation programs, COVID-19 related cost management actions, reduced inventory reserve costs, and other cost reduction efforts including product cost reduction programs totaling $159 million. These cost reductions offset lower revenue volumes, unfavorable sales mix, increased factory operating costs attributable to COVID-19 employee safety measures, investments to support new product mix, inventory variances, production cost increases including inventory write-downs, high product rebates from a pre-spin contract, impact of acquisitionslaunches, and the license fee paid to Honeywell associated with the Trademark License Agreement. These negative impacts were partially offset by $40 million of profit from increased volume, increased selling priceslabor and material productivity.inflation totaling $157 million.

 

ADI Global Distribution

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

September 26,

 

 

September 28,

 

 

 

 

 

 

September 26,

 

 

September 28,

 

 

 

 

 

 

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

 

2020

 

 

2019

 

 

% Change

 

 

2020

 

 

2019

 

 

% Change

 

 

External revenue

 

$

714

 

 

$

674

 

 

 

6

%

 

$

2,084

 

 

$

1,994

 

 

 

5

%

 

$

790

 

 

$

714

 

 

 

11

%

 

$

2,125

 

 

$

2,084

 

 

 

2

%

 

Segment Adjusted EBITDA

 

$

48

 

 

$

43

 

 

 

12

%

 

$

141

 

 

$

124

 

 

 

14

%

 

$

52

 

 

$

48

 

 

 

8

%

 

$

126

 

 

$

141

 

 

 

(11

)%

 

 

 

 

2019 vs. 2018

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Factors Contributing to Year-Over-Year Change

 

Revenue

(%)

 

 

Segment

Adjusted

EBITDA

(%)

 

 

Revenue

(%)

 

 

Segment

Adjusted

EBITDA

(%)

 

Constant Currency Growth

 

 

7

%

 

 

13

%

 

 

6

%

 

 

15

%

Foreign currency translation

 

 

(1

)%

 

 

(1

)%

 

 

(1

)%

 

 

(1

)%

Total % Change

 

 

6

%

 

 

12

%

 

 

5

%

 

 

14

%


Three months ended

 

ADI Global Distribution revenue increased 6% on a reported basis,11%, highlighted by strong growth in U.S. and 7% on a constant currency basis. ADI Global Distribution segment constant currency performance was driven by increased sales volume in the Americas, EMEA and APAC regions.Canada, as well as EMEA. Segment Adjusted EBITDA increased from $43of $52 million to $48was up $4 million or 12%8%. This increaseSegment Adjusted EBITDA was due to increased volumefavorably impacted primarily by higher revenue, cost reduction actions including COVID-19 related cost management efforts and other expense productivity net of inflation which wastotaling $15 million. These positive impacts were partially offset by unfavorable foreign exchange rates.sales mix, as well as commercial investments and other cost inflation totaling $11 million.

 

Nine months ended

 

ADI Global Distribution revenue increased 5% on a reported basis, and 6% on a constant currency basis. ADI Global Distribution segment constant currency performance was driven by increased sales volume primarily in the Americas and EMEA regions, partly impacted by one less selling day year over year in the first quarter.2%, while Segment Adjusted EBITDA increased from $124of $126 million to $141was down $15 million or 14%11%. This increaseSegment Adjusted EBITDA was due to increased volumenegatively impacted primarily by COVID-19 related slowdowns in the second quarter, unfavorable sales mix, commercial investments, and productivity, net ofother cost inflation which wastotaling $41 million. Negative impacts were partially offset by unfavorable foreign exchange rates.cost reduction actions including COVID-19 related cost management actions, transformation programs and other expense productivity totaling $26 million.

31


 

RepositioningRestructuring Charges

 

During the second quarter of 2019, management began a repositioning plan to reduce operating costsWe have an ongoing financial and better align our workforce with the needs of the business going forward.  These repositioning actions are expected to generate incremental pre-tax savings of $15 million in 2019 compared with 2018 principally from planned workforce reductions. Cash spending related to our repositioning actions was $22 million for the nine months ended September 30, 2019 and was funded through operating cash flows.  We expect to incur an additional $3 million of repositioning expense in 2019.

On October 22nd, 2019, we announced the commencement of a comprehensive operational and financial review which is focused on product cost and gross margin improvement, and general and administrative expenseexpenses simplification. As weWe have retained industry-recognized experts in supply chain optimization and organizational excellence to assist in the review. Certain restructuring actions have been and are still identifying thecontinuing to be implemented under this program as well as previous programs. These restructuring actions that will be undertaken, we currently cannot estimate the total costsare expected to be incurred.generate incremental pre-tax savings of $40 million to $45 million, net of costs of implementation which includes severance and consulting fees, in 2020 compared with 2019 principally from planned workforce reductions. Cash spending related to our restructuring actions was $23 million for the nine months ended September 26, 2020 and was funded through operating cash flows.

 

Net repositioningrestructuring and related expenses were $7 million and $27 million for the three and nine months ended September 26, 2020, respectively, primarily related to severance. Net restructuring and related expenses were $9 million and $34 million for the three and nine months ended September 30,28, 2019, respectively, and primarily related to severance.

For further discussion of repositioningrestructuring activities, refer to Note 6. RepositioningRestructuring and Other Charges of Notes to unaudited Consolidated and Combined Interim Financial Statements.Statements of this Form 10-Q.

Capital Resources and Liquidity

Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations. Additional liquidity may also be provided through access to the financialoperations, supplemented by external sources of capital markets and a committed global credit facility.as needed.

 

Operating cash flows from continuing operations was an outflow of $70 million for the nine months ended September 30, 2019 and was an inflow of $375 million for the nine months ended September 30, 2018.

Cash flows provided by operating activities was $92 million for the nine months ended September 26, 2020. Cash flows used for operating activities was $70 million for the nine months ended September 28, 2019.

As of September 30, 2019, total cash and cash equivalents were $132 million.

As of September 26, 2020, total cash and cash equivalents were $260 million.

At September 30, 2019, there were $60 million of borrowings and no letters of credit issued under our $350 million Revolving Credit Facility.


At September 26, 2020, there were $150 million of borrowings and no letters of credit issued under our $350 million revolving credit facility.

Our future capital requirements will depend on many factors, including the impact of the COVID-19 pandemic, 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. We believe our existing cash, cash equivalents, investments and credit under our Credit Facilitiescredit facilities are sufficient to meet our capital requirements through at least the next 12 months. We are in discussions with our credit agreement agent bank to consider amendments to our leverage covenant and related definitions to support expenditure for our planned operational review and to maintain flexibility to pursue tuck-in acquisitions. We anticipate any resulting amendment transaction to be undertaken in the fourth quarter of fiscal 2019.

Honeywell Reimbursement Agreement

In connection with the Spin-Off, we entered into the Honeywell 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 (exclusive of any late payment fees up to 5% per annum). During 2020, we entered into two amendments with Honeywell. See “Note 13. Commitments and Contingencies” of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of the Reimbursement Agreement amendments. The amount paid during the nine months ended September 30, 201926, 2020 was $105$70 million. See “Note 2119. Commitments and Contingencies” of Notes to Consolidated and Combined Financial Statements in our 20182019 Annual Report on Form 10-K for further discussion.

32


Cash Flow Summary for the Nine Months Ended September 30,26, 2020 and September 28, 2019 and 2018

Our cash flows from operating, investing and financing activities for the nine months ended September 30,26, 2020 and September 28, 2019, and 2018, as reflected in the unaudited Consolidated and Combined Interim Financial Statements are summarized as follows:

 

 

Nine Months Ended September 30,

 

 

Nine Months Ended

 

 

2019

 

 

2018

 

 

September 26,

 

 

September 28,

 

Cash (used for) provided by:

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

Cash provided by (used for):

 

 

 

 

 

 

 

 

Operating activities

 

$

(70

)

 

$

375

 

 

$

92

 

 

$

(70

)

Investing activities

 

 

(83

)

 

 

(56

)

 

 

(85

)

 

 

(83

)

Financing activities

 

 

22

 

 

 

(186

)

 

 

135

 

 

 

22

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(2

)

 

 

(5

)

 

 

(4

)

 

 

(2

)

Net (decrease) increase in cash and cash equivalents

 

$

(133

)

 

$

128

 

Net increase (decrease) in cash and cash equivalents

 

$

138

 

 

$

(133

)

 

Cash used forprovided by operating activities for the nine months ended September 30, 201926, 2020 increased by $445$162 million, primarily due to lower margins on higher sales volume.  This drove a $190 million increase in cash usage as a resultthe impacts from the slow-down of an increase in accounts receivable andour business related to the COVID-19 pandemic. We saw a decrease in inventory payables.sales and related purchases starting at the end of the first quarter with the most significant decreases in the first two months of the second quarter. Due to the timing of collections and payments, our working capital decreased significantly as we were collecting/paying on higher balances. In addition, we deferred a significant amount of payments, including the Reimbursement Agreement payment of $35 million, which resulted in preservation of cash. We expect to have a decrease in cash during the fourth quarter of the 2020.

Cash used for investing activities increased by $27$2 million, primarily due to an increase$18 million of $17 millionadditional cash paid for acquisitions, an increasepartially offset by a decrease of $3$16 million of cash paid for capital expenditures, and a decrease of $7 million in proceeds received related to amounts due from related parties.expenditures.

Net cash provided by financing activities increased by $208$113 million. The increase in cash provided by financing activities was primarily due to $185 million in pre-spin activity related to cash outflowsan increase of invested equity to Honeywell and cash pooling during the nine months ended September 30, 2018 that is no longer applicable to the post Spin-Off period. For the nine months ended September 30, 2019, $60$90 million of borrowings under our $350 million revolving credit facility to increase our cash was provided by proceeds fromposition in light of the Revolving Credit Facility. These cash proceeds wereeconomic uncertainty surrounding the COVID-19 pandemic, partially offset by $24decreases of $22 million of non-operating obligations paid to Honeywell $11 million of long-term debt repayments and $3$1 million of tax payments related to stock vestings during the nine months ended September 30, 2019.vestings.


Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so.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. Capital expenditures for full year 2019 are expected to be $93 million, of which $35 million relates to costs associated with investments in infrastructure as a stand-alone company.

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.

33


Critical Accounting Policies

The preparation of our unaudited Consolidated and Combined 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 20182019 Annual Report on Form 10-K for the year ended December 31, 2018, to be critical to the understanding of our unaudited Consolidated and Combined Interim Financial Statements.Statements included in this Form 10-Q. There have been no changes in our critical accounting policies as compared to what was disclosed in the 20182019 Annual Report on Form 10-K for the year ended December 31, 2018.10-K. Actual results could differ from our estimates and assumptions, and any such differences could be material to our unaudited Consolidated and Combined Interim Financial Statements.

Goodwill

As there remains uncertainty around the impacts of September 30, 2019, Goodwill recorded on ourthe COVID-19 pandemic, we intend to address and evaluate the impacts frequently. See “Note 2. Summary of Significant Accounting Policies” of Notes to Consolidated and Combined Interim Balance sheet was $2.6 billion. We perform goodwill impairment testing annually on October 1, or more frequently if indicatorsFinancial Statements of impairment exist. The goodwill impairment test is performed atthis Form 10-Q for a discussion of the reporting unit level, Products & Solutions and ADI Global Distribution.

Inaccounting policies most likely affected by the fourth quarter of 2018, we performed our annual goodwill impairment test of each of reporting unit using a weighting of fair values derived from the income approach and the market approach. Fair value under the income approach was based on the present value of estimated future cash flows and under the market approach utilized the public company guideline method. Resulting fair values of both reporting units exceeded the respective carrying values in excess of 40%.  COVID-19 pandemic.

During the third quarter of 2019, performance in the Products & Solutions reporting unit experienced revenue, as well as Segment EBITDA, declines. Additionally, during the third quarter of 2019, the Company’s stock price experienced a decline, opening the quarter at $21.76 per share on July 1, 2019 and closing at $14.35 per share on September 30, 2019.

Considering the substantial margin by which the fair value of our reporting units exceeded carrying value in our 2018 annual impairment test, and market capitalization exceeding the carrying value of our net assets throughout the third quarter, these events were not considered significant enough to indicate that it is more likely than not that goodwill is impaired and therefore, an interim impairment analysis was not performed.

On October 22, 2019, we revised guidance for the full year of 2019 and our stock declined below our book value per share. If the market price of our common stock does not increase from current levels in the near future, or if circumstances change that would more likely than not reduce the fair value of our reporting units below their respective carrying values, such as projections of future cash flows and financial performance not being achieved, all or a portion of our goodwill may be impaired in future periods.  Any impairment charges that we may take in the future could be material to our results of operations and financial condition.  We will perform our annual goodwill testing in the fourth quarter and will consider the decline in the stock price, reduced operating performance, and any other applicable market conditions in the analysis. 


Other Matters

Litigation, and Environmental Matters and Reimbursement Agreement

See “Note 15.13. Commitments and Contingencies” of Notes to unaudited Consolidated and Combined 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 unaudited Consolidated and Combined 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 September 30, 2019, $87426, 2020, $942 million of our total debt of $1.3 billion$1,322 million carried variable interest rates. The fair market values of our fixed-rate financial instruments are sensitive to changes in interest rates. At September 30, 2019,26, 2020, an increase or decrease in interest rate on our Term Loansterm loans and revolving credit facility by 100 basis points would have an approximate $8$10 million impact on our annual interest expense on long-term debt.

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 Euro, British Pound, Canadian Dollar, and 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 September 30,26, 2020 and December 31, 2019 we have no outstanding hedging arrangements.

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.

 


34


Item 4.

ControlsControls 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 Interim 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 September 30, 201926, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have implemented, and continue to refine, internal controls and key system functionality to enable the preparation of financial information related to the new lease standard (ASU No. 2016-02) upon adoption on January 1, 2019. There were no significant changes to our internal control over financial reporting due to the adoption of the new lease standard.

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PART II

 


PART II

Item 1.

 

We are subject to various lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, settlement agreements, government contracts, product liability, prior acquisitions and divestitures, employee matters, intellectual property, antitrust and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of 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.

Additionally, in connection with our entry into the Honeywell Reimbursement Agreement, we will be required to make payments to Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case including consequential damages in respect of specified properties contaminated through historical business operations, including the legal and other costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. For further information, see “Note 15.See Note 13. Commitments and Contingencies”Contingencies — Other Matters” of Notes to unaudited Consolidated and CombinedInterim Financial Statements of this Form 10-Q.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 20182019 Annual Report on Form 10-K, except as reflected in the two revised risk factors and one additional risk factor set forth below.

We operate in highly competitive markets.

We operate in highly competitive markets and compete directly with global, national, regional and local providers of our products, services and solutions including manufacturers, distributors, service providers, retailers and online commerce providers. The most significant competitive factors we face are product and service innovation, reputation of our Company and brands, sales and marketing programs, product performance, quality of product training and events, product availability, speed and accuracy of delivery, service and price, technical support, furnishing of customer credit and product reliability and warranty, with the relative importance of these factors varying among our segments and products. In addition to current competitive factors, there may be new market entrants with non-traditionalOur business, and customer service models or disruptive technologies and products, resulting in increased competition and changing business dynamics. See “Risks Relating to Our Business—The market for connected home solutions is fragmented, highly competitive, continually evolving and subject to disruptive technologies.” Existing or future competitors may seek to gain or retain market share by reducing prices, and we may be required to lower prices or may lose business, which could adversely affect our business, financial condition, results of operations, financial condition, cash flows and stock price may be materially adversely impacted by pandemics, epidemics or other public health emergencies, such as the coronavirus (COVID-19) outbreak.

Our business, results of operations, financial condition, cash flows. Also,flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the COVID-19 virus, which has been characterized by the World Health Organization as a pandemic. This outbreak has negatively impacted and could continue to negatively impact the global economy. Our operating results will be subject to fluctuations based on general economic conditions and the extent thatto which COVID-19 may ultimately impact our business will depend on future developments, which are uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease and the duration of the outbreak and business closures or business disruptions for our Company, our suppliers and our customers. We have experienced, and may experience in the future, shutdowns affecting our key manufacturing sites due to regional health and safety reasons. While we do not meet changing customer preferences or demands or other market changes, or if one or morecontinue to comply with all applicable health and sanitation requirements, we cannot ensure uninterrupted operations in areas impacted by COVID-19.

Deterioration in economic conditions could reduce our sales and profitability. Any financial distress of our competitors introduces new products, becomes more successful with private label products, online offerings or establishes exclusive supply relationships,customers due to deterioration in economic conditions could result in reduced sales and decreased collectability of accounts receivable which would negatively impact our results of operations. We also expect business conditions to remain challenging throughout the duration of the pandemic. The COVID-19 outbreak has had, and could continue to have an impact on our ability to attractobtain certain of the raw materials, parts and retain customers could be adversely affected.  Incomponents we need to manufacture our products as our suppliers face disruptions in their businesses, including closures and potential bankruptcy as a result of the third quarter of 2019, we experienced lower salesCOVID-19 outbreak. We depend greatly on our suppliers for items that are essential to the manufacturing of our non-connected thermostats due in partproducts. If our suppliers fail to a poor pre-spin cutover from the prior generation of non-connected thermostatsmeet our manufacturing needs, it could delay our production and our product shipments to the T-Series line which resulted in loss of sales of certain thermostats to competition.customers and negatively affect our operations.

 

We alsoShould the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we could experience declines in revenues and profitability, as we have long-standing relationships with customers whose business models may be subject to the risks articulated above. For example, changesexperienced in the security system market,second quarter. A prolonged period of such asdeclines, including any impacts arising out of related general economic downtowns, could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a shift away from subscription monitoring services, could adversely impact certainsignificant portion or all of our large customers or cause them to change their business models in ways that adversely impact our business and cash flows. As new market entrants emerge there can be no


guarantee that we will be successful in developing customer relationships with them, or that such relationships will be as mutually beneficial as our current relationships. Furthermore, if new technologies or business models become ascendant in our customers’ markets our relationships and service commitments with incumbent businesses may become a disadvantage.

To remain competitive, we will need to invest continually in product development, marketing, customer service and support, manufacturing and our distribution networks. We may not have sufficient resources to continue to make such investments andthen-outstanding debt obligations, which we may be unable to maintaindo.

The impact of a pandemic like COVID-19 can be mitigated by measures that international, federal, state, and local governments, agencies, law enforcement, and/or health authorities implement to address it. However, efforts to lift restrictions on individuals’ daily activities and businesses’ normal operations may result in spikes in cases related to the pandemic and potentially prolong and intensify the impact of the crisis. While the economic impact of COVID-19 may be reduced by financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other similar COVID-19 related federal and state programs, such programs have not had a material impact on our competitive position. business.

36


To the extent the COVID-19 outbreak adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2019, including the following captioned risks described in such Annual Report:

“Disruption, or the need to relocate any of our facilities, could significantly disrupt our business;” “We rely on certain suppliers of materials and components for our product;” “We are subject to the economic, political, health, epidemic, regulatory, foreign exchange and other risks of international operations;” “Our operations require substantial capital and we may not be able to obtain additional capital that we need in the future on favorable terms or at all;” “Market and economic conditions may adversely affect the economic conditions of our customers, demand for our products and services and our results of operations;” “We have credit exposure to our customers;” “The commercial and credit environment may adversely affect our access to capital.”

We have experienced significant management turnover.

In addition,November 2019, we announced the departure of our former Chief Financial Officer, and the appointment of an Interim Chief Financial Officer. In December 2019, we announced that the Board was conducting a search for a successor for our Chief Executive Officer. In January 2020, the Board appointed Sach Sankpal as our new President of Products & Solutions. On May 19, 2020, we announced the appointment of Jay Geldmacher as our new Chief Executive Officer and member of the board of directors. On May 29, 2020 we further announced the appointment of Tony Trunzo as our Executive Vice President and Chief Financial Officer. On October 13, 2020 the Company filed an 8-K which provided information about the departure of Sach Sankpal as President of the Products & Solutions segment and the appointment of Phil Theodore as President of the Products & Solutions segment. We are required to pay significant amounts of severance in connection with certain of these management transitions. Transitions in senior executive leadership can adversely affect relationships with our clients, suppliers, and employees, make it difficult to attract and retain talent and disrupt execution of our strategy and our efforts to enhance our operations. Changes in other key management positions may temporarily affect our financial performance and results of operations as the new management becomes familiar with our business. Accordingly, our future financial performance will depend to a significant extent on our ability to motivate and retain key management personnel.

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

In the ordinary course of business, we may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses, and issue guarantees of third-party obligations. We are also subject to various lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters.

In particular, the Company, the Company’s former CEO Michael Nefkens, the Company’s former CFO Joseph Ragan, and the Company’s former CIO Niccolo de Masi are named defendants of a purported class action securities suit styled In re Resideo Technologies, Inc. Securities Litigation, 19-cv-02863 (the “Securities Litigation”). The Securities Litigation is a class action securities suit with the class defined as all persons or entities who purchased or otherwise acquired common stock of Resideo during the class period of October 29, 2018 to November 6, 2019. The complaint asserts claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, broadly alleging, among other things, that the defendants (or some of them) made false and misleading statements regarding, among other things, Resideo’s business, performance, the efficiency of its supply chain, operational and administrative issues resulting from the spin-off from Honeywell, certain business initiatives, and financial guidance in 2019. The defendants filed a motion to dismiss the complaint on July 10, 2020.  We expect the motion to dismiss to be fully briefed in November 2020. A tentative argument is scheduled for December 1, 2020. See “Note 19. Commitments and Contingencies” of Notes to Consolidated and Combined Financial Statements in our 2019 Annual Report on Form 10-K for further discussion. The Company intends to vigorously defend against the allegations in the Securities Litigation, but there can be no assurance that the defense will be successful.

37


On July 7, 2020, Jawad A. Ayaz as Trustee of the Shiv Venkatasetty 2016 Trust (“Derivative Plaintiff”) filed a shareholder derivative complaint (the “Derivative Complaint”) against certain current or former directors and officers of the Company (“Derivative Defendants”) in the District Court for the District of Delaware, captioned Ayaz v. Nefkens, 20-cv-00915. Derivative Plaintiff alleges generally that Derivative Defendants breached fiduciary duties owed to the Company by allegedly causing or allowing the Company to make materially false and misleading statements to the public regarding the Company’s business operations and financial prospects. Derivative Plaintiff also alleges that the Company’s 2019 proxy statement was materially false and misleading, in violation of Section 14(a) of the Securities Exchange Act of 1934, and asserts claims of corporate waste and unjust enrichment, among other allegations, and relies on a similar set of facts as alleged in the Securities Litigation. The Derivative Complaint seeks declaratory relief and unspecified money damages on behalf of the Company. On July 28, 2020, certain of the Derivative Defendants filed a stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation. An additional shareholder derivative complaint was filed on August 12, 2020, by Plaintiff Daniel Sanclemente (the “Sanclemente Action”) on behalf of the Company in the District Court for the District of Delaware, captioned Sanclemente v. Nefkens, 20-cv-1062, alleging substantially the same facts and making substantially the same claims against the same defendants as in the Derivative Complaint. The parties to the Derivative Complaint and the Sanclemente Action have agreed to consolidate both actions. The consolidated action is styled In re Resideo Technologies, Inc. Derivative Litigation, 20-cv-00915 (the “Derivative Action”), and lead counsel has been appointed. Additionally, the pending stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation was granted and is applicable to the consolidated action. On August 28, 2020, Riviera Beach Police Pension Fund (“Riviera Beach”) filed a motion to intervene in the Derivative Action, noticing its intent to file a complaint against some or all of the Derivative Defendants. As of September 18, 2020, Riviera Beach and the existing plaintiffs reached an agreement regarding the leadership structure of the Derivative Action in the event that Riviera Beach files its own complaint. The Company intends to defend this action vigorously, but there can be no assurance that the defense will be successful.

We are unable to predict how long such proceedings, in particular the purported class action and derivative lawsuits, will continue, but we anticipate that we may have to reduce the prices ofincur significant costs in connection with some of our products or solutions to stay competitive, potentially resulting in a reduction in the profit margin for, and inventory valuationall of these products. It is possiblematters and that competitive pressures resulting from consolidation, including customers taking manufacturing or distribution in house, moving to a competitorthese proceedings and consolidation among our customers, could affect our growth and profit margins. In addition, competitors in certain high growth regionsany related matters may have lower costs than we do due to lower local labor costs and favorable government regulation. Countries in high growth regions may have differing codes and standards impacting the cost of doing business and may have fewer protections for, or offer less ability to utilize, existing intellectual property. We may not be able to compete effectively with new competitors from such regions. Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price for, and reducing the number of, suitable acquisitions.

Global climate change could negatively affect our business.

Responses to climate change may cause a shift away from fossil fuels to alternative power sources. Many of our thermal solutions are designed for application with oil and gas systems. A shift away from fossil fuels could affect our OEM customers’ business and result in a losssubstantial distraction of business for themmanagement’s time. In addition, we are and for us. Ifcould, in the future, face additional legal proceedings and investigations and inquiries by governmental agencies relating to these or similar matters. Our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we failmay become subject to adapt our solutionsor be required to alternative power sources, itpay damage awards or settlements that could have an adverse effect on our business, financial condition, results of operations and cash flows.

Cooler than normal summers If we were required to make payments, such payments could be significant and warmer than normal winters may depress our sales. In addition, stable temperatures may result in less wear and tear on cooling and heating equipment which may depress Comfort and RTS sales. Demand for our products and our services, particularly our products and solutions geared towardcould exceed the home construction repair and remodel industry, including our Comfort and RTS businesses, is seasonal and strongly affected by the weather. Cooler than normal summers depress our sales of replacement controls for heating, ventilation, cooling and water heating equipment in certain larger markets. Similarly, warmer than normal wintersamounts we have the same effect on our heating products and services. Increased public awareness and concern regarding global climate change have led to our development of social responsibility, sustainability and other business policies, which in some instances are more restrictive than current laws and regulations. In light of the current regulatory environment, we also face uncertaintyaccrued with respect to future climate change initiatives, including regional and/or federal requirements to reduce greenhouse gas emissions.  

Moreover, climate change itself creates financial risk to our business. Unseasonable weather conditions may impact the availability and cost of materials needed for manufacturing and increase insurance and other operating costs and, especially in the case of disruptions at our ADI stores, our ability to make sales during the pendency of site closures. These factors may influence our decisions to construct new facilities or maintain existing facilities in areas that are prone to physical climate risks. We could also face indirect financial risks passed through the supply chain, and process disruptions due to physical climate changes could result in price modifications for our products and the resources needed to produce them.  In the third quarter of 2019, we experienced lower sales of our RTS products due in part to wet weather that slowed housing construction earlier in the year and a relatively mild start to the heating season.

We may not be able to retain or expand relationships with certain large customers.

A number of our customers are large and contribute significantly to our net revenue and operating income. Consolidation or change of control, particularly among our OEM customers, or a decision by any one or more of our customers to outsource all or most manufacturing work to a single equipment manufacturer, may concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on a smaller number of customers. By virtue of our largest customers’ size and the significant portion of revenue that we derive


from them, they are able to exert significant influence in the negotiation of our commercial agreements and the conduct of our business with them. Furthermore, there is significant consolidation of companies focused on security products, and we have had customers combine with companies with whom we have little or no prior relationship, putting us at risk of loss of sales. If we are unable to retain and expand our business with these large customers on favorable terms,thereto, adversely affecting our business, financial condition, results of operations and cash flows willflows. While we maintain or may otherwise have access to insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities and we may have to satisfy insurance retentions. The incurrence of significant liabilities for which there is no or insufficient insurance coverage (or where there is available insurance but high retention levels) could adversely affected. In the third quarter of 2019, we became aware that a significant customer delayed the start date of expected purchases beyond the fourth quarter.

We can provide no assurance that the operationalaffect our liquidity and financial review we are conducting will result in the effects we are expecting.

In the third quarter of 2019, we experienced lower sales and lower margins than we expected.  As a result, we are conducting a comprehensive operational and financial review of our business.  However, there can be no assurance that this will review will appropriately identify the actions we need to take, or that we will be able to implement actions, in a manner that will resolve the issues we have identified or achieve the results we are forecasting.  In addition, uncertainty around the review could lead to disruption in our business, including our relationships with our customers, suppliers and employees.  

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We test, at least annually, the carrying value of goodwill for impairment, as discussed in Note 2 of the Notes to the Consolidated and Combined Financial Statements included in the 2018 Annual Report on Form 10-K. The estimates and assumptions about futurecondition, results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If the assumptions used in our analysis are not realized, it is possible that an impairment charge may need to be recorded in the future. During the third quarter of 2019, performance in the Products & Solutions reporting unit experienced revenue, as well as Segment EBITDA, declines. On October 22, 2019, we revised guidance for the full year of 2019 and our stock declined below our book value per share.  If the market price of our common stock does not increase from current levels in the near future, or if circumstances change that would more likely than not reduce the fair value of our reporting units below their respective carrying values, such as projections of future cash flows and financial performance not being achieved, all or a portion of our goodwill may be impaired in future periods.  Any impairment charges that we may take in the future could be material to our results of operations and financial condition.  There were no impairment charges taken during the years ended 2018, 2017, and 2016.

38


 


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 2.1

 

Second Amendment to Indemnification and Reimbursement Agreement, dated as of July 28, 2020, between Resideo Deferred Compensation Plan for Non-Employee Directors‡ (filed herewith)

10.2

Resideo Director Deferred Election Form‡ (filed herewith)

10.3

2018 Stock Plan for Non-Employee Directors of Resideo Technologies,Intermediate Holding Inc. and Honeywell International Inc. (incorporated by reference to Exhibit 2.1 to Resideo's Form of Restricted Stock Unit Agreement (Annual Grants)‡ (filed herewith)

10.4

Non-Employee Director Form of Deferred Stock Unit Agreement (Deferred Director Fees)‡ (filed herewith)8-K filed July 31, 2020)

 

 

 

31.1

 

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

 

 

32.1

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

 

 

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

 

 

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

 

Certain schedulesCover Page Interactive Data File (formatted as Inline XBRL and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules and similar attachments upon request by the U.S. Securities and Exchange Commission.

Indicates management contracts or compensatory plans or arrangements.contained in Exhibit 101)

 


Signatures39


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: November 6th, 20195, 2020

By:

/s/ Joseph D. Ragan IIIAnthony L. Trunzo

 

 

Joseph D. Ragan IIIAnthony L. Trunzo

Executive Vice President and Chief Financial Officer

Officer (on(on behalf of the Registrant and as the

Registrant’s Principal Financial Officer)

 

Date: November 6th, 20195, 2020

By:

/s/ AnnMarie Geddes

 

 

AnnMarie Geddes

InterimVice President, Controller and Chief Accounting

Officer

(on behalf of the Registrant and as the

Registrant’s Principal Accounting Officer)

 

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