Resideo Technologies, Inc 10-Q for FY2022 Q1
Resideo Technologies, Inc. (REZI)
About this 10-Q
Resideo Technologies, Inc filed this 10-Q on May 3, 2022, covering the quarter ended April 2, 2022 (FY2022 Q1).
Headline figures
Quarter ended April 2, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.51B
- up 6.1% from $1.42B a year earlier
- Net income
- $87M
- up 77.6% from net income of $49M a year earlier
- Diluted EPS
- $0.58
- up 75.8% from $0.33 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ______ to _____
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Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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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
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of April 29, 2022 was
TABLE OF CONTENTS
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Part I. |
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Consolidated Interim Balance Sheets (unaudited) – April 2, 2022 and December 31, 2021 |
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Notes to Consolidated Interim Financial Statements (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Part II. |
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1A. |
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Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industries and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:
3
These and other factors are more fully discussed in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Form 10-Q. There have been no material changes to the risk factors described in our 2021 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
PART I
The financial statements and related footnotes as of April 2, 2022 should be read in conjunction with the financial statements for the year ended December 31, 2021 contained in our 2021 Annual Report on Form 10-K.
4
Item 1. Financial Statements
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In millions except shares in thousands and per share data)
(Unaudited)
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Three Months Ended |
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April 2, |
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April 3, |
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Net revenue |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Research and development expenses |
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Selling, general and administrative expenses |
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Operating profit |
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Other expense, net |
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Interest expense |
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Income before taxes |
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Tax expense |
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Net income |
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$ |
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$ |
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Weighted Average Number of Common Shares Outstanding (in thousands) |
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Basic |
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Diluted |
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Earnings Per Share |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
5
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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Three Months Ended |
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April 2, |
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April 3, |
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Net income |
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$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Foreign exchange translation adjustment |
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Changes in unrealized gain on derivatives |
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Total other comprehensive income (loss), net of tax |
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Comprehensive income |
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$ |
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$ |
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The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
6
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
(Unaudited)
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April 2, 2022 |
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December 31, 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable – net |
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Inventories – net |
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Other current assets |
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Total current assets |
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Property, plant and equipment – net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Current maturities of debt |
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Accrued liabilities |
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Total current liabilities |
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Long-term debt |
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Obligations payable under Indemnification Agreements |
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Other liabilities |
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AND CONTINGENCIES |
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EQUITY |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock, at cost |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
7
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Three Months Ended |
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April 2, 2022 |
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April 3, 2021 |
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Cash flows (used for) provided by operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash (used for) provided by operating activities: |
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Depreciation and amortization |
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Stock compensation expense |
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Other |
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Changes in assets and liabilities, net of acquired companies: |
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Accounts receivable |
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Inventories – net |
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( |
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Other current assets |
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Accounts payable |
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Accrued liabilities |
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Obligations payable under Indemnification Agreements |
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Other |
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Net cash (used for) provided by operating activities |
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Cash flows used for investing activities: |
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Expenditures for property, plant, equipment and other intangibles |
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Cash paid for acquisitions, net of cash acquired |
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Other |
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( |
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- |
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Net cash used for investing activities |
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Cash flows provided by financing activities: |
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Proceeds from long-term debt |
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Payment of debt facility issuance and modification costs |
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( |
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Repayment of long-term debt |
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( |
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( |
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Other |
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( |
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Net cash provided by financing activities |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
8
RESIDEO TECHNOLOGIES, INC.
CONSOLIDATED INTERIM STATEMENTS OF EQUITY
(In millions, shares in thousands)
(Unaudited)
Three Months Ended April 2, 2022 |
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Common |
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Treasury |
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Common |
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Treasury |
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Additional |
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Retained |
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Accumulated |
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Total |
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Balance at January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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Other comprehensive income, net of tax |
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- |
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- |
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- |
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Stock issuances, net of shares withheld for taxes |
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( |
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( |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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- |
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Balance at April 2, 2022 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
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$ |
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Three Months Ended April 3, 2021 |
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Common |
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Treasury |
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Common |
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Treasury |
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Additional |
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Retained |
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Accumulated |
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Total |
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Balance at January 1, 2021 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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- |
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- |
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Other comprehensive loss, net of tax |
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- |
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- |
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- |
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- |
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( |
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( |
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Stock issuances, net of shares withheld for taxes |
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( |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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- |
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Balance at April 3, 2021 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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$ |
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The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
9
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
Note 1. Organization, Operations, and Basis of Presentation
Business Description
Resideo Technologies, Inc. (“Resideo” or “the Company”), is a leading manufacturer and developer of technology-driven products that provide critical comfort, energy, smoke and carbon monoxide detection home safety products, and security solutions to homes globally. The Company is also the leading wholesale distributor of low-voltage security products including access control, fire detection, intrusion, and video products, and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. The Company has a global footprint serving commercial and residential end markets.
The Company was incorporated in Delaware on April 24, 2018. The Company separated from Honeywell International Inc. (“Honeywell”) on
Basis of Presentation
The Company’s financial statements are presented on a consolidated basis (collectively, the “Interim Financial Statements”) and 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 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.
The Company reports financial information on a fiscal quarter basis using a “modified” 4-4-5 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31). The effects of this practice are generally not significant to reported results for any quarter. In the event that differences in closing dates are material to year-over-year comparisons of quarterly or year-to-date results, the Company will provide appropriate disclosures.
Reclassification
Certain reclassifications have been made to the prior period financial statements to conform to the classification adopted in the current period.
The prior period unaudited consolidated interim statement of operations was reclassified to present research and development expenses as a separate line item within the statement. Research and development expenses were formerly included within Selling, general and administrative expenses.
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 2021 Annual Report on Form 10-K.
Recent Accounting Pronouncements—The Company considers the applicability and impact of all recent accounting standards updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s consolidated financial position or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is optional guidance related to reference rate reform that provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance along with its subsequent
10
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
clarifications, is effective from March 12, 2020 through December 31, 2022 and is applicable for the Company’s A&R Senior Credit Facilities and Swap Agreements, which use LIBOR as a reference rate. The A&R Senior Credit Facilities include a transition clause to a new reference rate in the event LIBOR is discontinued and Swap Agreements will be amended to match the new reference rate. We are currently evaluating the potential impact of adopting this guidance, but do not expect it to have a material impact on our consolidated financial statements. Refer to Note 13. Long-term Debt and Credit Agreement for further details on the Company’s Swap Agreements and A&R Senior Credit Facilities.
Note 3. Revenue Recognition
Disaggregated Revenue
The Company has two operating segments, Products & Solutions and ADI Global Distribution. Disaggregated revenue information for Products & Solutions is presented by product grouping while ADI Global Distribution is presented by region. Beginning January 1, 2022, the Products & Solutions segment further disaggregated the Comfort product grouping into Air and Water. Residential Thermal Solutions is now referenced as Energy.
Revenues by product grouping and region are as follows:
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Three Months Ended |
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April 2, |
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April 3, |
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Air |
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$ |
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$ |
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Water |
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Energy |
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Security |
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Products & Solutions |
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U.S. and Canada |
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EMEA (1) |
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APAC (2) |
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ADI Global Distribution |
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Net revenue |
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$ |
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$ |
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(1)
(2)
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
Note 4. Segment Financial Data
The Company monitors its business operations through
Products & Solutions—The Products & Solutions business is a leading global provider of products, software solutions and technologies that help homeowners stay connected and in control of their comfort, security, and energy use.
ADI Global Distribution—The ADI Global Distribution business is the leading distributor of low-voltage security products including access control, fire detection, intrusion, and video products and participates significantly
11
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable.
Corporate—Corporate includes executive, legal, finance, information technology, human resources, strategy, and communications activities not allocated directly to either business units.
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions, and assesses operating performance.
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Three Months Ended |
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April 2, |
|
|
April 3, |
|
||
Revenue |
|
|
|
|
|
|
||
Total Products & Solutions revenue |
|
$ |
|
|
$ |
|
||
Less: Intersegment revenue |
|
|
|
|
|
|
||
External Products & Solutions revenue |
|
|
|
|
|
|
||
External ADI Global Distribution revenue |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Operating profit |
|
|
|
|
|
|
||
Products & Solutions |
|
$ |
|
|
$ |
|
||
ADI Global Distribution |
|
|
|
|
|
|
||
Corporate |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
The Company’s Chief Operating Decision Maker does not use segment assets information to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
Note 5. Stock-Based Compensation Plans
Restricted Stock Units (“RSUs”) and Performance Stock Unit (“PSUs”)
During the three months ended April 2, 2022, as part of the Company’s annual long-term compensation under the 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates and the 2018 Stock Incentive Plan for Non-Employee Directors of Resideo Technologies, Inc. as may be amended from time to time (together, the “Stock Incentive Plan”), it granted
Note 6. Leases
The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment. Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
12
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
The Company’s operating lease costs for the three months ended April 2, 2022 and April 3, 2021 consisted of the following:
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Cost of goods sold |
|
$ |
|
|
$ |
|
||
Selling, general and administrative |
|
|
|
|
|
|
||
Total operating lease costs |
|
$ |
|
|
$ |
|
||
The Company recognized the following related to its operating leases:
|
|
Financial |
|
At April 2, |
|
|
At December 31, |
|
||
Operating right-of-use assets |
|
|
|
$ |
|
|
$ |
|
||
Operating lease liabilities - current |
|
|
|
$ |
|
|
$ |
|
||
Operating lease liabilities - noncurrent |
|
|
|
$ |
|
|
$ |
|
||
Maturities of the Company’s operating lease liabilities were as follows:
|
|
At April 2, |
|
|
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
|
|
|
Less: imputed interest |
|
|
|
|
Present value of operating lease liabilities |
|
$ |
|
|
Weighted-average remaining lease term (years) |
|
|
|
|
Weighted-average incremental borrowing rate |
|
|
% |
|
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
|
|
Three Months Ended |
|
|||||
|
|
|
|
April 2, 2022 |
|
|
April 3, 2021 |
|
||
Operating cash outflows |
|
|
|
$ |
|
|
$ |
|
||
Operating right-of-use assets obtained in exchange for operating lease liabilities |
|
|
|
$ |
|
|
$ |
|
||
Note 7. Income Taxes
The Company recorded tax expense of $
13
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by the Company’s forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where the Company expects to report losses for which the Company does not expect to receive tax benefits, the Company applies separate forecasted effective tax rates to those jurisdictions rather than including them in the consolidated forecasted effective tax rate.
For the three months ended April 2, 2022 the net tax expense of $
Note 8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in millions, except shares in thousands and per share data):
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Numerator: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Denominator - Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Add: dilutive effect of common stock equivalents |
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Earnings per share: |
|
|
|
|
|
|
||
Basic |
|
$ |
|
|
$ |
|
||
Diluted |
|
$ |
|
|
$ |
|
||
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 the Company’s common stock for the three months ended April 2, 2022 and April 3, 2021. For the three months ended April 2, 2022, average options and other rights to purchase approximately
Note 9. Inventories—Net
|
|
April 2, 2022 |
|
|
December 31, 2021 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished products |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Note 10. Acquisitions
14
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
On
The Company has not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations. The consideration paid by the Company to complete the acquisition has been allocated preliminarily to the assets acquired and liabilities assumed based upon the net book values. The purchase price in excess of the net book value was recorded as goodwill, as of the date of the acquisition, as a temporary measure pending the completion of the valuation analysis. The Company included net assets and Goodwill of $
The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of the date of the acquisition:
Accounts receivable – net |
|
$ |
|
|
Inventories – net |
|
|
|
|
Cash and other current assets |
|
|
|
|
Property, plant and equipment – net |
|
|
|
|
Goodwill (includes unallocated identified intangible assets) |
|
|
|
|
Other assets (non-current) |
|
|
|
|
Total assets |
|
$ |
|
|
Accounts payable |
|
|
|
|
Accrued liabilities |
|
|
|
|
Other liabilities |
|
|
|
|
Net assets acquired |
|
$ |
|
The Company expensed approximately $
On February 14, 2022, the Company acquired
15
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
Note 11. Accrued Liabilities
|
|
April 2, 2022 |
|
|
December 31, 2021 |
|
||
Obligations payable under Indemnification Agreements |
|
$ |
|
|
$ |
|
||
Taxes payable |
|
|
|
|
|
|
||
Compensation, benefit and other employee-related |
|
|
|
|
|
|
||
Customer rebate reserve |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Refer to Note 12. Commitments and Contingencies for further details on Obligations payable under Indemnification Agreements.
Note 12. 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. For the three months ended April 2, 2022 and April 3, 2021, environmental expenses related to these operating sites were not material. Liabilities for environmental costs were $
Obligations Payable Under Indemnification Agreements
The indemnification and reimbursement agreement (the “Reimbursement Agreement”) and the tax matters agreement (the “Tax Matters Agreement”) (collectively, the “Indemnification Agreements”) are described below.
Reimbursement Agreement
The following table summarizes information concerning the Company’s Reimbursement Agreement liabilities:
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Accruals for indemnification liabilities deemed probable and reasonably estimable |
|
|
|
|
|
|
||
Indemnification payment |
|
|
( |
) |
|
|
( |
) |
Ending balance (1) |
|
$ |
|
|
$ |
|
||
16
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
For the three months ended April 2, 2022 and April 3, 2021 net expenses related to the Reimbursement Agreement were $
Reimbursement Agreement liabilities are included in the following balance sheet accounts:
|
|
April 2, 2022 |
|
|
December 31, 2021 |
|
||
Accrued liabilities |
|
$ |
|
|
$ |
|
||
Obligations payable under Indemnification Agreements |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with such indemnification liability payments can be determined although they could be material to the Company’s unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.
Tax Matters Agreement
In connection with the Spin-Off, the Company entered into the Tax Matters Agreement with Honeywell pursuant to which it is responsible and will indemnify Honeywell for certain taxes, including certain income taxes, sales taxes, VAT and payroll taxes, relating to the business for all periods, including periods prior to the consummation of the Spin-Off. In addition, the Tax Matters Agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the Spin-Off. As of April 2, 2022 and December 31, 2021, the Company has recorded a liability in respect to the Tax Matters Agreement of $
Trademark Agreement
In connection with the Spin-Off, the Company and Honeywell entered into a
Other Matters
The Company is subject to lawsuits, investigations, and disputes arising out of the conduct of its business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee matters, intellectual property, and environmental, health, and safety matters. The Company recognizes a liability for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. No such matters are material to the Company's unaudited financial statements.
The Company, the Company’s former CEO Michael Nefkens, the Company’s former CFO Joseph Ragan, and the Company’s former CIO Niccolo de Masi were named defendants in a class action securities suit that was filed in the U.S. District Court for the District of Minnesota styled In re Resideo Technologies, Inc. Securities Litigation, (the “Securities Litigation”). The amended complaint asserted 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.
17
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
On August 18, 2021, the Company and plaintiffs’ representative executed a definitive Stipulation and Agreement of Settlement providing for, among other things, a total settlement payment of $
Certain current or former directors and officers of the Company were defendants in a consolidated derivative action in the District Court for the District of Delaware under the caption In re Resideo Technologies, Inc. Derivative Litigation, (the “Federal Derivative Action”). On September 23, 2021 the Federal Derivative Action was transferred to the District of Minnesota, where Securities Litigation was pending. On September 1, 2021, an additional shareholder derivative complaint was filed by Riviera Beach, part of the leadership group in the Federal Derivative Action, and City of Hialeah Employees Retirement System against certain current or former directors and officers of the Company in the District of Minnesota, alleging substantially that the same facts and making substantially the same claims against the same defendants as in the Federal Derivative Action, and additionally referencing board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8 (the “Riviera Beach Action”). On December 1, 2021, the Federal Derivative Action and the Riviera Beach Action were consolidated into a single action under the caption: In re Resideo Technologies, Inc. Derivative Litigation, (the “Consolidated Federal Derivative Action”) and was stayed pending entry of final judgement in the Securities Litigation. On April 19, 2022, after entry of the final judgement in the Securities Litigation, the court entered the parties' stipulation suspending all deadlines in the case for sixty days to facilitate settlement discussions.
On June 25, 2021, the Bud & Sue Frashier Family Trust U/A DTD 05/05/98, filed a shareholder derivative complaint against certain current or former directors and officers of the Company in the Court of Chancery of the State of Delaware, captioned Bud & Sue Frashier Trust U/A DTD 05/05/98 v. Fradin, (“Delaware Chancery Derivative Action”). The Delaware Chancery Derivative Action alleges substantially the same facts and makes substantially the same claims as the Federal Derivative Action, and additionally references board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8. The Delaware Chancery Derivative Action remains stayed by agreement of the parties.
While the Company is engaged in discussions concerning potential settlement of the Federal Derivative Action and the Delaware Chancery Derivative Action, there can be no guarantees that a settlement will be reached or approved. In the event that no settlement is reached, the Company intends to defend these actions vigorously, but there can be no assurance that the defense will be successful.
See Note 17. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in the Company’s 2021 Annual Report on Form 10-K for further discussion of these matters.
Warranties and Guarantees
In the normal course of business, the Company issues product warranties and product performance guarantees. It accrues for the estimated cost of product warranties and product performance guarantees based on contract terms and historical experience at the time of sale. Adjustments to initial obligations for warranties and guarantees are made as changes to the obligations become reasonably estimable. Product warranties and product performance guarantees are included in Accrued liabilities.
18
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
The following table summarizes information concerning recorded obligations for product warranties and product performance guarantees:
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Beginning of period |
|
$ |
|
|
$ |
|
||
Accruals for warranties/guarantees issued during the year |
|
|
|
|
|
|
||
Additions from acquisitions |
|
|
|
|
|
- |
|
|
Adjustment of pre-existing warranties/guarantees |
|
|
( |
) |
|
|
( |
) |
Settlement of warranty/guarantee claims |
|
|
( |
) |
|
|
( |
) |
End of period |
|
$ |
|
|
$ |
|
||
Note 13. Long-term Debt and Credit Agreement
The Company’s debt as of April 2, 2022 and December 31, 2021 consisted of the following:
|
|
April 2, 2022 |
|
|
December 31, 2021 |
|
||
|
$ |
|
|
$ |
|
|||
Seven-year variable rate term loan B due |
|
|
|
|
|
|
||
Revolving Credit Facility |
|
|
|
|
|
|
||
Unamortized deferred financing costs |
|
|
( |
) |
|
|
( |
) |
Total outstanding indebtedness |
|
|
|
|
|
|
||
Less: Amounts expected to be paid within one year |
|
|
|
|
|
|
||
Total long-term debt due after one year |
|
$ |
|
|
$ |
|
||
At April 2, 2022 and April 3, 2021, the interest rate for the A&R Term B Facility (defined below) was
The Company assessed the amounts recorded under the A&R Term B Facility, the Senior Notes due 2029, and the A&R Revolving Credit Facility. The Company determined that the A&R Revolving Credit Facility approximated fair value. The A&R Term B Facility and the Senior Notes due 2029 had approximate fair values of $
Senior Notes due 2029
On August 26, 2021, the Company issued $
Credit Agreement
The A&R Credit Agreement provides for a (i)
19
RESIDEO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
(Unaudited)
facility in an aggregate principal amount of $
On March 28, 2022, the A&R Credit Agreement was further amended to include an additional aggregate principal amount of $
Refer to Note 18. Long-Term Debt and Credit Agreement in the Company’s 2021 Annual Report on Form 10-K for further discussion regarding the Company’s long-term debt and credit agreement.
Note 14. Derivative Instruments
The Company uses interest rate swap agreements to manage exposure to interest rate risks. The Company does not use interest rate swap agreements for speculative or trading purposes. The gain or loss on the interest rate swaps that qualify as derivatives is recorded in Accumulated other comprehensive loss and is subsequently recognized as Interest expense in the Interim Consolidated Statements of Operations when the hedged exposure affects earnings. If the related debt or the interest rate swap is terminated prior to maturity, the fair value of the interest rate swap recorded in Accumulated other comprehensive loss may be recognized in the Consolidated Interim Statements of Operations based on an assessment of the agreements at the time of termination.
In March 2021, the Company entered into
Note 15. Pension
The Company sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of its U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit plans. It also sponsors defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in certain jurisdictions, principally Germany, Austria, Belgium, France, India, Switzerland, and the Netherlands. The pension obligations as of April 2, 2022 and December 31, 2021 were $
The components of net periodic benefit costs other than the service cost are included in Other expense, net in the unaudited Consolidated Interim Statements of Operations for the three months ended April 2, 2022 and April 3, 2021.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except per share amounts)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand the results of operations and financial condition of Resideo Technologies, Inc. and its consolidated subsidiaries (“Resideo” or “the Company”, “we”, “us” or “our”) for the three months ended April 2, 2022 and should be read in conjunction with the unaudited Consolidated Interim Financial Statements and the notes thereto contained elsewhere in this Form 10-Q. The financial information as of April 2, 2022 should be read in conjunction with the consolidated and combined financial statements for the year ended December 31, 2021 contained in our 2021 Annual Report on Form 10-K (the “2021 Annual Report on Form 10-K”).
Overview and Business Trends
We are a leading global manufacturer and distributor of technology-driven products and solutions that help homeowners and businesses stay connected and in control of their comfort, security, and energy use. We are a leader in the home heating, ventilation and air conditioning controls, including smoke and carbon monoxide detection home safety products, and security markets. We have a global footprint serving commercial and residential end-markets. We manage our business operations through two operating segments, Products & Solutions and ADI Global Distribution. Our Products & Solutions segment offerings include temperature and humidity control, energy products and solutions, water and air solutions, as well as smoke and carbon monoxide detection home safety products, security panels, sensors, peripherals, wire and cable, communications devices, video cameras, awareness solutions, cloud infrastructure, installation and maintenance tools, and related software. Our ADI Global Distribution business is the leading wholesale distributor of low-voltage security products including access control, fire detection, intrusion, and video products and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. The Products & Solutions segment, consistent with our industry, has a higher gross and operating profit margin profile in comparison to the ADI Global Distribution segment.
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. We are experiencing global shortages in key materials and components in certain instances impacting our ability to supply certain products as well as labor shortages, materials price inflation, and increased freight costs.
Current Quarter Developments
In March 2022, we completed the acquisition of First Alert, Inc. (“First Alert”), a leading provider of home safety products. This acquisition was integrated into the Products & Solutions portfolio and expands our footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products.
In March 2022, the A&R Credit Agreement was further amended to increase the aggregate principal amount of the A&R Term B Facility by $200 million. A portion of the proceeds of this increased borrowing under the A&R Term B Facility was used to finance the First Alert acquisition.
First Quarter Highlights
Net revenue increased $87 million, or 6%, in the first quarter of 2022 compared to the same quarter of 2021, driven by price increases. During the first quarter of 2022, gross profit was favorably impacted due to timing impacts of selling through lower cost inventory in the quarter. Gross profit as a percent of net revenues increased to 29% in the first quarter of 2022 from 26% in the first quarter of 2021. The primary items driving the 300 basis point (“bps”) increase in gross profit percentage were a 300 bps benefit from price increases and sales mix.
Research and development expense for the three months ended April 2, 2022 was $24 million, an increase of $3 million from $21 million for the three months ended April 3, 2021. The increase was primarily due to planned investment to support new product launches.
21
Selling, general and administrative expense for the three months ended April 2, 2022 was $238 million, an increase of $21 million from $217 million for the three months ended April 3, 2021. The increase was driven by transaction costs associated with the First Alert acquisition, increased commercial investment, and labor inflation and other items totaling $27 million. The increases were partially offset by foreign currency translation, and other cost reductions totaling $6 million.
First quarter net income was $87 million for the three months ended April 2, 2022 compared to net income of $49 million for the three months ended April 3, 2021.
We ended the first quarter with $244 million in cash and cash equivalents. Net cash used for operating activities was $59 million for the three months ended April 2, 2022. At April 2, 2022, accounts receivable were $1,008 million, inventories were $922 million, accounts payable were $958 million, and there were no borrowings under our revolving credit facility.
COVID-19 and Recent Macroeconomic Environment
Our visibility toward future performance is more limited than is typical due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and its variants, and the overall prevailing macroeconomic environment, including due to COVID-19. For example, recent business conditions have been impacted by shortages in key materials and components which have impacted our ability to supply certain products. We have also experienced increased labor rates, labor shortages, materials price inflation, and increased freight costs. In response to these challenges, we have, among other measures, aggressively managed supplier relationships to mitigate some of these shortages, developed contingency plans for future supply, aligned our production schedules with demand in a proactive manner; and pursued further improvements in the productivity and effectiveness of our manufacturing, selling, and administrative activities.
Basis of Presentation
Our financial statements are presented on a consolidated basis (collectively, the “Interim Financial Statements”). The Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassification
The prior period unaudited consolidated interim statement of operations was reclassified to present Research and development expenses as a separate line item within the statement. Research and development expenses were formerly included within Selling, general and administrative expenses.
Components of Operating Results
Net Revenue
We manage our global business operations through two operating segments, Products & Solutions and ADI Global Distribution:
Products & Solutions: We generate the majority of our Products & Solutions net revenue primarily from residential end-markets. Our Products & Solutions segment includes traditional products, as well as connected products, which we define as any device with the capability to be monitored or controlled from a remote location by an end-user or service provider. Our products are sold primarily through a network of HVAC, plumbing, security, and electrical distributors including our ADI Global Distribution business, OEMs, and service providers such as HVAC contractors, security dealers, and plumbers, and additionally through retail and online channels for specific markets.
ADI Global Distribution: We generate revenue through the distribution of low-voltage electronic and security products, as well as audio, communications, data communications, fire, networking, smart home, power, ProAV, and wire and cable that are delivered through a comprehensive network of professional contractors, distributors and OEMs, as well as major retailers and online merchants. In addition to our own security products, ADI Global Distribution distributes products from industry-leading manufacturers and carries a line of private label products. We sell these
22
products to contractors that service non-residential and residential end-users. 14% of ADI Global Distribution’s net revenue is supplied by our Products & Solutions segment. Management estimates that in 2022 and 2021 approximately two-thirds of ADI Global Distribution’s net revenue was attributed to commercial 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, equipment associated with manufacturing support, logistics and quality assurance, non-research and development engineering costs, and costs of certain intangible assets.
ADI Global Distribution: Cost of goods sold consists primarily of inventory-related costs and includes labor and personnel-related expenses.
Research and Development Expenses
Research and development expenses include expenses related to development of new products as well as enhancements and improvements to existing products that substantially change the product. These expenses are primarily related to employee compensation and consulting fees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include 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.
Other Expense, Net
Other expense, net consists primarily of Reimbursement Agreement expenses. For further information see Note 12. Commitments and Contingencies of Notes to Interim Financial Statements of this Form 10-Q. Other expense, net also includes debt extinguishment costs incurred as a result of the redemption of our previously outstanding senior notes due 2026 and the execution of the A&R Credit Agreement as well as foreign exchange gains and losses and other non-operating related expenses or income.
Interest Expense
Interest expense consists of interest on our short and long-term obligations, including our senior notes, term credit facilities, revolving credit facilities, and any realized gains or losses from our interest rate swaps. Interest expense on our obligations includes contractual interest, amortization of the debt discount, and amortization of deferred financing costs.
Tax Expense
Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory tax rates, adjusted for U.S. taxation of foreign earnings, non-deductible expenses, and other permanent differences.
Results of Operations
The following table sets forth our selected unaudited consolidated interim statements of operations for the periods presented:
23
Unaudited Consolidated Interim Statements of Operations
(In millions except shares in thousands and per share data)
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Net revenue |
|
$ |
1,506 |
|
|
$ |
1,419 |
|
Cost of goods sold |
|
|
1,072 |
|
|
|
1,051 |
|
Gross profit |
|
|
434 |
|
|
|
368 |
|
Research and development expenses |
|
|
24 |
|
|
|
21 |
|
Selling, general and administrative expenses |
|
|
238 |
|
|
|
217 |
|
Operating profit |
|
|
172 |
|
|
|
130 |
|
Other expense, net |
|
|
40 |
|
|
|
44 |
|
Interest expense |
|
|
11 |
|
|
|
13 |
|
Income before taxes |
|
|
121 |
|
|
|
73 |
|
Tax expense |
|
|
34 |
|
|
|
24 |
|
Net income |
|
$ |
87 |
|
|
$ |
49 |
|
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
||
Basic |
|
|
145,118 |
|
|
|
143,382 |
|
Diluted |
|
|
148,760 |
|
|
|
147,656 |
|
Earnings Per Share |
|
|
|
|
|
|
||
Basic |
|
$ |
0.60 |
|
|
$ |
0.34 |
|
Diluted |
|
$ |
0.58 |
|
|
$ |
0.33 |
|
Results of Operations for the Three Months Ended April 2, 2022 and April 3, 2021
Net Revenue
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
Net revenue |
|
$ |
1,506 |
|
|
$ |
1,419 |
|
% change compared with prior period |
|
|
6 |
% |
|
|
|
|
Net revenue for the three months ended April 2, 2022 was $1,506 million, an increase of $87 million, or 6%, from $1,419 for the three months ended April 3, 2021. The increase in net revenue was driven by price increases.
A discussion of net revenue by segment can be found in the Review of Business Segments section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cost of Goods Sold
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Cost of goods sold |
|
$ |
1,072 |
|
|
$ |
1,051 |
|
% change compared with prior period |
|
|
2 |
% |
|
|
|
|
Gross profit percentage |
|
|
28.8 |
% |
|
|
25.9 |
% |
Cost of goods sold for the three months ended April 2, 2022 was $1,072 million, an increase of $21 million, or 2%, from $1,051 million for the three months ended April 3, 2021.
This increase in cost of goods sold was driven by increased material costs, costs related to acquisitions, increased freight costs, and labor inflation totaling $69 million. These increased costs were partially offset by the,
24
foreign currency translation, favorable changes in sales mix, sourcing productivity, and other cost savings totaling $48 million.
Gross profit percentage was 29% for the three months ended April 2, 2022, compared to 26% for the three months ended April 3, 2021. The primary items driving the increase in gross profit percentage were a 300 bps impact from price increases and favorable sales mix.
Research and Development Expenses
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Research and development expenses |
|
$ |
24 |
|
|
$ |
21 |
|
% of revenue |
|
|
2 |
% |
|
|
1 |
% |
Research and development expense for the three months ended April 2, 2022 was $24 million, an increase of $3 million from $21 million for the three months ended April 3, 2021. The increase was driven by planned investment to support new product launches.
Selling, General and Administrative Expenses
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Selling, general and administrative |
|
$ |
238 |
|
|
$ |
217 |
|
% of revenue |
|
|
16 |
% |
|
|
15 |
% |
Selling, general and administrative expense for the three months ended April 2, 2022 was $238 million, an increase of $21 million from $217 million for the three months ended April 3, 2021. The increase was driven by transaction costs associated with the First Alert acquisition, increased investment, and labor inflation and other items totaling $27 million. These increases were partially offset by foreign currency translation, and other cost reductions totaling $6 million.
Other Expense, Net
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Other expense, net |
|
$ |
40 |
|
|
$ |
44 |
|
Other expense, net for the three months ended April 2, 2022 was $40 million, a decrease of $4 million from $44 million for the three months ended April 3, 2021. Other expense, net for the three months ended April 2, 2022 included $41 million in expenses related to the Honeywell Reimbursement Agreement partially offset by $1 million of other non-operating expenses. Other expense, net for the three months ended April 3, 2021, included $36 million in expenses related to the Honeywell Reimbursement Agreement and $23 million of debt extinguishment costs, partially offset by a $9 million reduction in accruals related to the Tax Matters Agreement, and $6 million of other non-operating income.
Tax Expense
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Tax expense |
|
$ |
34 |
|
|
$ |
24 |
|
Effective tax rate |
|
|
29 |
% |
|
|
32 |
% |
25
Tax expense for the three months ended April 2, 2022 was $34 million.
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 April 2, 2022 the net tax expense of $34 million consists primarily of interim period tax expense of $35 million based on year-to-date pretax income multiplied by our forecasted effective tax rate partially offset by a tax benefit specific to the period of approximately $1 million consisting primarily of excess deductions for share-based compensation and the release of a previously unrecognized tax benefit. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
Review of Business Segments
Products & Solutions
|
|
Three Months Ended |
|
|||||||||
|
|
April 2, |
|
|
April 3, |
|
|
|
|
|||
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
Total revenue |
|
$ |
714 |
|
|
$ |
700 |
|
|
|
|
|
Less: Intersegment revenue |
|
|
95 |
|
|
|
94 |
|
|
|
|
|
External revenue |
|
$ |
619 |
|
|
$ |
606 |
|
|
|
2 |
% |
Operating profit |
|
$ |
153 |
|
|
$ |
130 |
|
|
|
18 |
% |
Operating profit percentage |
|
|
25 |
% |
|
|
21 |
% |
|
|
|
|
On March 31, 2022, we completed the acquisition of First Alert, a leading provider of home safety products. This acquisition was integrated into the Products & Solutions portfolio and expands our footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products. The impact of this acquisition was not material for the three months ended April 2, 2022
Products & Solutions revenue increased 2%, mainly due to price increases. Operating profit increased from $130 million to $153 million, or 18%. Operating profit was positively impacted by price increases and cost reductions totaling $69 million. These impacts were partially offset by lower volume, unfavorable changes in sales mix, increased investment, increased freight costs, and labor inflation totaling $46 million.
ADI Global Distribution
|
|
Three Months Ended |
|
|||||||||
|
|
April 2, |
|
|
April 3, |
|
|
|
|
|||
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
External revenue |
|
$ |
887 |
|
|
$ |
813 |
|
|
|
9 |
% |
Operating profit |
|
$ |
80 |
|
|
$ |
59 |
|
|
|
36 |
% |
Operating profit percentage |
|
|
9 |
% |
|
|
7 |
% |
|
|
|
|
In February 2022, we completed the acquisition of Arrow Wire and Cable, Inc. a leading regional distributor of data communications, connectivity, and security products. This acquisition was integrated into and builds upon the ADI Global Distribution product portfolio and expands its presence in the data communications category with an assortment of copper and fiber cabling and connectivity, connectors, racking solutions, and network equipment. The impact of this acquisition was not material for the three months ended April 2, 2022.
ADI Global Distribution revenue increased 9% highlighted by strong growth in the U.S. and Canada driven by price increases, increased volume, and the impact of acquisitions. Operating profit increased from $59 million to $80 million, or 36%. Operating profit was favorably impacted primarily by changes in sales mix, price increases, impact of acquisitions, higher revenue, and other expense productivity totaling $29 million. These positive impacts were partially offset by commercial investments, increased freight costs, as well as labor inflation totaling $8 million.
26
Corporate
|
|
Three Months Ended |
|
|||||||||
|
|
April 2, |
|
|
April 3, |
|
|
|
|
|||
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|||
Corporate costs |
|
$ |
61 |
|
|
$ |
59 |
|
|
|
3 |
% |
Corporate costs for the three months ended April 2, 2022 were $61 million, an increase from $59 million for the three months ended April 3, 2021, or 3%. The increase was due primarily to transaction costs associated with the First Alert acquisition of $10 million partially offset by lower consulting spend, foreign currency translation, and other cost reductions totaling $8 million.
Capital Resources and Liquidity
Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations, supplemented by external sources of capital as needed. Additional liquidity may also be provided through access to the financial capital markets and a committed global credit facility. The following is a summary of our liquidity position:
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies, and the expansion of our sales and marketing activities. While we may elect to seek additional funding at any time, we believe our existing cash, cash equivalents, and availability under our credit facilities are sufficient to meet our capital requirements through at least the next 12 months and the longer term. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.
Reimbursement Agreement
In connection with the Spin-Off, we entered into the Reimbursement Agreement, pursuant to which we have an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable by us in respect of such liabilities arising in any given year is subject to a cap of $140 million.
The amount paid during the three months ended April 2, 2022 was $35 million. See Note 12. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of the Form 10-Q and Note 17. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in our 2021 Annual Report on Form 10-K for further discussion.
27
Cash Flow Summary for the three months ended April 2, 2022 and April 3, 2021
Our cash flows from operating, investing and financing activities for the three months ended April 2, 2022 and April 3, 2021, as reflected in the unaudited Interim Financial Statements, are summarized as follows:
|
|
Three Months Ended |
|
|||||
|
|
April 2, |
|
|
April 3, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Cash (used for) provided by: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
(59 |
) |
|
$ |
5 |
|
Investing activities |
|
|
(665 |
) |
|
|
(24 |
) |
Financing activities |
|
|
189 |
|
|
|
13 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
- |
|
|
|
(3 |
) |
Net decrease in cash and cash equivalents |
|
$ |
(535 |
) |
|
$ |
(9 |
) |
Cash used for operating activities for the three months ended April 2, 2022 increased by $64 million, primarily due to increased working capital of $68 million to support higher revenue and higher inventory levels to support the business.
Cash used for investing activities increased by $641 million, primarily due to $628 million of additional cash paid for acquisitions in the three months ended April 2, 2022.
Net cash provided by financing activities increased by $176 million. The increase was primarily due to $196 million of net proceeds from the March 2022 Amended A&R Credit Agreement, as compared to $8 million of net proceeds resulting from the 2021 execution of the A&R Credit Agreement, redemption of the $140 million in principal amount of our previously outstanding senior notes, and debt issuance and modification costs, and a $3 million repayment of long-term debt. In addition, cash used for other financing activities increased by $9 million.
Capital Expenditures
We believe our capital spending has been sufficient to support the requirements of the business. We expect to continue investing to expand and modernize our existing facilities and to create capacity for new product development.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, net revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
28
Critical Accounting Policies
The preparation of our unaudited Interim Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed in our 2021 Annual Report on Form 10-K to be critical to the understanding of our unaudited Interim Financial Statements included in this Form 10-Q. There have been no changes in our critical accounting policies as compared to what was disclosed in the 2021 Annual Report on Form 10-K. Actual results could differ from our estimates and assumptions, and any such differences could be material to our unaudited Interim Financial Statements.
Other Matters
Litigation, Environmental Matters and Reimbursement Agreement
See Note 12. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of environmental and other litigation matters.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.
Interest Rate Risk
As of April 2, 2022, $1,140 million of our total debt, excluding unamortized deferred financing costs, carried variable interest rates. In March 2021, eight interest rate swap agreements were entered into with various financial institutions for a combined notional amount of $560 million (the “Swap Agreements”). The Swap Agreements effectively converted a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over a term of two to four years. For more information on the Swap Agreements, see Note 14. Derivative Instruments of Notes to Consolidated Interim Financial Statements of this Form 10-Q. The fair market values of our fixed-rate financial instruments and Swap Agreements are sensitive to changes in interest rates. At April 2, 2022, an increase in interest rate by 100 basis points would have an approximate $6 million impact on our annual interest expense, while a decrease in interest rate is not possible due to the interest rate floor on our variable rate debt.
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, Canadian Dollar, Indian Rupee, British Pound, and Mexican Peso. 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 April 2, 2022 and December 31, 2021, we have no outstanding foreign currency 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.
29
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, 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 April 2, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
30
PART II
Item 1. Legal Proceedings
See Note 12. Commitments and Contingencies — Other Matters of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion on legal proceedings.
Item 1A. Risk Factors
We face a variety of risks that are inherent in our business and our industry, including operational, legal, and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations, and historical trends. There have been no material changes to the risk factors described in our 2021 Annual Report on Form 10-K.
31
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 |
2.1 |
|
|
|
|
|
4.1 |
|
|
|
|
|
10.1 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document (filed herewith) |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema (filed herewith) |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith) |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith) |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
† |
Schedules omitted pursuant to item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon its request. |
32
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: May 3, 2022 |
By: |
/s/ Anthony L. Trunzo |
|
|
Anthony L. Trunzo Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as the Registrant’s Principal Financial Officer) |
33
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jay Geldmacher, certify that:
Date: May 3, 2022 |
By: |
/s/Jay Geldmacher |
|
|
Jay Geldmacher |
|
|
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony L. Trunzo, certify that:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 3, 2022 |
By: |
/s/Anthony L. Trunzo |
|
|
Anthony L. Trunzo |
|
|
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Resideo Technologies, Inc. (the Company) on Form 10-Q for the period ended April 2, 2022 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jay Geldmacher, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 3, 2022 |
By: |
/s/ Jay Geldmacher |
|
|
Jay Geldmacher |
|
|
President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Resideo Technologies, Inc. (the Company) on Form 10-Q for the period ended April 2, 2022 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Anthony L. Trunzo, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 3, 2022 |
By: |
/s/ Anthony L. Trunzo |
|
|
Anthony L. Trunzo |
|
|
Executive Vice President and Chief Financial Officer |