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 July 3, 2021
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) |
(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 July 30, 2021 was 144,182,941 shares.
TABLE OF CONTENTS
|
|
Item |
|
Page |
|
|
|
|
|
|
Part I. |
|
5 |
|
|
|
|
|
|
|
|
1. |
5 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Consolidated Interim Balance Sheets (unaudited) – July 3, 2021 and December 31, 2020 |
7 |
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
Notes to Consolidated Interim Financial Statements (unaudited) |
10 |
|
|
|
|
|
|
|
2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
|
|
|
|
|
|
|
3. |
34 |
|
|
|
|
|
|
|
|
4. |
35 |
|
|
|
|
|
|
|
Part II. |
1. |
36 |
|
|
|
|
|
|
|
|
1A. |
36 |
|
|
|
|
|
|
|
|
6. |
37 |
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
2
RESIDEO TECHNOLOGIES, INC.
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:
|
|
• |
competition from other companies in our markets and segments, as well as in new markets and emerging markets; |
|
|
• |
our ability to successfully develop new technologies and products and develop and protect the intellectual property related to the same and to defend against IP threats of others; |
|
|
• |
our inability to maintain intellectual property agreements necessary to our business; |
|
|
• |
our ability to recruit and retain qualified personnel; |
|
|
• |
our ability to retain or expand relationships with significant customers; |
|
|
• |
changes in prevailing global and regional economic conditions; |
|
|
• |
the impact of pandemics, epidemics, natural disasters and other public health emergencies, such as COVID-19; |
|
|
• |
fluctuation in financial results due to the seasonal nature of portions of our business; |
|
|
• |
failure to achieve and maintain a high level of product and service quality; |
|
|
• |
inability to obtain necessary product components, production equipment or replacement parts; |
|
|
• |
dependence upon information technology infrastructure having adequate cyber-security functionality; |
|
|
• |
labor disputes, work stoppages, other disruptions, or the need to relocate any of our facilities; |
|
|
• |
economic, political, regulatory, foreign exchange and other risks of international operations, including the impact of tariffs; |
|
|
• |
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; |
|
|
• |
the failure to increase productivity through sustainable operational improvements; |
|
|
• |
the operational constraints and financial distress of third parties; |
|
|
• |
our ability to borrow funds and access capital markets; |
|
|
• |
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; |
|
|
• |
our reliance on Honeywell for the Honeywell Home trademark; |
|
|
• |
potential material environmental liabilities; |
|
|
• |
potential material costs as a result of warranty claims, including product recalls, and product liability actions that may be brought against us; |
|
|
• |
potential material litigation matters; including the shareholder litigation described in this Form 10-Q; |
|
|
• |
unforeseen U.S. federal income tax and foreign tax liabilities; 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 2020 Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Form 10-Q. There have been no material changes to
3
RESIDEO TECHNOLOGIES, INC.
the risk factors described in our 2020 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
PART I
The financial statements and related footnotes as of July 3, 2021 should be read in conjunction with the financial statements for the year ended December 31, 2020 contained in our 2020 Annual Report on Form 10-K.
4
RESIDEO TECHNOLOGIES, INC.
|
Item 1. |
Financial Statements |
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In millions except share and per share data)
(Unaudited)
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Net revenue |
|
$ |
1,477 |
|
|
$ |
1,029 |
|
|
$ |
2,896 |
|
|
$ |
2,208 |
|
|
Cost of goods sold |
|
|
1,096 |
|
|
|
793 |
|
|
|
2,147 |
|
|
|
1,688 |
|
|
Gross profit |
|
|
381 |
|
|
|
236 |
|
|
|
749 |
|
|
|
520 |
|
|
Selling, general and administrative expenses |
|
|
238 |
|
|
|
223 |
|
|
|
455 |
|
|
|
455 |
|
|
Research and development expenses |
|
|
22 |
|
|
|
19 |
|
|
|
43 |
|
|
|
37 |
|
|
Operating profit (loss) |
|
|
121 |
|
|
|
(6 |
) |
|
|
251 |
|
|
|
28 |
|
|
Other expense, net |
|
|
28 |
|
|
|
29 |
|
|
|
72 |
|
|
|
71 |
|
|
Interest expense |
|
|
12 |
|
|
|
18 |
|
|
|
25 |
|
|
|
35 |
|
|
Income (loss) before taxes |
|
|
81 |
|
|
|
(53 |
) |
|
|
154 |
|
|
|
(78 |
) |
|
Tax expense |
|
|
23 |
|
|
|
23 |
|
|
|
47 |
|
|
|
19 |
|
|
Net income (loss) |
|
$ |
58 |
|
|
$ |
(76 |
) |
|
$ |
107 |
|
|
$ |
(97 |
) |
|
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
143,939 |
|
|
|
123,203 |
|
|
|
143,657 |
|
|
|
123,083 |
|
|
Diluted |
|
|
148,328 |
|
|
|
123,203 |
|
|
|
148,050 |
|
|
|
123,083 |
|
|
Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.40 |
|
|
$ |
(0.62 |
) |
|
$ |
0.74 |
|
|
$ |
(0.79 |
) |
|
Diluted |
|
$ |
0.39 |
|
|
$ |
(0.62 |
) |
|
$ |
0.72 |
|
|
$ |
(0.79 |
) |
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 (LOSS)
(In millions)
(Unaudited)
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Net income (loss) |
|
$ |
58 |
|
|
$ |
(76 |
) |
|
$ |
107 |
|
|
$ |
(97 |
) |
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange translation adjustment |
|
|
9 |
|
|
|
44 |
|
|
|
(17 |
) |
|
|
(22 |
) |
|
Changes in unrealized gain on derivatives |
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total other comprehensive income (loss), net of tax |
|
|
7 |
|
|
|
44 |
|
|
|
(17 |
) |
|
|
(22 |
) |
|
Comprehensive income (loss) |
|
$ |
65 |
|
|
$ |
(32 |
) |
|
$ |
90 |
|
|
$ |
(119 |
) |
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)
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)
|
|
|
Six Months Ended |
|
|||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||
|
Cash flows provided by operating activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
107 |
|
|
$ |
(97 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
45 |
|
|
|
42 |
|
|
Stock compensation expense |
|
|
19 |
|
|
|
14 |
|
|
Other |
|
|
18 |
|
|
|
21 |
|
|
Changes in assets and liabilities, net of acquired companies: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(33 |
) |
|
|
113 |
|
|
Inventories – net |
|
|
(8 |
) |
|
|
58 |
|
|
Other current assets |
|
|
(24 |
) |
|
|
13 |
|
|
Accounts payable |
|
|
(15 |
) |
|
|
(109 |
) |
|
Accrued liabilities |
|
|
(10 |
) |
|
|
14 |
|
|
Obligations payable under Indemnification Agreements |
|
|
(6 |
) |
|
|
(9 |
) |
|
Other |
|
|
6 |
|
|
|
11 |
|
|
Net cash provided by operating activities |
|
|
99 |
|
|
|
71 |
|
|
Cash flows used for investing activities: |
|
|
|
|
|
|
|
|
|
Expenditures for property, plant, equipment and other intangibles |
|
|
(35 |
) |
|
|
(31 |
) |
|
Cash paid for acquisitions, net of cash acquired |
|
|
(10 |
) |
|
|
(35 |
) |
|
Other |
|
|
3 |
|
|
|
- |
|
|
Net cash used for investing activities |
|
|
(42 |
) |
|
|
(66 |
) |
|
Cash flows provided by financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
950 |
|
|
|
- |
|
|
Payment of debt facility issuance and modification costs |
|
|
(21 |
) |
|
- |
|
|
|
Net proceeds from revolving credit facility |
|
|
- |
|
|
|
250 |
|
|
Repayment of long-term debt |
|
|
(923 |
) |
|
|
(6 |
) |
|
Other |
|
|
1 |
|
|
|
(3 |
) |
|
Net cash provided by financing activities |
|
|
7 |
|
|
|
241 |
|
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
(2 |
) |
|
|
(6 |
) |
|
Net increase in cash and cash equivalents |
|
|
62 |
|
|
|
240 |
|
|
Cash and cash equivalents at beginning of period |
|
|
517 |
|
|
|
122 |
|
|
Cash and cash equivalents at end of period |
|
$ |
579 |
|
|
$ |
362 |
|
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 July 3, 2021 |
|
Common Shares |
|
|
Treasury Shares |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional Paid- In Capital |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Equity |
|
||||||||
|
Balance at April 3, 2021 |
|
|
143,819 |
|
|
|
1,069 |
|
|
$ |
- |
|
|
$ |
(10 |
) |
|
$ |
2,088 |
|
|
$ |
124 |
|
|
$ |
(170 |
) |
|
$ |
2,032 |
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
58 |
|
|
Other comprehensive income, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
7 |
|
|
Stock issuances, net of shares withheld for taxes |
|
|
352 |
|
|
|
119 |
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4 |
) |
|
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
|
Balance at July 3, 2021 |
|
|
144,171 |
|
|
|
1,188 |
|
|
$ |
- |
|
|
$ |
(14 |
) |
|
$ |
2,098 |
|
|
$ |
182 |
|
|
$ |
(163 |
) |
|
$ |
2,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 27, 2020 |
|
Common Shares |
|
|
Treasury Shares |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional Paid- In Capital |
|
|
Retained Earnings (Deficit) |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Equity |
|
||||||||
|
Balance at March 28, 2020 |
|
|
123,121 |
|
|
|
752 |
|
|
$ |
- |
|
|
$ |
(4 |
) |
|
$ |
1,768 |
|
|
$ |
17 |
|
|
$ |
(260 |
) |
|
$ |
1,521 |
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(76 |
) |
|
|
- |
|
|
|
(76 |
) |
|
Other comprehensive income, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
44 |
|
|
|
44 |
|
|
Stock issuances, net of shares withheld for taxes |
|
|
257 |
|
|
|
100 |
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
Balance at June 27, 2020 |
|
|
123,378 |
|
|
|
852 |
|
|
$ |
- |
|
|
$ |
(5 |
) |
|
$ |
1,775 |
|
|
$ |
(59 |
) |
|
$ |
(216 |
) |
|
$ |
1,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 3, 2021 |
|
Common Shares |
|
|
Treasury Shares |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional Paid- In Capital |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Equity |
|
||||||||
|
Balance at January 1, 2021 |
|
|
143,059 |
|
|
|
900 |
|
|
$ |
- |
|
|
$ |
(6 |
) |
|
$ |
2,070 |
|
|
$ |
75 |
|
|
$ |
(146 |
) |
|
$ |
1,993 |
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
107 |
|
|
|
- |
|
|
|
107 |
|
|
Other comprehensive loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17 |
) |
|
|
(17 |
) |
|
Stock issuances, net of shares withheld for taxes |
|
|
1,112 |
|
|
|
288 |
|
|
|
- |
|
|
|
(8 |
) |
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
Stock-based compensation |
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19 |
|
|
|
- |
|
|
- |
|
|
|
19 |
|
|||
|
Balance at July 3, 2021 |
|
|
144,171 |
|
|
|
1,188 |
|
|
$ |
- |
|
|
$ |
(14 |
) |
|
$ |
2,098 |
|
|
$ |
182 |
|
|
$ |
(163 |
) |
|
$ |
2,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 27, 2020 |
|
Common Shares |
|
|
Treasury Shares |
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional Paid- In Capital |
|
|
Retained Earnings (Deficit) |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Equity |
|
||||||||
|
Balance at January 1, 2020 |
|
|
122,873 |
|
|
|
615 |
|
|
$ |
- |
|
|
$ |
(3 |
) |
|
$ |
1,761 |
|
|
$ |
38 |
|
|
$ |
(194 |
) |
|
$ |
1,602 |
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(97 |
) |
|
|
- |
|
|
|
(97 |
) |
|
Other comprehensive loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(22 |
) |
|
|
(22 |
) |
|
Stock issuances, net of shares withheld for taxes |
|
|
505 |
|
|
|
237 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
|
Stock-based compensation |
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
|
- |
|
|
|
14 |
|
|||
|
Balance at June 27, 2020 |
|
|
123,378 |
|
|
|
852 |
|
|
$ |
- |
|
|
$ |
(5 |
) |
|
$ |
1,775 |
|
|
$ |
(59 |
) |
|
$ |
(216 |
) |
|
$ |
1,495 |
|
The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
9
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 global manufacturer and developer of technology-driven products that provide critical comfort, residential thermal and security solutions to homes globally. The Company is also the leading wholesale distributor of low-voltage security products including intrusion, access control and video products, and participates significantly in the broader related markets of smart home, fire, power, audio, ProAV, networking, communications, wire and cable, and data communications. 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 October 29, 2018, becoming an independent publicly traded company as a result of a pro rata distribution of the Company’s common stock to shareholders of Honeywell (the “Spin-Off”).
Basis of Presentation
The Company’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) that requires its businesses to close their first, second and third quarter books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. 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
The prior year segment information was recast to present Corporate separately. See Note 4. Segment Financial Data for additional information. Certain reclassifications have been made to the prior period financial statements to conform to the classification adopted in the current period.
The prior year unaudited Consolidated Interim Statements of Operations were reclassified to present Research and development expenses as a separate line item within the statements. Research and development expenses were formerly included within Selling, general and administrative expenses.
Note 2. Summary of Significant Accounting Policies
The Company’s accounting policies are set forth in Note 2. Summary of Significant Accounting Policies of the Company’s Notes to Consolidated and Combined Financial Statements included in the 2020 Annual Report on Form 10-K.
10
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. In January 2021, amendments were issued to clarify numerous accounting topics. This guidance is applicable for the Company’s A&R Senior Credit Facilities and Swap Agreements, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. Refer to Note 13. Long-term Debt and Credit Agreement for further details on the Company’s A&R Senior Credit Facilities and Note 14. Derivative Instruments for further details on the Company's Swap Agreements. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
Note 3. Revenue Recognition
Disaggregated Revenue
Revenues by geography and business line are as follows:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Comfort |
|
$ |
295 |
|
|
$ |
198 |
|
|
$ |
574 |
|
|
$ |
428 |
|
|
Security |
|
|
163 |
|
|
|
115 |
|
|
|
340 |
|
|
|
237 |
|
|
Residential Thermal Solutions |
|
|
140 |
|
|
|
85 |
|
|
|
290 |
|
|
|
208 |
|
|
Products & Solutions |
|
|
598 |
|
|
|
398 |
|
|
|
1,204 |
|
|
|
873 |
|
|
U.S. and Canada |
|
|
731 |
|
|
|
532 |
|
|
|
1,398 |
|
|
|
1,108 |
|
|
EMEA (1) |
|
|
140 |
|
|
|
95 |
|
|
|
274 |
|
|
|
209 |
|
|
APAC (2) |
|
|
8 |
|
|
|
4 |
|
|
|
20 |
|
|
|
18 |
|
|
ADI Global Distribution |
|
|
879 |
|
|
|
631 |
|
|
|
1,692 |
|
|
|
1,335 |
|
|
Net revenue |
|
$ |
1,477 |
|
|
$ |
1,029 |
|
|
$ |
2,896 |
|
|
$ |
2,208 |
|
|
(1) |
EMEA represents Europe, the Middle East and Africa. |
|
(2) |
APAC represents Asia and Pacific countries. |
The Company recognizes the majority of its revenue from performance obligations outlined in contracts with its customers that are satisfied at a point in time. Approximately 3% of the Company’s revenue is satisfied over time. As of July 3, 2021 and June 27, 2020, contract assets and liabilities were not material.
Note 4. Segment Financial Data
In May 2020, the Board appointed Jay Geldmacher as President and CEO of the Company. As part of this transition, during the fourth quarter of 2020, the format of the Chief Operating Decision Maker’s reporting package was modified which resulted in changes to how business operations are presented. The Company continues to monitor its business operations through two operating segments, Products & Solutions and ADI Global Distribution. The Company now reports Corporate separately from the two operating segments. The reporting package also includes segment Operating profit, which replaces Segment Adjusted EBITDA as a performance metric.
These changes were designed to better align accountability and authority, give a clearer view into the operational performance of the two segments and increase accountability for management of corporate spending. As a result, the Company recast prior periods to conform with the new presentation.
11
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 global distributor of low-voltage security products including intrusion, access control and video products and participates significantly in the broader related markets of smart home, fire, access control, power, audio, ProAV, networking, communications, wire and cable, and data communications.
Corporate—Corporate includes expenses associated with legal, finance, information technology, human resources, strategy and communications related to the Corporate office as well as supporting the operating segments, but do not relate directly to revenue-generating activities.
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance.
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Products & Solutions revenue |
|
$ |
695 |
|
|
$ |
482 |
|
|
$ |
1,395 |
|
|
$ |
1,041 |
|
|
Less: Intersegment revenue |
|
|
97 |
|
|
|
84 |
|
|
|
191 |
|
|
|
168 |
|
|
External Products & Solutions revenue |
|
|
598 |
|
|
|
398 |
|
|
|
1,204 |
|
|
|
873 |
|
|
External ADI Global Distribution revenue |
|
|
879 |
|
|
|
631 |
|
|
|
1,692 |
|
|
|
1,335 |
|
|
Total revenue |
|
$ |
1,477 |
|
|
$ |
1,029 |
|
|
$ |
2,896 |
|
|
$ |
2,208 |
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Operating profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions |
|
$ |
129 |
|
|
$ |
42 |
|
|
$ |
259 |
|
|
$ |
100 |
|
|
ADI Global Distribution |
|
|
66 |
|
|
|
31 |
|
|
|
125 |
|
|
|
79 |
|
|
Corporate |
|
|
(74 |
) |
|
|
(79 |
) |
|
|
(133 |
) |
|
|
(151 |
) |
|
Total |
|
$ |
121 |
|
|
$ |
(6 |
) |
|
$ |
251 |
|
|
$ |
28 |
|
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.
Note 5. Stock-Based Compensation Plans
Restricted Stock Units (“RSUs”)
During the six months ended July 3, 2021, as part of the Company’s annual long-term compensation under the 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates and the 2018 Stock Incentive Plan for Non-Employee Directors of Resideo Technologies, Inc. as may be amended from time to time (together, the “Stock Incentive Plan”), it granted 500,227 market-based RSUs and 1,050,054 service-based RSUs to eligible employees. The weighted average grant date fair value per share for market-based RSUs and service-based RSUs was $42.98 and $27.35, respectively.
Note 6. Leases
The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment. Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation, and certain automobile
12
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 six months ended July 3, 2021 and June 27, 2020 consisted of the following:
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Cost of goods sold |
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
8 |
|
|
$ |
8 |
|
|
Selling, general and administrative |
|
|
10 |
|
|
|
10 |
|
|
|
22 |
|
|
|
20 |
|
|
Total operating lease costs |
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
30 |
|
|
$ |
28 |
|
Total operating lease costs include variable lease costs of $4 million and $8 million for the three and six months ended July 3, 2021. For the three and six months ended June 27, 2020, total operating lease costs include variable lease costs of $4 million and $7 million, respectively. Total operating lease costs also include offsetting sublease income which is immaterial for the three and six months ended July 3, 2021 and June 27, 2020.
The Company recognized the following related to its operating leases:
|
|
|
Financial Statement Line Item |
|
At July 3, 2021 |
|
|
At December 31, 2020 |
|
||
|
Operating right-of-use assets |
|
Other assets |
|
$ |
134 |
|
|
$ |
133 |
|
|
Operating lease liabilities - current |
|
Accrued liabilities |
|
$ |
34 |
|
|
$ |
33 |
|
|
Operating lease liabilities - noncurrent |
|
Other liabilities |
|
$ |
107 |
|
|
$ |
107 |
|
Maturities of the Company’s operating lease liabilities were as follows:
|
|
|
At July 3, 2021 |
|
|
|
2021 |
|
$ |
21 |
|
|
2022 |
|
|
37 |
|
|
2023 |
|
|
32 |
|
|
2024 |
|
|
21 |
|
|
2025 |
|
|
16 |
|
|
Thereafter |
|
|
36 |
|
|
Total lease payments |
|
|
163 |
|
|
Less: imputed interest |
|
|
22 |
|
|
Present value of operating lease liabilities |
|
$ |
141 |
|
|
Weighted-average remaining lease term (years) |
|
|
5.47 |
|
|
Weighted-average incremental borrowing rate |
|
|
5.51 |
% |
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
|
|
|
Six Months Ended |
|
|||||
|
|
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||
|
Operating cash outflows |
|
|
|
$ |
17 |
|
|
$ |
15 |
|
|
Operating right-of-use assets obtained in exchange for operating lease liabilities |
|
|
|
$ |
17 |
|
|
$ |
10 |
|
13
As of July 3, 2021, the Company has additional operating leases that have not yet commenced. Obligations under these leases are not material. Additionally, as a lessor, the Company leases all or a portion of certain owned properties. Rental income for the three and six months ended July 3, 2021 and June 27, 2020 was not material.
Note 7. Income Taxes
The Company recorded a tax expense of $23 million and a tax expense of $47 million for the three and six months ended July 3, 2021, respectively.
For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by the Company’s forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where the Company expects to report losses for which the Company does not expect to receive tax benefits, the Company is required to 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 July 3, 2021 the net tax expense of $23 million consists primarily of interim period tax expense of $23 million based on year-to-date pretax income multiplied by the Company’s forecasted effective tax rate. In addition to items specific to the period, the Company’s income tax rate is impacted by the mix of earnings across the jurisdictions in which the Company operates, non-deductible expenses, and U.S. taxation of foreign earnings.
For the six months ended July 3, 2021, the net tax expense of $47 million consists primarily of interim period tax expense of $47 million based on year-to-date pretax income multiplied by the Company’s forecasted effective tax rate. In addition to items specific to the period, the Company’s income tax rate is impacted by the mix of earnings across the jurisdictions in which the Company operates, non-deductible expenses, and U.S. taxation of foreign earnings.
Note 8. Other Expense, Net
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Reimbursement Agreement expense |
|
$ |
36 |
|
|
$ |
35 |
|
|
$ |
72 |
|
|
$ |
69 |
|
|
Loss on extinguishment of debt |
|
|
- |
|
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
Other |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
(23 |
) |
|
|
2 |
|
|
|
|
$ |
28 |
|
|
$ |
29 |
|
|
$ |
72 |
|
|
$ |
71 |
|
14
Note 9. Earnings (Loss) 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 |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||||
|
Net income (loss) |
|
$ |
58 |
|
|
$ |
(76 |
) |
|
$ |
107 |
|
|
$ |
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share |
|
|
143,939 |
|
|
|
123,203 |
|
|
|
143,657 |
|
|
|
123,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents |
|
|
4,389 |
|
|
|
- |
|
|
|
4,393 |
|
|
|
- |
|
|
Shares used in computing diluted earnings per share |
|
|
148,328 |
|
|
|
123,203 |
|
|
|
148,050 |
|
|
|
123,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.40 |
|
|
$ |
(0.62 |
) |
|
$ |
0.74 |
|
|
$ |
(0.79 |
) |
|
Diluted |
|
$ |
0.39 |
|
|
$ |
(0.62 |
) |
|
$ |
0.72 |
|
|
$ |
(0.79 |
) |
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 and six months ended July 3, 2021 and June 27, 2020. In periods where the Company has a net loss, no dilutive common shares are included in the calculation for diluted shares as they are considered anti-dilutive. For the three and six months ended July 3, 2021, average options and other rights to purchase approximately 0.1 million shares of common stock were outstanding and anti-dilutive, and therefore excluded from the computation of diluted earnings per common share. In addition, an average of approximately 0.9 million and 0.8 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and six months ended July 3, 2021 as the contingency has not been satisfied. For the three and six months ended June 27, 2020, average options and other rights to purchase approximately 4.7 million and 4.1 million shares of common stock, respectively, were outstanding and anti-dilutive, and therefore excluded from the computation of diluted income per common share. An average of approximately 0.6 million and 0.5 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and six months ended June 27, 2020, as the contingency has not been satisfied.
Note 10. Inventories—Net
|
|
|
July 3, 2021 |
|
|
December 31, 2020 |
|
||
|
Raw materials |
|
$ |
137 |
|
|
$ |
127 |
|
|
Work in process |
|
|
19 |
|
|
|
19 |
|
|
Finished products |
|
|
528 |
|
|
|
526 |
|
|
|
|
$ |
684 |
|
|
$ |
672 |
|
15
Note 11. Accrued Liabilities
|
|
|
July 3, 2021 |
|
|
December 31, 2020 |
|
||
|
Obligations payable under Indemnification Agreements |
|
$ |
140 |
|
|
$ |
140 |
|
|
Taxes payable |
|
|
61 |
|
|
|
62 |
|
|
Compensation, benefit and other employee-related |
|
|
85 |
|
|
|
105 |
|
|
Customer rebate reserve |
|
|
62 |
|
|
|
91 |
|
|
Litigation reserve |
|
|
55 |
|
|
|
3 |
|
|
Restructuring reserve |
|
|
15 |
|
|
|
24 |
|
|
Other |
|
|
168 |
|
|
|
170 |
|
|
|
|
$ |
586 |
|
|
$ |
595 |
|
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 and six months ended July 3, 2021 and June 27, 2020, environmental expenses related to these operating sites were not material. Liabilities for environmental costs were $22 million as of July 3, 2021 and December 31, 2020.
The Company does not currently possess sufficient information to reasonably estimate the amounts of environmental liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to the Company’s unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.
Obligations Payable Under Indemnification Agreements
The indemnification and reimbursement agreement (the “Reimbursement Agreement”) and the tax matters agreement (the “Tax Matters Agreement”) (collectively, the “Indemnification Agreements”) are described below.
Reimbursement Agreement
On October 29, 2018, in connection with the Spin-Off, the Company entered into the Reimbursement Agreement with Honeywell pursuant to which the Company has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed (“payments”), less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the “recoveries”). The amount payable by the Company in respect of such liabilities arising in respect of any given year is subject to a cap of $140 million. See Note 19. Commitments and Contingencies in the Company’s 2020 Annual Report on Form 10-K for further discussion.
16
The following table summarizes information concerning the Company’s Reimbursement Agreement liabilities:
|
|
|
Six Months Ended |
|
|||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||
|
Beginning balance |
|
$ |
591 |
|
|
$ |
585 |
|
|
Accruals for indemnification liabilities deemed probable and reasonably estimable |
|
|
72 |
|
|
|
69 |
|
|
Indemnification payment |
|
|
(70 |
) |
|
|
(35 |
) |
|
Ending balance (1) |
|
$ |
593 |
|
|
$ |
619 |
|
|
(1) |
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 six months ended July 3, 2021, net expenses related to the Reimbursement Agreement were $36 million and $72 million, respectively, and for the three and six months ended June 27, 2020, net expenses related to the Reimbursement Agreement were $35 million and $69 million, respectively, and are recorded in Other expense, net.
Reimbursement Agreement liabilities are included in the following balance sheet accounts:
|
|
|
July 3, 2021 |
|
|
December 31, 2020 |
|
||
|
Accrued liabilities |
|
$ |
140 |
|
|
$ |
140 |
|
|
Obligations payable under Indemnification Agreements |
|
|
453 |
|
|
|
451 |
|
|
|
|
$ |
593 |
|
|
$ |
591 |
|
The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to the Company’s 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. As of July 3, 2021 and December 31, 2020, the Company had an indemnity liability owed to Honeywell for future tax payments of $130 million and $139 million, respectively, which is included in Obligations payable under Indemnification Agreements.
17
Trademark Agreement
In connection with the Spin-Off, the Company and Honeywell entered into a 40-year Trademark License Agreement (the “Trademark Agreement”) that authorizes the Company’s use of certain licensed trademarks in the operation of Resideo’s business for the advertising, sale and distribution of certain licensed products. In exchange, the Company pays a royalty fee 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 Interim Statements of Operations. For the three and six months ended July 3, 2021, royalty fees were $4 million and $9 million, respectively. For the three and six months ended June 27, 2020, royalty fees were $5 million and $11 million, respectively.
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 are named defendants of a class action securities suit in the U.S. District Court for the District of Minnesota styled In re Resideo Technologies, Inc. Securities Litigation, 19-cv-02863 (the “Securities Litigation”). The Securities Litigation is a putative 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, as amended, 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. On March 30, 2021, United States District Judge Wilhelmina M. Wright issued an order and decision denying the motion to dismiss. On April 13, 2021, the Defendants filed an answer in the Securities Litigation. See Note 19. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in the Company’s 2020 Annual Report on Form 10-K for further discussion.
On July 30, 2021, the Company executed a term sheet with plaintiffs’ representatives setting forth an agreement in principle to settle the claims alleged in the complaint, as amended. Pursuant to the terms of the agreement in principle, the Company did not make any admission of liability, and the Company continues to deny any and all liability in connection with the allegations of the complaint, as amended. The total amount to be paid in settlement of the claims as set forth in the agreement in principle is $55 million. Insurance recoveries of approximately $39 million are expected related to the settlement. The claim settlement payment and related insurance recoveries are recorded in Accrued liabilities and Other current assets, respectively. The net expense of $16 million from the claim settlement and related insurance recoveries is recorded in Selling, general and administrative expenses. The settlement provided for the full release of all parties and Honeywell, including the Company and the Company’s present and former directors and officers, including without limitation the defendants who were named in the suits. The settlement is subject to, among other things, court review and approval and other customary conditions.
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
18
also alleges that the Company’s 2019 proxy statement was materially false and misleading, in violation of Section 14(a) of the Securities Exchange Act of 1934, and asserts claims of corporate waste and unjust enrichment, among other allegations, and relies on a similar set of facts as alleged in the Securities Litigation. The Derivative Complaint seeks declaratory relief and unspecified money damages on behalf of the Company. On July 28, 2020, certain of the Derivative Defendants filed a stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation. An additional shareholder derivative complaint was filed on August 12, 2020, by Plaintiff Daniel Sanclemente (the “Sanclemente Action”) on behalf of the Company in the District Court for the District of Delaware, captioned Sanclemente v. Nefkens, 20-cv-1062, alleging substantially the same facts and making substantially the same claims against the same defendants as in the Derivative Complaint. The District Court has consolidated the Derivative Complaint and the Sanclemente Action. The consolidated action is styled In re Resideo Technologies, Inc. Derivative Litigation, 20-cv-00915 (the “Derivative Action”), and lead counsel has been appointed. Additionally, the court granted a stipulation to stay the consolidated action pending the resolution of the motion to dismiss in the Securities Litigation. On August 28, 2020, Riviera Beach Police Pension Fund (“Riviera Beach”) filed a motion to intervene in the Derivative Action. On September 18, 2020, Riviera Beach and the existing plaintiffs reached an agreement regarding the leadership structure of the Derivative Action in the event that Riviera Beach files its own complaint in the future, and in connection therewith, Riviera Beach withdrew its motion to intervene. On March 30, 2021, the stay of the Derivative Action expired by its terms, given the denial of the motion to dismiss in the Securities Litigation, but was extended by a series of stipulations of the parties until, most recently, August 10, 2021, The Company intends to defend this action vigorously, but there can be no assurance that the defense will be successful.
On June 25, 2021, the Bud & Sue Frashier Family Trust U/A DTD 05/05/98, filed a shareholder derivative complaint (“Delaware Chancery Derivative Complaint”) against certain current or former directors and officers of the Company (“Delaware Chancery Derivative Defendants”) in the Court of Chancery of the State of Delaware, captioned Bud & Sue Frashier Trust U/A DTD 05/05/98 v. Fradin, 2021-0556. The Delaware Chancery Derivative Complaint alleges substantially the same facts and makes substantially the same claims as the Derivative Action, and additionally references board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8. On July 19, 2021, the parties filed a stipulation extending Delaware Chancery Derivative Defendants’ deadline to respond to the Delaware Chancery Derivative Complaint until August 2, 2021. The extension was ordered by the Court on July 20, 2021. The Company 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:
|
|
|
Six Months Ended |
|
|||||
|
|
|
July 3, 2021 |
|
|
June 27, 2020 |
|
||
|
Beginning of period |
|
$ |
22 |
|
|
$ |
25 |
|
|
Accruals for warranties/guarantees issued during the year |
|
|
8 |
|
|
|
12 |
|
|
Adjustment of pre-existing warranties/guarantees |
|
|
(1 |
) |
|
|
(2 |
) |
|
Settlement of warranty/guarantee claims |
|
|
(9 |
) |
|
|
(9 |
) |
|
End of period |
|
$ |
20 |
|
|
$ |
26 |
|
19
Note 13. Long-term Debt and Credit Agreement
The Company’s debt at July 3, 2021 and December 31, 2020 consisted of the following:
|
|
|
July 3, 2021 |
|
|
December 31, 2020 |
|
||
|
6.125% notes due 2026 |
|
$ |
260 |
|
|
$ |
400 |
|
|
Five-year variable rate term loan A due 2023 |
|
|
- |
|
|
|
315 |
|
|
Seven-year variable rate term loan B due 2025 |
|
|
- |
|
|
|
465 |
|
|
Seven-year variable rate term loan B due 2028 |
|
|
948 |
|
|
|
- |
|
|
Unamortized deferred financing costs |
|
|
(14 |
) |
|
|
(18 |
) |
|
Total outstanding indebtedness |
|
|
1,194 |
|
|
|
1,162 |
|
|
Less: Amounts expected to be paid within one year |
|
|
10 |
|
|
|
7 |
|
|
Total long-term debt due after one year |
|
$ |
1,184 |
|
|
$ |
1,155 |
|
On February 12, 2021, the Company entered into an amended and restated credit agreement (the “A&R Credit Agreement”). The A&R Credit Agreement provides for (i) a seven-year senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the A&R Term B Facility, the “A&R Senior Credit Facilities”).
The A&R Credit Agreement replaces the five-year variable rate term loan A due 2023, the seven-year variable rate term loan B due 2025 and the five-year senior secured first-lien revolving credit facility.
In addition to paying interest on outstanding borrowings under the A&R Revolving Credit Facility, the Company is required to pay a quarterly commitment fee based on the unused portion of the A&R Revolving Credit Facility. Borrowings under the A&R Credit Agreement can be prepaid at the Company’s option without premium or penalty other than a 1.00% prepayment premium that may be payable in connection with certain repricing transactions within a certain period of time after the closing date. Up to $75 million may be utilized under the A&R Revolving Credit Facility for the issuance of letters of credit to the Company or any of the Company’s subsidiaries. Letters of credit are available for issuance under the A&R Credit Agreement on terms and conditions customary for financings of this kind, which issuances will reduce the available funds under the A&R Revolving Credit Facility.
The A&R Senior Credit Facilities are subject to an interest rate and interest period which the Company will elect. If the Company chooses to make a base rate borrowing on an overnight basis, the interest rate will be based on the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1.00% per annum. For the A&R Term Loan B, the applicable LIBOR rate will not be less than 0.50% per annum. The applicable margin for the A&R Term B Facility is 2.25% per annum (for LIBOR loans) and 1.25% per annum (for base rate loans). The applicable margin for the A&R Revolving Credit Facility varies from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for base rate loans) based on the Company’s leverage ratio.
The A&R Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit the Company and the Company’s subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends, to make other distributions or redemptions/repurchases, in respect of the Company and the Company’s subsidiaries’ equity interests, to engage in transactions with affiliates or amend certain material documents. In addition, the A&R Revolving Credit Facility also contains certain financial maintenance covenants.
All obligations under the A&R Senior Credit Facilities are or will be unconditionally guaranteed jointly and severally, by: (a) the Company and (b) substantially all of the direct and indirect wholly owned subsidiaries of the Company that are organized under the laws of the United States, any state thereof or the District of Columbia (collectively, the “Guarantors”). The Guarantors entered into a guarantee under the A&R Credit Agreement
20
concurrently with the effectiveness of the A&R Credit Agreement. Subject to certain limitations, the A&R Senior Credit Facilities are or will be secured on a first priority basis by: (x) a perfected security interest in the equity interests of each direct subsidiary of the Company and each Guarantor under the A&R Senior Credit Facilities (subject to certain customary exceptions) and (y) perfected, security interests in, and mortgages on, substantially all tangible and intangible personal property and material real property of the Company and each of the Guarantors under the A&R Senior Credit Facilities, subject, in each case, to certain exceptions.
On February 16, 2021 the Company redeemed $140 million in principal amount of the 6.125% senior unsecured notes (the “Senior Notes”) at a redemption price of 106.125% of par plus accrued interest.
As a result of the Senior Notes redemption and the execution of the A&R Credit Agreement, debt extinguishment costs of $23 million were incurred during the three months ended April 3, 2021 and were recorded in Other expense, net.
As of July 3, 2021, there were no borrowings and no letters of credit issued under the Revolving Credit Facility. The Company assessed the amounts recorded under the A&R Term B Facility, the Senior Notes, and the Revolving Credit Facility. The Company determined that the Revolving Credit Facility approximated fair value. The A&R Term B Facility and the Senior Notes’ fair values are approximately $946 million and $274 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 July 3, 2021 the interest rate for the A&R Term B Facility was 2.75%.
For more information, please refer to Note 15. Long-term Debt and Credit Agreement in the Company’s 2020 Annual Report on Form 10-K.
21
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 swap 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 eight interest rate swap agreements (the “Swap Agreements”) with several financial institutions for a combined notional value of $560 million. The effect of the Swap Agreements is to convert a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over terms ranging from three to five years. The Swap Agreements are adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs primarily including the forward LIBOR curve available to swap dealers. Contract gains recognized in other comprehensive income (loss) and amounts reclassified from Accumulated other comprehensive loss into earnings were not material for any of the periods presented. The fair value of the Swap Agreements at July 3, 2021 was not material. Amounts expected to be reclassified into earnings in the next 12 months were not material as of July 3, 2021.
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 July 3, 2021 and December 31, 2020 were $167 million and $168 million, respectively, and are included in Other liabilities in the unaudited Consolidated Interim Balance Sheets. Net periodic benefit cost recognized in Comprehensive income (loss) for the three and six months ended July 3, 2021 is $2 million and $5 million, respectively. Net periodic benefit cost recognized in Comprehensive income (loss) for the three and six months ended June 27, 2020 was $2 million and $4 million, respectively.
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 and six months ended July 3, 2021 and June 27, 2020.
Note 16. Subsequent Events
On July 30, 2021, in relation to a putative class action securities suit, the Company executed a term sheet with plaintiffs’ representatives setting forth an agreement in principle to settle the claims alleged in the complaint, as amended. See Note 12. Commitments and Contingencies — Other Matters for a discussion on the agreement.
22
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
(In millions, except per share amounts)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand the results of operations and financial condition of Resideo Technologies, Inc. and its consolidated subsidiaries (“Resideo” or “the Company”, “we”, “us” or “our”) for the three and six months ended July 3, 2021 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 July 3, 2021 should be read in conjunction with the consolidated and combined financial statements for the year ended December 31, 2020 contained in our 2020 Annual Report on Form 10-K (the “2020 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, and security markets. We have a global footprint serving commercial and residential end-markets. We manage our business operations through two operating segments, Products & Solutions and ADI Global Distribution. Our Products & Solutions segment consists of comfort, security, residential thermal products and solutions. Our offerings include temperature and humidity control, thermal and combustion solutions, water and air 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 security products including intrusion, access control and video products and participates significantly in the broader related markets of smart home, fire, power, audio, ProAV, networking, communications, wire and cable, and data communications. 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.
During the fourth quarter of 2020, we made a change to our reportable segments. Previously we allocated corporate costs to the Products & Solutions segment as well as the ADI Global Distribution segment. We now report corporate costs separately, as Corporate, from the two operating segments. In addition, during the fourth quarter of 2020, our Chief Operating Decision Maker moved towards making financial decisions and allocating resources based on segment Operating profit, rather than Segment Adjusted EBITDA. These changes were designed to better align accountability and authority, give a clearer view into the operational performance of the two segments and increase accountability for management of corporate spending.
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 of 2020, we experienced constrained supply and slowed customer demand, as well as temporary closures of several of our ADI Global Distribution branches, that adversely impacted business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, customer demand has improved and ongoing cost actions and transformation efforts contributed to the improvements in the Company’s operations and overall financial performance.
Second Quarter Highlights
Net revenue increased $448 million in the second quarter of 2021 compared to the same quarter of 2020, which was negatively impacted by the emergence of COVID-19. Gross profit as a percent of net revenues increased to 26% in the second quarter of 2021 from 23% in the second quarter of 2020. The primary items driving the 300 basis point increase in gross profit percentage were a 200 bps favorable impact resulting from higher revenue volumes, a 100 bps favorable impact from sourcing productivity, a 100 bps favorable impact from changes in sales mix, and a 100 bps favorable impact from reduced obsolete and surplus inventory charges. These favorable changes were partially offset by a 200 bps unfavorable impact from increased freight costs.
23
Second quarter net income was $58 million for the three months ended July 3, 2021 compared to a net loss of $76 million for the three months ended June 27, 2020.
Selling, general, and administrative expenses increased by $15 million in the recent quarter compared to the second quarter of 2020. The increase was driven by the pending securities class action litigation settlement net of insurance recoveries, commercial investments, foreign currency translation, increased bonus expense, increases relative to prior year COVID-19 related cost management efforts, increased stock-based compensation expense and labor and other inflation totaling $54 million. These increases were partially offset by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $39 million.
Research and development expense for the three months ended July 3, 2021 was $22 million, an increase of $3 million from $19 million for the three months ended June 27, 2020. The increase was driven by commercial investments and labor and other inflation totaling $6 million. These increases were partially offset by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $3 million.
We ended the second quarter with $579 million in cash and cash equivalents. Net cash provided by operating activities was $99 million for the six months ended July 3, 2021. At July 3, 2021, accounts receivable were $895 million, inventories were $684 million and there were no borrowings under our revolving credit facility.
COVID-19 Pandemic
The World Health Organization (“WHO”) declared COVID-19 a pandemic in March 2020. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. During the second half of 2020 and into 2021 customer demand has improved versus the first half of 2020 and on-going cost actions and transformation efforts contributed to the improvements in the Company’s results of operations and overall financial performance. As viruses constantly change through mutation, new variants of the COVID virus have occurred and are expected to continue to occur over time. The CDC and other world health agencies have identified multiple variants which are circulating globally. As new information emerges it may have an impact on potential restrictions globally in areas including travel, freight, shipping, and commercial operations. As there remains uncertainty around the impacts of the COVID-19 pandemic, we address and evaluate the impacts frequently.
U.S. and international government responses to the COVID-19 outbreak have included “shelter in place,” “stay at home”, and similar types of orders. In the United States, Canada and certain other countries globally, these orders exempt certain products and services needed to maintain continuity of operations of critical infrastructure sectors as determined by the federal government. If additional lockdown orders are put in place or if any of the applicable exemptions are curtailed or revoked in the future, that could adversely impact our business, operating results and financial condition. Furthermore, to the extent these exemptions do not extend to our key suppliers and customers, this could also adversely impact our business, operating results and financial condition. 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 its variants, and the mitigation measures that are implemented by governmental authorities. We also expect business conditions to remain challenging, with global shortages in key materials and components in certain instances impacting our ability to supply certain products. 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.
24
Recent Developments
Amended and Restated Credit Facilities and Senior Notes Redemption
On February 12, 2021, we entered into an amended and restated credit agreement (the “A&R Credit Agreement”). The A&R Credit Agreement provides for (i) a seven-year senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the Term Loan Facilities, the “A&R Senior Credit Facilities”).
On February 16, 2021, we redeemed $140 million in principal amount of the Senior Notes at a redemption price of 106.125% of par plus accrued interest.
As a result of the Senior Notes redemption and the execution of the A&R Credit Agreement, debt extinguishment costs of $23 million were incurred during the three months ended April 3, 2021 and were recorded in Other expense, net.
Basis of Presentation
Our financial statements are presented on a consolidated basis (collectively, the “Interim Financial Statements”). The Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassification
The prior year segment information was recast to present Corporate separately as well as present Operating profit which replaces Segment Adjusted EBITDA. See Note 4. Segment Financial Data of Notes to Consolidated Interim Financial Statements for additional information. Certain reclassifications have been made to prior period financial statements to conform to the classification adopted in the current period.
The prior year unaudited Consolidated Interim Statements of Operations were reclassified to present Research and development expenses as a separate line item within the statements. Research and development expenses were formerly included within Selling, general and administrative expenses.
Components of Operating Results
Net Revenue
We manage our global business operations through two 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 HVAC, plumbing, security, and electrical distributors including our ADI Global Distribution business, OEMs, and service providers such as HVAC contractors, security dealers and plumbers. We also sell some products via retail and online channels.
ADI Global Distribution: We generate revenue through the distribution of low-voltage electronic and security products, as well as smart home, fire, power, audio and ProAV, networking, communications, wire and cable, and data communications that are delivered through a comprehensive network of professional contractors, distributors and OEMs, as well as major retailers and online merchants. In addition to our own security products, ADI Global Distribution distributes products from industry-leading manufacturers and also carries a line of private label products. We sell these products to contractors that service non-residential and residential end-users. 14% of ADI Global Distribution’s net revenue is supplied by our Products & Solutions segment. Management estimates that
25
in 2020 and 2021 approximately two-thirds of ADI Global Distribution’s net revenue was attributed to non-residential end markets and one-third to residential end markets.
Cost of Goods Sold
Products & Solutions: Cost of goods sold includes costs associated with raw materials, assembly, shipping and handling of those products; costs of personnel-related expenses, including pension benefits, and equipment associated with manufacturing support, logistics and quality assurance, non-research and development engineering costs, and costs of certain intangible assets.
ADI Global Distribution: Cost of goods sold consists primarily of inventory-related costs and includes labor and personnel-related expenses.
Selling, General and Administrative Expense
Selling, general and administrative expense includes trademark royalty expenses, sales incentives and commissions, professional fees, legal fees, promotional and advertising expenses, personnel-related expenses, including stock compensation expense and pension benefits, and research and development expenses.
Other Expense, Net
Other expense, net consists primarily of Reimbursement Agreement expenses for certain Honeywell environmental liability payments. For further information see the “Reimbursement Agreement” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 12. Commitments and Contingencies of Notes to Interim Financial Statements of this Form 10-Q. Other expense, net also includes debt extinguishment costs incurred as a result of the Senior Notes redemption and the execution of the A&R Credit Agreement as well as foreign exchange gains and losses and other non-operating related expense or income.
Interest Expense
Interest expense consists of interest on our short and long-term obligations, including our senior notes, term credit facilities, revolving credit facilities, and any realized gains or losses from our interest rate swaps. Interest expense on our obligations includes contractual interest, amortization of the debt discount, and amortization of deferred financing costs.
Tax Expense
Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory tax rates, adjusted for U.S. taxation of foreign earnings, non-deductible expenses, and other permanent differences.
26
Results of Operations
The following table sets forth our selected unaudited consolidated interim statements of operations for the periods presented:
Unaudited Consolidated Interim Statements of Operations
(In millions except share and per share data)
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Net revenue |
|
$ |
1,477 |
|
|
$ |
1,029 |
|
|
$ |
2,896 |
|
|
$ |
2,208 |
|
|
Cost of goods sold |
|
|
1,096 |
|
|
|
793 |
|
|
|
2,147 |
|
|
|
1,688 |
|
|
Gross profit |
|
|
381 |
|
|
|
236 |
|
|
|
749 |
|
|
|
520 |
|
|
Selling, general and administrative expenses |
|
|
238 |
|
|
|
223 |
|
|
|
455 |
|
|
|
455 |
|
|
Research and development expenses |
|
|
22 |
|
|
|
19 |
|
|
|
43 |
|
|
|
37 |
|
|
Operating profit (loss) |
|
|
121 |
|
|
|
(6 |
) |
|
|
251 |
|
|
|
28 |
|
|
Other expense, net |
|
|
28 |
|
|
|
29 |
|
|
|
72 |
|
|
|
71 |
|
|
Interest expense |
|
|
12 |
|
|
|
18 |
|
|
|
25 |
|
|
|
35 |
|
|
Income (loss) before taxes |
|
|
81 |
|
|
|
(53 |
) |
|
|
154 |
|
|
|
(78 |
) |
|
Tax expense |
|
|
23 |
|
|
|
23 |
|
|
|
47 |
|
|
|
19 |
|
|
Net income (loss) |
|
$ |
58 |
|
|
$ |
(76 |
) |
|
$ |
107 |
|
|
$ |
(97 |
) |
|
Weighted Average Number of Common Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
143,939 |
|
|
|
123,203 |
|
|
|
143,657 |
|
|
|
123,083 |
|
|
Diluted |
|
|
148,328 |
|
|
|
123,203 |
|
|
|
148,050 |
|
|
|
123,083 |
|
|
Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.40 |
|
|
$ |
(0.62 |
) |
|
$ |
0.74 |
|
|
$ |
(0.79 |
) |
|
Diluted |
|
$ |
0.39 |
|
|
$ |
(0.62 |
) |
|
$ |
0.72 |
|
|
$ |
(0.79 |
) |
Results of Operations for the Three and Six Months Ended July 3, 2021 and June 27, 2020
Net Revenue
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Net revenue |
|
$ |
1,477 |
|
|
$ |
1,029 |
|
|
$ |
2,896 |
|
|
$ |
2,208 |
|
|
% change compared with prior period |
|
|
44 |
% |
|
|
|
|
|
|
31 |
% |
|
|
|
|
Three months ended
Net revenue for the three months ended July 3, 2021 was $1,477 million, an increase of $448 million, or 44%, from $1,029 for the three months ended June 27, 2020, which was negatively impacted by the emergence of COVID-19. The increase is mainly due to volume.
Six months ended
Net revenue for the six months ended July 3, 2021 was $2,896 million, an increase of $688 million, or 31% from $2,208 for the six months ended June 27, 2020, which was negatively impacted by the emergence of COVID-19. The increase is mainly due to volume.
A discussion of net revenue by segment can be found in the Review of Business Segments section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
27
Cost of Goods Sold
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Cost of goods sold |
|
$ |
1,096 |
|
|
$ |
793 |
|
|
$ |
2,147 |
|
|
$ |
1,688 |
|
|
% change compared with prior period |
|
|
38 |
% |
|
|
|
|
|
|
27 |
% |
|
|
|
|
|
Gross profit percentage |
|
|
26 |
% |
|
|
23 |
% |
|
|
26 |
% |
|
|
24 |
% |
Three months ended
Cost of goods sold for the three months ended July 3, 2021 was $1,096 million, an increase of $303 million, or 38%, from $793 million for the three months ended June 27, 2020.
This increase in cost of goods sold was driven by higher revenue volumes, increased freight costs, foreign currency translation, and material and labor inflation totaling $344 million. These increased costs were partially offset by favorable changes in sales mix, lower charges related to obsolete and surplus inventory, sourcing productivity, decreased Spin-Off and restructuring related costs, transformation programs cost savings, and other cost savings totaling $41 million.
Gross profit percentage was 26% for the three months ended July 3, 2021, compared to 23% for the three months ended June 27, 2020. The primary items driving the 300 basis point increase in gross profit percentage were a 200 bps favorable impact resulting from higher revenue volumes, a 100 bps favorable impact from sourcing productivity, a 100 bps favorable impact from changes in sales mix, and a 100 bps favorable impact from reduced obsolete and surplus inventory charges. These favorable changes were partially offset by a 200 bps unfavorable impact from increased freight costs.
Six months ended
Cost of goods sold for the six months ended July 3, 2021 was $2,147 million, an increase of $459 million, or 27%, from $1,688 for the six months ended June 27, 2020.
This increase in cost of goods sold was driven by higher revenue volumes, increased freight costs, foreign currency translation, and material and labor inflation totaling $533 million. These increased costs were partially offset by favorable changes in sales mix, lower charges related to obsolete and surplus inventory, sourcing productivity, decreased Spin-Off and restructuring related costs, transformation programs cost savings, and other cost savings totaling $74 million.
Gross profit percentage was 26% for the six months ended July 3, 2021, compared to 24% for the six months ended June 27, 2020. The primary items driving the increase in gross profit percentage were a 100 bps favorable impact resulting from higher revenue volumes, a 100 bps favorable impact from sourcing productivity, a 100 bps favorable impact from changes in sales mix, and a 100 bps favorable impact from lower charges related to obsolete and surplus inventory. These impacts were partially offset by a 200 bps unfavorable impact from increased freight costs.
Selling, General and Administrative Expenses
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Selling, general and administrative expenses |
|
$ |
238 |
|
|
$ |
223 |
|
|
$ |
455 |
|
|
$ |
455 |
|
|
% of revenue |
|
|
16 |
% |
|
|
22 |
% |
|
|
16 |
% |
|
|
21 |
% |
28
Three months ended
Selling, general and administrative expense for the three months ended July 3, 2021 was $238 million, an increase of $15 million from $223 million for the three months ended June 27, 2020. The increase was driven by the pending securities class action litigation settlement net of insurance recoveries, commercial investments, foreign currency translation, increased bonus expense, increases relative to prior year COVID-19 related cost management efforts, increased stock-based compensation expense, and labor and other inflation totaling $54 million. These increases were partially offset by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $39 million.
Six months ended
Selling, general and administrative expense for the six months ended July 3, 2021 and June 27, 2020 was $455 million. Selling, general and administrative expense was impacted by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $79 million. These decreases were offset by the pending securities class action litigation settlement net of insurance recoveries, commercial investments, foreign currency translation, increased bonus expense, increased stock-based compensation expense, and labor and other inflation totaling $79 million.
Research and Development Expenses
|
|
|
Three Months Ended |
|
Six Months Ended |
||||
|
|
|
July 3, |
|
June 27, |
|
July 3, |
|
June 27, |
|
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Research and development expenses |
|
$22 |
|
$19 |
|
$43 |
|
$37 |
|
% of revenue |
|
1% |
|
2% |
|
1% |
|
2% |
Three months ended
Research and development expense for the three months ended July 3, 2021 was $22 million, an increase of $3 million from $19 million for the three months ended June 27, 2020. The increase was driven by commercial investments and labor and other inflation totaling $6 million. These increases were partially offset by lower restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $3 million.
Six months ended
Research and development expense for the six months ended July 3, 2021 was $43 million, an increase of $6 million from $37 million for the six months ended June 27, 2020. The increase was driven by commercial investments and labor and other inflation totaling $13 million. These increases were partially offset by transformation programs cost savings, lower restructuring related expenses, and other cost reductions totaling $7 million.
Other Expense, Net
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Other expense, net |
|
$ |
28 |
|
|
$ |
29 |
|
|
$ |
72 |
|
|
$ |
71 |
|
Three months ended
Other expense, net for the three months ended July 3, 2021 was $28 million, a decrease of $1 million from $29 million for the three months ended June 27, 2020.
Six months ended
29
Other expense, net for the six months ended July 3, 2021 was $72 million, an increase of $1 million from $71 million for the six months ended June 27, 2020. Other expense, net increased $23 million from debt extinguishment costs incurred as a result of the Senior Notes redemption and the execution of the A&R Credit Agreement, offset by $9 million in favorable foreign exchange impact, $9 million reduction in the accruals related to the Tax Matters Agreement, and $4 million decrease in other non-operating expense.
Tax Expense
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
July 3, |
|
|
June 27, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Tax expense |
|
$ |
23 |
|
|
$ |
23 |
|
|
$ |
47 |
|
|
$ |
19 |
|
|
Effective tax rate |
|
|
29 |
% |
|
|
(43 |
)% |
|
|
31 |
% |
|
|
(24 |
)% |
The Company recorded a tax expense of $23 million and $47 million for the three and six months ended July 3, 2021.
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
For the three months ended July 3, 2021 the net tax expense of $23 million consists primarily of interim period tax expense of $23 million based on year-to-date pretax income multiplied by our forecasted effective tax rate. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
Six months ended
For the six months ended July 3, 2021 the net tax expense of $47 million consists primarily of interim period tax expense of $47 million based on year-to-date pretax income multiplied by our forecasted effective tax rate. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
Review of Business Segments
Products & Solutions
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
|
|
|
|
July 3, |
|
|
June 27, |
|
|
|
|
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
Total revenue |
|
$ |
695 |
|
|
$ |
482 |
|
|
|
|
|
|
$ |
1,395 |
|
|
$ |
1,041 |
|
|
|
|
|
|
Less: Intersegment revenue |
|
|
97 |
|
|
|
84 |
|
|
|
|
|
|
|
191 |
|
|
|
168 |
|
|
|
|
|
|
External revenue |
|
$ |
598 |
|
|
$ |
398 |
|
|
|
50 |
% |
|
$ |
1,204 |
|
|
$ |
873 |
|
|
|
38 |
% |
|
Operating profit |
|
$ |
129 |
|
|
$ |
42 |
|
|
|
207 |
% |
|
$ |
259 |
|
|
$ |
100 |
|
|
|
159 |
% |
30
Three months ended
Products & Solutions revenue increased 50%, mainly due to increased unit volume. Operating profit increased from $42 million to $129 million, or 207%. Operating profit was positively impacted by higher revenue, sourcing productivity, a decrease in Spin-Off and restructuring related expenses, lower charges related to obsolete and surplus inventory, transformation programs cost savings, favorable changes in sales mix, and other cost reduction efforts totaling $139 million. These impacts were partially offset by increased freight costs, investments to support new product launches, increased bonus expense, and labor and material inflation totaling $52 million.
Six months ended
Products & Solutions revenue increased 38%, mainly due to increased unit volume. Operating profit increased from $100 million to $259 million, or 159%. Operating profit was positively impacted by higher revenue, sourcing productivity, a decrease in Spin-Off and restructuring related expenses, lower charges related to obsolete and surplus inventory, transformation programs cost savings, favorable changes in sales mix, and other cost reduction efforts totaling $242 million. These impacts were partially offset by increased freight costs, investments to support new product launches, increased bonus expense, and labor and material inflation totaling $83 million.
ADI Global Distribution
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
|
|
|
|
July 3, |
|
|
June 27, |
|
|
|
|
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
External revenue |
|
$ |
879 |
|
|
$ |
631 |
|
|
|
39 |
% |
|
$ |
1,692 |
|
|
$ |
1,335 |
|
|
|
27 |
% |
|
Operating profit |
|
$ |
66 |
|
|
$ |
31 |
|
|
|
113 |
% |
|
$ |
125 |
|
|
$ |
79 |
|
|
|
58 |
% |
During 2021, ADI Global Distribution completed the acquisition of Norfolk Wire & Electronics, a regional distributor of data communications products and Shoreview Distribution, a U.S. distributor of Pro AV products. Both acquisitions are an example of our strategy to utilize M&A to accelerate expansion in attractive adjacent categories.
Three months ended
ADI Global Distribution revenue increased 39%, highlighted by strong growth across all regions. Operating profit increased from $31 million to $66 million, or 113%. Operating profit was favorably impacted primarily by higher revenue, favorable changes in sales mix, and other expense productivity totaling $47 million. These positive impacts were partially offset by commercial investments, increased freight costs, as well as labor and other cost inflation totaling $12 million.
Six months ended
ADI Global Distribution revenue increased 27%, highlighted by strong growth across all regions. Operating profit increased from $79 million to $125 million, or 58%. Operating profit was favorably impacted primarily by higher revenue, favorable changes in sales mix, and other expense productivity totaling $67 million. These positive impacts were partially offset by commercial investments, increased freight costs, as well as labor and other cost inflation totaling $21 million.
Corporate
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||||||||||
|
|
|
July 3, |
|
|
June 27, |
|
|
|
|
|
|
July 3, |
|
|
June 27, |
|
|
|
|
|
||||
|
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
|
2021 |
|
|
2020 |
|
|
% Change |
|
||||||
|
Corporate costs |
|
$ |
(74 |
) |
|
$ |
(79 |
) |
|
|
(6 |
)% |
|
$ |
(133 |
) |
|
$ |
(151 |
) |
|
|
(12 |
)% |
31
Three months ended
Corporate costs for the three months ended July 3, 2021 were $74 million, a decrease from $79 million for the three months ended June 27, 2020, or 6%. The decrease was driven by lower Spin-Off and restructuring related expenses, and other cost reductions totaling $27 million. These decreases were partially offset by the pending securities class action litigation settlement net of insurance recoveries, increased bonus expense, foreign currency translation, increased stock-based compensation expense, and labor and other inflation totaling $22 million.
Six months ended
Corporate costs for the six months ended July 3, 2021 were $133 million, a decrease from $151 million for the six months ended June 27, 2020, or 12%. The decrease was driven by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $55 million. These decreases were partially offset by the pending securities class action litigation settlement net of insurance recoveries, increased bonus expense, increased consulting expense, foreign currency translation, increased stock-based compensation expense, and labor and other inflation totaling $37 million.
Capital Resources and Liquidity
Our liquidity is primarily dependent on our ability to continue to generate cash flows from operations, supplemented by external sources of capital as needed.
|
|
• |
Cash flows provided by operating activities was $99 million for the six months ended July 3, 2021 compared to $71 million for the six months ended June 27, 2020. |
|
|
• |
As of July 3, 2021, total cash and cash equivalents were $579 million. |
|
|
• |
At July 3, 2021, there were no borrowings and no letters of credit issued under our $500 million revolving credit facility. |
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. 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, although we could be required, or could elect, to seek additional funding prior to that time. 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 six months ended July 3, 2021 was $70 million. See Note 12. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of the Form 10-Q and Note 19. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in our 2020 Annual Report on Form 10-K for further discussion.
32
Cash Flow Summary for the six months ended July 3, 2021 and June 27, 2020
Our cash flows from operating, investing and financing activities for the six months ended July 3, 2021 and June 27, 2020, as reflected in the unaudited Interim Financial Statements, are summarized as follows:
|
|
|
Six Months Ended |
|
|||||
|
|
|
July 3, |
|
|
June 27, |
|
||
|
|
|
2021 |
|
|
2020 |
|
||
|
Cash provided by (used for): |
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
99 |
|
|
$ |
71 |
|
|
Investing activities |
|
|
(42 |
) |
|
|
(66 |
) |
|
Financing activities |
|
|
7 |
|
|
|
241 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(2 |
) |
|
|
(6 |
) |
|
Net increase in cash and cash equivalents |
|
$ |
62 |
|
|
$ |
240 |
|
Cash provided by operating activities for the six months ended July 3, 2021 increased by $28 million, primarily due to increased profitability, offset by an increase in working capital balances as a result of revenue growth as well as cash preservation measures taken due to the slow-down of our business related to the COVID-19 pandemic in the prior year.
Cash used for investing activities decreased by $24 million, primarily due to $25 million of additional cash paid for acquisitions in the six months ended June 27, 2020.
Net cash provided by financing activities decreased by $234 million. The decrease in cash provided by financing activities was primarily due to a decrease of $250 million of proceeds from our revolving credit facility that was used to increase our cash position in 2020 in light of the economic uncertainty surrounding the COVID-19 pandemic, partially offset by $8 million of net proceeds resulting from the A&R Credit Agreement, redemption of the $140 million in principal amount of the Senior Notes and debt issuance and modification costs, $4 million of decreased debt repayments, and $4 million of other financing activities.
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.
33
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 2020 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 2020 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. As there remains uncertainty around the impacts of the COVID-19 pandemic, we intend to address and evaluate the impacts frequently.
Other Matters
Litigation, Environmental Matters and Reimbursement Agreement
See Note 12. 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 July 3, 2021, $948 million of our total debt of $1,208 million carried variable interest rates. In March 2021, eight interest rate swap agreements were entered into with various financial institutions for a combined notional amount of $560 million (the “Swap Agreements”). The Swap Agreements effectively converted a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over a term of three to five 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 July 3, 2021, an increase in interest rate by 100 basis points would have an approximate $4 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, British Pound, Indian Rupee, Canadian Dollar, 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 July 3, 2021 and December 31, 2020, we have no outstanding foreign currency hedging arrangements.
34
Commodity Price Risk
While we are exposed to commodity price risk, we attempt to pass through significant changes in component and raw material costs to our customers based on the contractual terms of our arrangements. In limited situations, we may not be fully compensated for such changes in costs.
|
Item 4. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, including our Chief Accounting Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended July 3, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
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 2020 Annual Report on Form 10-K.
36
|
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 |
|
Amendment to Employment Agreement Letter with Jay Geldmacher dated July 1, 2021 (filed herewith) |
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
32.2 |
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document (filed herewith) |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema (filed herewith) |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith) |
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith) |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
37
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: August 5, 2021 |
By: |
/s/ Anthony L. Trunzo |
|
|
|
Anthony L. Trunzo Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as the Registrant’s Principal Financial Officer) |
|
Date: August 5, 2021 |
By: |
/s/ AnnMarie Geddes |
|
|
|
AnnMarie Geddes Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) |
38
Exhibit 10.1
July 1, 2021
Jay Geldmacher
Jay.geldmacher@resideo.com
Re:Amendment to Employment Agreement Letter
Dear Jay:
As discussed, the Compensation and Human Capital Management Committee has approved an amendment to your relocation benefits. Upon your acceptance of this Amendment to Employment Agreement Letter, the following Relocation terms will be in place:
RELOCATION (New Terms as of July 2021)
You agree to relocate to the area of the Company’s corporate headquarters within a time frame that is mutually agreeable to you and the Board following your commencement of employment. You will be provided temporary housing in the area of the Company’s corporate headquarters, and will be eligible for additional relocation assistance in accordance with the Company’s Officer Level relocation guidelines. Your temporary housing costs in excess of the amount covered under the Company’s Officer Level guidelines shall be reimbursed up to $125,000, and the Company will provide additional payments to you on a fully grossed up basis to cover resultant federal, state and local income taxes. You may contact our relocation vendor at any time after you return this signed Agreement to initiate the relocation process. You agree that as a condition of and in consideration of such relocation assistance, you will, following your relocation, sign a Resideo Technologies, Inc. Noncompete Agreement for Senior Executives and a non-California version of the Employee Agreement Relating to Trade Secrets, Proprietary and Confidential Information in the forms substantially similar to the agreements attached hereto; provided that for purposes of the list of corporations or entities that constitute Competing Businesses, the reference to Alphabet shall be limited to the Nest Labs business and the reference to Amazon shall be limited the Ring business.
The above Relocation terms replace the following provision previously contained in your Employment Agreement Letter, under which no reimbursement by the company has been made:
RELOCATION (Replaced as of July 2021)
You agree to relocate to the area of the Company’s corporate headquarters within a time frame that is mutually agreeable to you and the Board following your commencement of employment. You will be provided temporary housing in the area of the Company’s corporate headquarters for a period not to exceed twelve (12) months, and be eligible for additional relocation assistance in accordance with the Company’s Officer Level relocation guidelines. Your temporary housing costs for the first twelve (12) months in excess of the amount covered under the Company’s Officer Level shall be reimbursed up to a maximum of $75,000. You may contact our relocation vendor at any time after you return this signed Agreement to initiate the relocation process. You agree that as a condition of and in consideration of such relocation assistance, you will, following your relocation, sign a Resideo Technologies, Inc. Noncompete Agreement for Senior Executives and a non-California version of the Employee Agreement Relating to Trade Secrets, Proprietary and Confidential Information in the forms substantially similar to the agreements attached hereto; provided that for purposes of the list of corporations or entities that constitute Competing Businesses, the reference to Alphabet shall be limited to the Nest Labs business and the reference to Amazon shall be limited the Ring business.
All other terms and conditions in your Employment Agreement Letter remain unchanged. Please indicate your acceptance of this offer by signing this below and returning to Steve Kelly. If you have any questions or need any further information, please contact me directly.
Sincerely,
/s/ Sharon Wienbar
Sharon Wienbar
Chair of the Compensation and Human Capital Management Committee
Resideo Board of Directors
|
Read and Accepted: |
|
|
|
|
|
|
|
|
|
|
|
/s/ Jay Geldmacher |
|
July 28, 2021 |
|
JAY GELDMACHER |
|
Date |
|
|
|
|
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jay Geldmacher, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Resideo Technologies, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
|
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: August 5, 2021 |
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:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Resideo Technologies, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
|
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. |
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 July 3, 2021 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: August 5, 2021 |
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 July 3, 2021 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: August 5, 2021 |
By: |
/s/ Anthony L. Trunzo |
|
|
|
Anthony L. Trunzo |
|
|
|
Executive Vice President and Chief Financial Officer |