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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _____

Commission File Number 001-38635

Resideo Technologies, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-5318796

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

901 E 6th Street

Austin, Texas

 

78702

(Address of principal executive offices)

 

(Zip Code)

(512) 726-3500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol:

 

Name of each exchange on which registered:

Common Stock, par value $0.001 per share

 

REZI

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares outstanding of the Registrant’s common stock, par value $0.001 per share, as of November 2, 2020 was 123,494,919 shares.

 

 

 

 


 

TABLE OF CONTENTS

 

 

Item

 

Page

 

 

 

 

Part I.

 

Item 1. Financial Statements

5

 

 

 

 

 

1.

Financial Statements

5

 

 

 

 

 

 

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

5

 

 

 

 

 

 

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

6

 

 

 

 

 

 

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

7

 

 

 

 

 

 

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

8

 

 

 

 

 

 

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

9

 

 

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

10

 

 

 

 

 

2.

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

24

 

 

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

 

 

4.

Controls and Procedures

35

 

 

 

 

Part II.

1.

Legal Proceedings

36

 

 

 

 

 

1A.

Risk Factors

36

 

 

 

 

 

6.

Exhibits

39

 

 

 

 

 

 

Signatures

40

 

 

 

 

 

 

 

2


RESIDEO TECHNOLOGIES, INC.

 

Cautionary Statement about Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industries and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

 

 

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

 

ability to successfully develop new technologies and introduce new products;

 

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

 

inability to recruit and retain qualified personnel;

 

changes in prevailing global and regional economic conditions;

 

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

 

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

 

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

 

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

 

dependence upon investment in information technology;

 

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

 

technical difficulties or failures;

 

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;

 

our growth strategy is dependent on expanding our distribution business;

 

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

 

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

 

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

 

the possibility that our goodwill or intangible assets become impaired;

 

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

 

difficulty collecting receivables;

 

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

 

our inability to maintain intellectual property agreements;

 

our inability to service our indebtedness;

 

the failure to increase productivity through sustainable operational improvements;

 

inability to grow successfully through future acquisitions;

 

the operational constraints and financial distress of third parties;

 

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

3


RESIDEO TECHNOLOGIES, INC.

 

 

labor disputes;

 

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;

 

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

 

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

 

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

 

potential material litigation matters;

 

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

 

U.S. federal income tax reform;

 

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

 

certain factors discussed elsewhere in this Form 10-Q.

 

These and other factors are more fully discussed in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report on Form 10-K”) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Form 10-Q. There have been no material changes to the risk factors described in our 2019 Annual Report on Form 10-K, except as reflected in the “Risk Factors” section in this Form 10-Q. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the 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 September 26, 2020 should be read in conjunction with the financial statements for the year ended December 31, 2019 contained in our 2019 Annual Report on Form 10-K.

4


RESIDEO TECHNOLOGIES, INC.

 

Item 1.

Financial Statements

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

(Dollars in millions except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

1,362

 

 

$

1,226

 

 

$

3,570

 

 

$

3,684

 

Cost of goods sold

 

 

992

 

 

 

917

 

 

 

2,680

 

 

 

2,720

 

Gross profit

 

 

370

 

 

 

309

 

 

 

890

 

 

 

964

 

Selling, general and administrative expenses

 

 

239

 

 

 

250

 

 

 

731

 

 

 

778

 

Operating profit

 

 

131

 

 

 

59

 

 

 

159

 

 

 

186

 

Other expense, net

 

 

35

 

 

 

35

 

 

 

106

 

 

 

54

 

Interest expense

 

 

14

 

 

 

16

 

 

 

49

 

 

 

51

 

Income before taxes

 

 

82

 

 

 

8

 

 

 

4

 

 

 

81

 

Tax expense

 

 

7

 

 

 

-

 

 

 

26

 

 

 

36

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

Weighted Average Number of Common Shares Outstanding (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

123,421

 

 

 

122,770

 

 

 

123,194

 

 

 

122,681

 

Diluted

 

 

125,235

 

 

 

123,244

 

 

 

123,194

 

 

 

123,404

 

Earnings (Loss) Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

 

$

0.07

 

 

$

(0.18

)

 

$

0.37

 

Diluted

 

$

0.60

 

 

$

0.06

 

 

$

(0.18

)

 

$

0.36

 

 

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)

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

75

 

 

$

8

 

 

$

(22

)

 

$

45

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

28

 

 

 

(35

)

 

 

6

 

 

 

(33

)

Total other comprehensive income (loss), net of tax

 

 

28

 

 

 

(35

)

 

 

6

 

 

 

(33

)

Comprehensive income (loss)

 

$

103

 

 

$

(27

)

 

$

(16

)

 

$

12

 

 

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

6


RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED INTERIM BALANCE SHEETS

(Dollars in millions, shares in thousands)

(Unaudited)

 

 

 

September 26,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

260

 

 

$

122

 

Accounts receivable – net

 

 

884

 

 

 

817

 

Inventories – net

 

 

618

 

 

 

671

 

Other current assets

 

 

161

 

 

 

175

 

Total current assets

 

 

1,923

 

 

 

1,785

 

Property, plant and equipment – net

 

 

311

 

 

 

316

 

Goodwill

 

 

2,657

 

 

 

2,642

 

Other assets

 

 

378

 

 

 

385

 

Total assets

 

$

5,269

 

 

$

5,128

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

858

 

 

$

920

 

Current maturities of debt

 

 

181

 

 

 

22

 

Accrued liabilities

 

 

606

 

 

 

552

 

Total current liabilities

 

 

1,645

 

 

 

1,494

 

Long-term debt

 

 

1,141

 

 

 

1,158

 

Obligations payable under Indemnification Agreements

 

 

586

 

 

 

594

 

Other liabilities

 

 

292

 

 

 

280

 

COMMITMENTS AND CONTINGENCIES (Note 13)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

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

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

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

1,782

 

 

 

1,761

 

Treasury stock, at cost

 

 

(5

)

 

 

(3

)

Retained earnings

 

 

16

 

 

 

38

 

Accumulated other comprehensive (loss)

 

 

(188

)

 

 

(194

)

Total equity

 

 

1,605

 

 

 

1,602

 

Total liabilities and equity

 

$

5,269

 

 

$

5,128

 

 

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

(Dollars in millions)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

Cash flows provided by (used for) operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(22

)

 

$

45

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

64

 

 

 

55

 

Restructuring charges, net of payments

 

 

4

 

 

 

12

 

Stock compensation expense

 

 

21

 

 

 

22

 

Other

 

 

20

 

 

 

10

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(64

)

 

 

(27

)

Inventories – net

 

 

64

 

 

 

(109

)

Other current assets

 

 

15

 

 

 

(13

)

Accounts payable

 

 

(62

)

 

 

(23

)

Accrued liabilities

 

 

48

 

 

 

(6

)

Obligations payable under Indemnification Agreements

 

 

(8

)

 

 

(49

)

Other

 

 

12

 

 

 

13

 

Net cash provided by (used for) operating activities

 

 

92

 

 

 

(70

)

Cash flows used for investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant, equipment and other intangibles

 

 

(50

)

 

 

(66

)

Cash paid for acquisitions, net of cash acquired

 

 

(35

)

 

 

(17

)

Net cash used for investing activities

 

 

(85

)

 

 

(83

)

Cash flows provided by financing activities:

 

 

 

 

 

 

 

 

Net proceeds from revolving credit facility

 

 

150

 

 

 

60

 

Repayment of long-term debt

 

 

(11

)

 

 

(11

)

Non-operating obligations paid to Honeywell, net

 

 

(2

)

 

 

(24

)

Tax payments related to stock vestings

 

 

(2

)

 

 

(3

)

Net cash provided by financing activities

 

 

135

 

 

 

22

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(4

)

 

 

(2

)

Net increase (decrease) in cash and cash equivalents

 

 

138

 

 

 

(133

)

Cash and cash equivalents at beginning of period

 

 

122

 

 

 

265

 

Cash and cash equivalents at end of period

 

$

260

 

 

$

132

 

 

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

 

 

8


RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED INTERIM STATEMENTS OF EQUITY

(Dollars in millions, shares in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 26, 2020

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings (Deficit)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at June 27, 2020

 

 

123,378

 

 

 

852

 

 

$

-

 

 

$

(5

)

 

$

1,775

 

 

$

(59

)

 

$

(216

)

 

$

1,495

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

75

 

 

 

-

 

 

 

75

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

28

 

 

 

28

 

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

 

 

65

 

 

 

29

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

7

 

Balance at September 26, 2020

 

 

123,443

 

 

 

881

 

 

$

-

 

 

$

(5

)

 

$

1,782

 

 

$

16

 

 

$

(188

)

 

$

1,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 28, 2019

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at June 29, 2019

 

 

122,710

 

 

 

558

 

 

$

-

 

 

$

(2

)

 

$

1,743

 

 

$

39

 

 

$

(187

)

 

$

1,593

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

8

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(35

)

 

 

(35

)

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

 

 

76

 

 

 

38

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

8

 

Balance at September 28, 2019

 

 

122,786

 

 

 

596

 

 

$

-

 

 

$

(3

)

 

$

1,751

 

 

$

47

 

 

$

(222

)

 

$

1,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 26, 2020

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at December 31, 2019

 

 

122,873

 

 

 

615

 

 

$

-

 

 

$

(3

)

 

$

1,761

 

 

$

38

 

 

$

(194

)

 

$

1,602

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22

)

 

 

-

 

 

 

(22

)

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

6

 

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

 

 

570

 

 

 

266

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

Stock-based compensation

 

-

 

 

-

 

 

 

-

 

 

 

 

 

 

 

21

 

 

 

-

 

 

-

 

 

 

21

 

Balance at September 26, 2020

 

 

123,443

 

 

 

881

 

 

$

-

 

 

$

(5

)

 

$

1,782

 

 

$

16

 

 

$

(188

)

 

$

1,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 28, 2019

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Equity

 

Balance at December 31, 2018

 

 

122,499

 

 

 

468

 

 

$

-

 

 

$

-

 

 

$

1,720

 

 

$

2

 

 

$

(189

)

 

$

1,533

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

45

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(33

)

 

 

(33

)

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

 

 

287

 

 

 

128

 

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3

)

Stock-based compensation

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22

 

 

 

-

 

 

-

 

 

 

22

 

Adjustments due to Spin-Off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

 

9

 

Balance at September 28, 2019

 

 

122,786

 

 

 

596

 

 

$

-

 

 

$

(3

)

 

$

1,751

 

 

$

47

 

 

$

(222

)

 

$

1,573

 

 

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

 

9


 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

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.

In periods subsequent to the Spin-Off, we have made adjustments to balances transferred at the Spin-Off, including adjustments to the classification of assets or liabilities transferred. Any such adjustments are recorded directly to equity in Adjustments due to the Spin-Off and are considered immaterial.

 

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 

 

On January 1, 2020, the Company changed its classification of research and development expenses in the Consolidated Interim Statements of Operations from Cost of goods sold to Selling, general and administrative expenses, such that research and development expenses are excluded from the calculation of Gross profit. The impact on the September 28, 2019 Consolidated Interim Statement of Operations is a reduction of Cost of goods sold, an increase in Gross profit and an increase in Selling, general and administrative expenses for the three and nine months ended September 28, 2019 of $20 million and $66 million, respectively. The impact of the reclassification for the three and nine months ended September 28, 2019 is also reflected in “Note 6. Restructuring and Other Charges”. This reclassification had no effect on the previously reported Net income (loss) or the Company’s Consolidated Interim Statements of Comprehensive Income (Loss), Consolidated Interim Statements of Cash Flows, or Consolidated Interim Balance Sheets.

 

10


 

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 2019 Annual Report on Form 10-K. Included herein are certain updates to those policies.

The World Health Organization (“WHO”) declared the novel coronavirus disease ("COVID-19") a pandemic in March 2020. Starting at the end of the first quarter and throughout the second quarter, the Company experienced constrained supply and slowed customer demand that adversely impacted the Company’s business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, during the third quarter customer demand improved and cost actions taken during the first half of the year contributed to improvements in the Company’s results of operations and overall financial performance. As there remains uncertainty around the impacts of the COVID-19 pandemic, the Company addresses and evaluates the impacts frequently. At September 26, 2020, the Company believes that the accounting policies most likely to be affected by the COVID-19 pandemic are the following:

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

Goodwill— The Company has determined that it is likely that the carrying value of goodwill exceeds the fair value at September 26, 2020. However, the extent to which COVID-19 may adversely impact our business depends on future developments, which are uncertain and unpredictable, depending upon the severity and duration of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time but may adversely affect our business and financial results. It is likely that, during the remainder of 2020 and into 2021, macroeconomic conditions will be volatile and could impact our business. If there is an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. Specifically, the fair value of our Products & Solutions reporting unit, with goodwill of approximately $2,012 million at September 26, 2020, exceeded its' carrying value by 10% in the 2019 annual impairment test and therefore is highly sensitive to adverse changes in the facts and circumstances that could result in a possible future impairment. Should the fair value of the Company’s reporting units fall below its' carrying amount because of reduced operating performance, market declines, changes in the discount rate, a more significant impact than expected from the COVID-19 pandemic, or other conditions, charges for impairment may be necessary. The Company regularly monitors its reporting units to determine if there is an indicator of potential impairment. The Company will perform its annual goodwill impairment assessment during the fourth quarter.

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

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

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

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

Note 3. Earnings (Loss) Per Share

 

The following table sets forth the computation of basic and diluted earnings per share (dollars in millions except shares in thousands and per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

75

 

 

$

8