(In millions, except number of shares which are reflected in thousands and par value)
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
The Notes to Consolidated and Combined Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In millions, unless otherwise noted)
Note 1. Organization, Operations and Basis of Presentation
Business Description
Resideo Technologies, Inc. (“Resideo” or “the Company”), is a leading manufacturer and distributor 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, enterprise connectivity, and structured wiring products. The Company has a global footprint serving commercial and residential end markets.
Separation from Honeywell
The Company was incorporated in Delaware on April 24, 2018. On October 29, 2018, the Company separated from Honeywell International Inc. (“Honeywell”) 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”). The Company began trading “regular way” under the ticker symbol “REZI” on the New York Stock Exchange on October 29, 2018.
In connection with the separation, Resideo and Honeywell entered into a Reimbursement Agreement (as defined in Note 2. Summary of Significant Accounting Policies), a Separation and Distribution Agreement, an Employee Matters Agreement, a Tax Matters Agreement, a Transition Services Agreement, a Trademark License Agreement and a Patent Cross-License Agreement. The agreements govern the relationship between Resideo and Honeywell following the separation and provide for the allocation of various assets, liabilities, rights, and obligations. These agreements also include arrangements for transition services provided by Honeywell to Resideo and by Resideo to Honeywell.
Basis of Presentation
Prior to the Spin-Off, the Company’s historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 29, 2018, these financial statements are presented on a combined basis and for the periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Financial Statements”). The Consolidated and Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
All intracompany transactions have been eliminated for all periods presented. As described in Note 5. Related Party Transactions with Honeywell, all significant transactions between the Company and Honeywell occurring prior to the Spin-Off have been included in these Consolidated and Combined Financial Statements.
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RESIDEO TECHNOLOGIES, INC.
While the Company was owned by Honeywell, a centralized approach to cash management and financing was used. Prior to the consummation of the Spin-Off, the majority of the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed.
The combined financial statements prior to the Spin-Off include certain assets and liabilities that have historically been held at Honeywell corporate level but were specifically identifiable or otherwise attributable to the Company. The cash and cash equivalents held by Honeywell at the corporate level were not specifically identifiable to the Company and therefore were not attributed. Honeywell third-party debt and the related interest expense were not allocated as Honeywell’s borrowings were not directly attributable to the company. In periods subsequent to the Spin-Off, the Company 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.
Prior to the Spin-Off, Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The cost of these services has been allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider these allocations to be a reasonable reflection of the benefits received by the Company. However, the financial information presented in these Consolidated and Combined Financial Statements may not reflect the consolidated and combined financial position, operating results and cash flows of the Company had the Company been a separate stand-alone entity during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both Resideo and Honeywell consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefits received by the Company during the periods presented. After the Spin-Off, a number of the above services have continued under a Transition Service Agreement with Honeywell, which the Company expenses as incurred based on the contractual pricing terms.
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.
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RESIDEO TECHNOLOGIES, INC.
Reclassification
On January 1, 2020, the Company changed its classification of research and development expenses in the Consolidated and Combined 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. This change had no impact on Net income and earnings per share or the Consolidated Balance Sheet, Consolidated and Combined Statements of Cash Flow or Equity. The Company determined the impact on previously issued consolidated and combined annual and interim financial statements was not material. The impact for the years ended December 31, 2019 and 2018 was a decrease in Cost of goods sold, an increase in Gross profit and in Selling, general and administrative expenses of $87 million and $59 million, respectively. The impact of the reclassification for the year ended December 31, 2019 is also reflected in Note 7. Restructuring Charges and Note 23. Unaudited Quarterly Financial Information.
In addition, the prior year segment information was recast to present Corporate separately. See Note 21. 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.
Issuance of Common Stock through Public Offering
On November 17, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) which provided for the offer and sale by the Company of 17,000,000 shares of common stock of the Company at the public offering price of $15.00 per share (the “Offering”). The Offering closed on November 20, 2020. On December 14, 2020, the Company completed the closing of the exercise of the underwriters’ option to purchase an additional 2,550,000 shares of common stock of the Offering price of $15.00 per share as allowed in the Underwriting Agreement. The Company received net proceeds of approximately $279 million, after deducting underwriting discounts of $13 million and offering expenses payable by the Company of $1 million.
Note 2. Summary of Significant Accounting 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 second half of 2020 customer demand improved and on-going cost actions and transformation efforts 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 December 31, 2020, the Company believes that the accounting policies most likely affected by the COVID-19 pandemic are the use of estimates and goodwill policies.
Accounting Principles—The financial statements and accompanying notes are prepared in accordance with U.S. GAAP. The following is a description of Resideo’s significant accounting policies.
Principles of Consolidation—The Consolidated and Combined Financial Statements include the accounts of Resideo Technologies, Inc. and all of its subsidiaries in which a controlling interest is maintained. All intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand and highly liquid investments having an original maturity of three months or less.
Accounts Receivables and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount as a result of transactions with customers. The Company maintains allowances for doubtful accounts for estimated losses as a result of customers’ inability to make required payments. The Company estimates anticipated losses from doubtful accounts based on days past due as measured from the contractual due date and historical collection history. The Company also takes into consideration changes in economic conditions that may not be reflected in historical trends, for example customers in bankruptcy, liquidation or reorganization. Receivables are written-off against the allowance for doubtful accounts when they are determined to be uncollectible. Such determination includes analysis and consideration of the particular conditions of the account, including time
53
RESIDEO TECHNOLOGIES, INC.
intervals since last collection, customer performance against agreed upon payment plans, solvency of customer and any bankruptcy proceedings.
Inventories—Inventories in the Products & Solutions business are stated at the lower of cost or net realizable value, determined on a first-in, first-out basis, including direct material costs and direct and indirect manufacturing costs, or net realizable value. Inventories in the ADI Global Distribution business are stated at average cost. Reserves are maintained for obsolete and surplus items.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost, less accumulated depreciation. For financial reporting, the straight-line method of depreciation is used over the estimated useful lives of 10 to 50 years for buildings and improvements, 3 to 16 years for machinery and equipment and 3 to 10 years for tooling equipment.
Goodwill—The Company performs goodwill impairment testing annually, on the first day of the fourth quarter each year or more frequently if indicators of potential impairment exist. The goodwill impairment test is performed at the reporting unit level. The Company has two reporting units, Products & Solutions and ADI Global Distribution. The Company performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. For the 2020 annual impairment test, the Company used a weighting of fair values derived from the income approach and market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. The income approach requires the exercise of significant judgment, including judgment about the amount and timing of expected future cash flows, assumed terminal value, and appropriate discount rates. Under the market approach, the Company utilizes the public company guideline method.
The Company believes the estimates and assumptions used in the calculations are reasonable. In addition, the extent to which COVID-19 may adversely impact the Company’s business depends on future developments, which are uncertain and unpredictable, depending upon 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 the Company’s business and financial results. It is likely that into 2021, macroeconomic conditions may have unexpected impacts on the Company’s business. If there were an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. 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, or other conditions, charges for impairment may be necessary. The Company monitors its reporting units to determine if there is an indicator of potential impairment.
Other Intangible Assets and Long-lived Assets—Other intangible assets with determinable lives consist of customer lists, technology, patents and trademarks and software intangibles and are amortized over their estimated useful lives, ranging from 3 to 15 years. They are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
Warranties and Guarantees—Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of the warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims.
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RESIDEO TECHNOLOGIES, INC.
Leases—Effective January 1, 2019, arrangements containing leases are evaluated as an operating or finance lease at lease inception. For operating leases, the Company recognizes an operating right-of-use asset and operating lease liability at lease commencement based on the present value of lease payments over the lease term.
Since an implicit rate of return is not readily determinable for the Company’s leases, an incremental borrowing rate is used in determining the present value of lease payments and is calculated based on information available at the lease commencement date. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow funds on a collateralized basis over a similar term. The Company references a market yield curve consistent with the Company’s credit rating which is risk-adjusted to approximate a collateralized rate in the currency of the lease. These rates are updated on a quarterly basis for measurement of new lease obligations. Most leases include renewal options; however, generally it is not reasonably certain that these options will be exercised at lease commencement. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recognized on the Company’s balance sheet. The Company does not separate lease and non-lease components for its real estate and automobile leases.
Revenue Recognition—Product and service revenues are recognized when or as the Company transfers control of the promised products or services to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.
In the sale of products, the terms of a contract or the historical business practice can give rise to variable consideration due to, but not limited to, discounts and rebates. The Company estimates variable consideration at the most likely amount that will be received from customers and reduces revenues recognized accordingly. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company.
Sales, use and value added taxes collected by the Company and remitted to various government authorities were not recognized as revenues and are reported on a net basis.
Shipping and handling fees billed to customers were included in Cost of goods sold.
Royalty—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% of net revenue of the licensed products to Honeywell which is recorded in Selling, general and administrative expense on the Consolidated and Combined Statements of Operations.
Reimbursement Agreement—In connection with the Spin-Off the Company entered into an Indemnification and Reimbursement Agreement with Honeywell (the “Reimbursement Agreement”) on October 14, 2018, pursuant to which it has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case, including consequential damages (the “liabilities”) in respect of specified Honeywell properties contaminated through historical business operations prior to the Spin-Off (“Honeywell Sites”), including the legal and other costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable in respect of such liabilities arising in any given year is subject to a cap of $140 million. Reimbursement Agreement expenses are presented within Other expense, net in the Consolidated and Combined Statements of Operations and within Accrued liabilities and Obligations payable under Indemnification Agreements in the Consolidated Balance Sheets. For additional information, see Note 19. Commitments and Contingencies.
55
RESIDEO TECHNOLOGIES, INC.
Environmental—The Company 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 costs for the Company’s owned sites are presented within Cost of goods sold for operating sites. Prior to the Spin-off, sites now under the Reimbursement Agreement were presented within Other expense, net in the Consolidated and Combined Statements of Operations. For additional information, see Note 19. Commitments and Contingencies.
Tax Indemnification Agreement—The Tax Matters Agreement provides that Resideo is required to indemnify Honeywell for any taxes (and reasonable expenses) resulting from the failure of the Spin-Off and related internal transactions to qualify for their intended tax treatment under U.S. federal, state and local income tax law, as well as foreign tax law, where such taxes result from (a) breaches of covenants and representations the Company makes and agrees to in connection with the Spin-Off, (b) the application of certain provisions of U.S. federal income tax law to these transactions or (c) any other action taken or omission made (other than actions expressly required or permitted by the Separation and Distribution Agreement, the Tax Matters Agreement or other ancillary agreements) after the consummation of the Spin-Off that gives rise to these taxes. As of December 31, 2020 and 2019, the Company had an indemnity outstanding to Honeywell of $139 million and $149 million, respectively. See Note 19. Commitments and Contingencies.
Research and Development—The Company conducts research and development activities, which consist primarily of the development of new products as well as enhancements and improvements to existing products that substantially change the product. Research and development costs primarily relate to employee compensation and consulting fees which are charged to expense as incurred. Such costs are included in Selling, general and administrative expenses and amount to $77 million, $87 million and $59 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Advertising Costs—The Company expenses advertising costs as incurred. Advertising costs totaled $25 million and $46 million for the years ended December 31, 2020 and 2019, respectively. Prior to the Spin-Off, advertising costs were allocated from Honeywell as described in Note 5. Related Party Transactions with Honeywell. Advertising costs are included within Selling, general and administrative expense.
Defined Contribution Plans—The Company sponsors various defined contribution plans with varying terms depending on the country of employment. The Company recognized compensation expense of $18 million for both years ended December 31, 2020 and 2019 related to employer contributions to these plans. Prior to the Spin-Off, costs were allocated from Honeywell as described in Note 5. Related Party Transactions with Honeywell.
Stock-Based Compensation Plans—The principal awards issued under Resideo’s stock-based compensation plans, which are described in Note 18. Stock-Based Compensation Plans, are restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. Some awards are issued with a market condition which are valued on the grant date utilizing a Monte Carlo simulation model. Stock options are also issued under Resideo’s stock-based compensation plans and are valued on the grant date using the Black-Scholes option pricing model.
The Black-Scholes option pricing model and the Monte Carlo simulation model require estimates of future stock price volatility, expected term, risk-free interest rate and forfeitures.
For all stock-based compensation, the fair value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. Forfeitures are estimated at the time of grant to recognize expense for those awards that are expected to vest and are based on historical forfeiture rates.
Pension—The Company disaggregates the service cost component of net benefit costs and reports those costs in the same line item or items in the Consolidated and Combined Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other non-service components of net benefit costs are required to be presented separately from the service cost component and outside of income from operations.
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RESIDEO TECHNOLOGIES, INC.
The Company has recorded the service cost component of pension expense in Costs of goods sold and Selling, general and administrative expenses based on the classification of the employees it relates to. The remaining components of net benefit costs within pension expense, primarily interest costs and expected return on plan assets, are recorded in Other expense, net. The Company recognizes net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year. This adjustment known as the mark to market adjustment is reported in Other expense, net.
Foreign Currency Translation—Assets and liabilities of operations outside the United States with a functional currency other than U.S. Dollars are translated into U.S. Dollars using year-end exchange rates. Revenue, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive loss.
Income Taxes—Significant judgment is required in evaluating tax positions. The Company establishes additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance which determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a change in estimate become known.
Earnings Per Share—Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. For additional information, see Note 3. Earnings Per Share.
Use of Estimates—The preparation of the Company’s Consolidated and Combined Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated and Combined Financial Statements and related disclosures in the accompanying notes. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed, and the effects of changes are reflected in the Consolidated and Combined Financial Statements in the period they are determined to be necessary. Estimates are used when accounting for stock-based compensation, pension benefits, 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 cause by the COVID-19 pandemic at December 31, 2020 in these estimates.
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 and combined financial position or results of operations.
The Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, and applied the changes prospectively as of the adoption date. As permitted by the new guidance, the Company elected the package of practical expedients, which, among other things, allowed historical lease classification to be carried forward.
Upon adoption of ASU No. 2016-02, the Company recognized an aggregate lease liability of $115 million, calculated based on the present value of the remaining minimum lease payments for qualifying leases as of January 1, 2019, with a corresponding right-of-use asset of $112 million. The cumulative-effect adjustment recognized to opening retained earnings was not material. The adoption of the new guidance did not impact the Company’s Consolidated and Combined Statements of Operations or Cash Flows.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for an entity to elect to reclassify, to retained earnings, the
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RESIDEO TECHNOLOGIES, INC.
one-time income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”). An entity that elects to make this reclassification must consider all items in AOCI that have tax effects stranded as a result of the tax rate change and must disclose the reclassification of these tax effects as well as the entity’s policy for releasing income tax effects from AOCI. The ASU may be applied either retrospectively or as of the beginning of the period of adoption. The Company adopted the standard on January 1, 2019 using the aggregate portfolio accounting policy for recognizing the disproportionate income tax effects in AOCI and has elected not to reclassify the stranded income tax effects of U.S. Tax Reform from AOCI to retained earnings.
In August 2018, the FASB issued ASU No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans, which 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. The Company adopted the standard effective January 1, 2020 and the adoption did not have a material financial statement impact.
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 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 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 the Company’s 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 15. Long-term Debt and Credit Agreement for further details on the Company’s 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 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):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37
|
|
|
$
|
36
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share
|
|
|
125,348
|
|
|
|
122,722
|
|
|
|
122,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents
|
|
|
976
|
|
|
|
516
|
|
|
|
125
|
|
Shares used in computing diluted earnings per share
|
|
|
126,324
|
|
|
|
123,238
|
|
|
|
122,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
|
$
|
0.29
|
|
|
$
|
3.31
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
3.30
|
|
58
RESIDEO TECHNOLOGIES, INC.
On October 29, 2018, the date of consummation of the Spin-Off, 122,499 shares of the Company’s Common Stock, par value $0.001 per share, were distributed to Honeywell shareholders of record as of October 16, 2018. For the 2018 year to date calculation, these shares are treated as issued and outstanding from January 1, 2018 for purposes of calculating historical basic earnings per share. For December 31, 2020 and 2019, this calculation excludes 900 and 615 treasury shares, respectively.
Diluted Earnings Per Share is computed based upon the weighted average number of common shares outstanding for the year 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 period. For the year ended December 31, 2018, the average market price of the Company’s common stock was calculated from the Spin-Off date to December 31, 2018. 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 year ended December 31, 2020, average options and other rights to purchase approximately 2.5 million shares of common stock were outstanding, all of which were anti-dilutive during the year ended December 31, 2020, and therefore excluded from the computation of diluted earnings per common share. Additionally, an average of approximately 0.5 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the year ended December 31, 2020 as the contingency has not been satisfied at December 31, 2020. For the year ended December 31, 2019, average option and other rights to purchase approximately 2.8 million shares of common stock were outstanding, all of which were anti-dilutive during the year ended December 31, 2019, and therefore excluded from the computation of diluted earnings per common share. Additionally, an average of approximately 0.2 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the year ended December 31, 2019 as the contingency has not been satisfied at December 31, 2019.
Note 4. Acquisitions
During the year ended December 31, 2020, the Company completed one acquisition which has been integrated into the ADI Global Distribution segment. On February 10, 2020, the Company completed the acquisition of privately held Herman ProAV, a leading provider and distributer of professional audio-visual products, procurement services and labor resources to systems integrators in the commercial audio-visual industry. The purchase price paid for this acquisition was approximately $36 million. In connection with this acquisition, the Company recognized goodwill and intangible assets of $4 million and $18 million, respectively. This acquisition was integrated into and builds upon ADI Global Distribution’s product portfolio and expands its presence in the pro-AV market. The Herman ProAV acquisition agreements include deferred payments for certain individuals that are contingent upon employment as well as financial performance. The Company determined that these deferred payments are accounted for as compensation expense over the requisite service period.
During the year ended December 31, 2019, the Company completed three acquisitions which have been integrated into the Products & Solutions segment. On March 28, 2019, the Company acquired all of the capital stock of Buoy Labs primarily to obtain the technology assets. Buoy provides innovative Wi-Fi enabled solutions that track the amount of water used in a home, integrating smart software and hardware that can help consumers identify potential leaks and allow consumers to act to prevent them through its subscription-based app services. On May 21, 2019, the Company acquired certain assets relating to innovative energy efficiency from Whisker Labs. The acquired technology creates a thermodynamic model of a home to accurately predict home heating and air conditioning run time and energy use to enable a homeowner to use less energy while maintaining comfort. On June 27, 2019, the Company acquired all of the membership interests of LifeWhere. LifeWhere uses machine learning and analytics to predict potential failure on critical home appliances, such as water heaters, furnaces, and air conditioners. This service provides the detailed analytics required for professional contractors to dispatch technicians with the right skills to quickly repair the appliance before it causes catastrophic failure. The aggregate purchase price paid for these acquisitions was $17 million. In connection with these acquisitions, the Company recognized goodwill and intangible assets of $10 million and $7 million, respectively.
These acquisitions have an immaterial financial statement impact on both an individual basis and when considered in the aggregate. Pro-forma disclosures are not provided as the acquisitions have an immaterial financial statement impact.
59
RESIDEO TECHNOLOGIES, INC.
Note 5. Related Party Transactions with Honeywell
Prior to the Spin-Off, the Consolidated and Combined Financial Statements were derived from the unaudited Consolidated Financial Statements and accounting records of Honeywell.
Prior to the Spin-Off, Honeywell was a related party that provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The costs of these services were allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider the allocations to be a reasonable reflection of the benefits received by the Company.
During the period from January 1, 2018 until October 29, 2018, the Company was allocated $228 million of general corporate expenses incurred by Honeywell and such amounts are included within Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. As certain expenses reflected in the Consolidated and Combined Financial Statements include allocations of corporate expenses from Honeywell, these statements could differ from those that would have been prepared had the Company operated on a stand-alone basis.
All significant intercompany transactions between the Company and Honeywell have been included in these Consolidated and Combined Financial Statements. During the period from January 1, 2018 until October 29, 2018, sales to Honeywell, Cost of goods sold to Honeywell, and purchases from Honeywell were $24 million, $19 million, and $212 million, respectively. The total net effect of the settlement of these intercompany transactions is reflected in the Consolidated and Combined Statements of Cash Flows as a financing activity.
Prior to the consummation of the Spin-Off, Honeywell managed the Company’s hedging activity which included centrally hedging its exposure to changes in foreign exchange rates principally with forward contracts. Certain contracts were specifically designated to and entered on behalf of the Company with Honeywell as a counterparty and were used to hedge known or probable anticipated foreign currency sales and purchases. The Company designated these hedges as cash flow hedges and the impact to the financial statements for 2018 was not material.
While the Company was owned by Honeywell, a centralized approach to cash management and financing of operations was used. Prior to consummation of the Spin-Off, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed. Net transfers to and from Honeywell are included within Invested equity on the Consolidated and Combined Statements of Equity. The components of the net transfers to and from Honeywell as of December 31, 2018 are as follows:
|
|
December 31,
|
|
|
|
2018
|
|
General financing activities
|
|
$
|
(383
|
)
|
Distribution to Honeywell in connection with Spin-Off
|
|
|
(1,415
|
)
|
Net contribution of assets and liabilities upon Spin-Off
|
|
|
81
|
|
Unbilled corporate allocations
|
|
|
228
|
|
Purchases from Honeywell
|
|
|
161
|
|
Mandatory transition tax
|
|
|
(85
|
)
|
Other
|
|
|
15
|
|
Net decrease in invested equity
|
|
$
|
(1,398
|
)
|
Subsequent to the Spin-Off on October 29, 2018, transactions with Honeywell were not considered related party transactions.
60
RESIDEO TECHNOLOGIES, INC.
Note 6. Revenue Recognition
Disaggregated Revenue
Revenues by channel are as follows for the years ended December 31:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Comfort
|
|
$
|
1,079
|
|
|
$
|
1,103
|
|
|
$
|
1,114
|
|
Security
|
|
|
538
|
|
|
|
520
|
|
|
|
479
|
|
Residential Thermal Solutions
|
|
|
504
|
|
|
|
552
|
|
|
|
576
|
|
Products & Solutions
|
|
|
2,121
|
|
|
|
2,175
|
|
|
|
2,169
|
|
U.S. and Canada
|
|
|
2,427
|
|
|
|
2,294
|
|
|
|
2,147
|
|
EMEA (1)
|
|
|
480
|
|
|
|
459
|
|
|
|
456
|
|
APAC (2)
|
|
|
43
|
|
|
|
60
|
|
|
|
55
|
|
ADI Global Distribution
|
|
|
2,950
|
|
|
|
2,813
|
|
|
|
2,658
|
|
Net revenue
|
|
$
|
5,071
|
|
|
$
|
4,988
|
|
|
$
|
4,827
|
|
(1)
|
EMEA represents Europe, the Middle East and Africa.
|
(2)
|
APAC represents Asia and Pacific countries.
|
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For product sales, typically each product sold to a customer represents a distinct performance obligation. 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 December 31, 2020 and December 31, 2019, contract assets and liabilities were not material.
The timing of satisfaction of the Company’s performance obligations does not significantly vary from the typical timing of payment. For some contracts, the Company may be entitled to receive an advance payment.
The Company has applied the practical expedient to not disclose the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which it recognizes revenue in proportion to the amount it has the right to invoice for services performed.
Note 7. Restructuring Charges
During 2019, the Company retained industry-recognized experts in supply chain optimization and organizational excellence to assist in a comprehensive financial and operational review which was focused on product cost and gross margin improvement, and general and administrative expenses simplification. Certain restructuring actions have been implemented under this program as well as previous programs. Product & Solutions segment restructuring expenses for the years ended December 31, 2020, 2019, and 2018 were $19 million, $26 million, and $5 million, respectively. ADI Global Distribution segment restructuring expenses for the years ended December 31, 2020, 2019, and 2018 were $6 million, $4 million, and $0 million, respectively. Corporate restructuring expenses for the years ended December 31, 2020, 2019 and 2018 were $15 million, $7 million, and $0 million, respectively. Restructuring expenses for all periods are primarily related to severance.
The Company’s restructuring expenses for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cost of goods sold
|
|
$
|
9
|
|
|
$
|
13
|
|
|
$
|
4
|
|
Selling, general and administrative expenses
|
|
|
31
|
|
|
|
24
|
|
|
|
1
|
|
|
|
$
|
40
|
|
|
$
|
37
|
|
|
$
|
5
|
|
61
RESIDEO TECHNOLOGIES, INC.
The following table summarizes the status of total restructuring reserves related to severance cost included in Accrued liabilities in the Consolidated Balance Sheets:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Beginning of year
|
|
$
|
19
|
|
|
$
|
13
|
|
|
$
|
22
|
|
Charges
|
|
|
40
|
|
|
|
38
|
|
|
|
5
|
|
Usage
|
|
|
(35
|
)
|
|
|
(31
|
)
|
|
|
(9
|
)
|
Other
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(5
|
)
|
End of year
|
|
$
|
24
|
|
|
$
|
19
|
|
|
$
|
13
|
|
Note 8. Other Expense, Net
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Environmental expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
323
|
|
Reimbursement Agreement expense
|
|
|
146
|
|
|
|
108
|
|
|
|
49
|
|
Other, net
|
|
|
1
|
|
|
|
10
|
|
|
|
(3
|
)
|
|
|
$
|
147
|
|
|
$
|
118
|
|
|
$
|
369
|
|
Refer to Note 19. Commitments and Contingencies for further details on environmental and Reimbursement Agreement expense.
Note 9. Income Taxes
Prior to the consummation of the Spin-Off, Resideo’s operating results were included in Honeywell’s various consolidated U.S. federal and state income tax returns, as well as non-U.S. filings. For the purposes of the Company’s Consolidated and Combined Financial Statements for periods prior to the Spin-Off, Income tax expense and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis separate from Honeywell. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise prior to the separation from Honeywell.
Income before taxes
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
U.S.
|
|
$
|
(93
|
)
|
|
|
$
|
(83
|
)
|
|
|
$
|
(169
|
)
|
Non-U.S.
|
|
|
194
|
|
|
|
|
154
|
|
|
|
|
273
|
|
|
|
$
|
101
|
|
|
|
$
|
71
|
|
|
|
$
|
104
|
|
62
RESIDEO TECHNOLOGIES, INC.
Income tax expense (benefit)
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
Tax expense (benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
21
|
|
|
|
$
|
23
|
|
|
|
$
|
(26
|
)
|
Non-U.S.
|
|
|
21
|
|
|
|
|
37
|
|
|
|
|
48
|
|
|
|
$
|
42
|
|
|
|
$
|
60
|
|
|
|
$
|
22
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
11
|
|
|
|
$
|
(11
|
)
|
|
|
$
|
(15
|
)
|
Non-U.S.
|
|
|
11
|
|
|
|
|
(14
|
)
|
|
|
|
(308
|
)
|
|
|
|
22
|
|
|
|
|
(25
|
)
|
|
|
|
(323
|
)
|
|
|
$
|
64
|
|
|
|
$
|
35
|
|
|
|
$
|
(301
|
)
|
|
|
Years Ended December 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
The U.S. federal statutory income tax rate is reconciled to the Company’s effective income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal statutory income tax rate
|
|
|
21.0
|
|
%
|
|
|
21.0
|
|
%
|
|
|
21.0
|
|
%
|
Impact of foreign operations
|
|
|
(5.4
|
)
|
|
|
|
(10.2
|
)
|
|
|
|
(11.6
|
)
|
|
U.S. state income taxes
|
|
|
6.4
|
|
|
|
|
6.6
|
|
|
|
|
6.4
|
|
|
U.S. Tax Reform and related items
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(385.1
|
)
|
|
Non-deductible indemnification costs
|
|
|
29.0
|
|
|
|
|
28.0
|
|
|
|
|
75.4
|
|
|
Executive compensation over $1 million
|
|
|
2.5
|
|
|
|
|
0.6
|
|
|
|
|
-
|
|
|
Other non-deductible expenses
|
|
|
3.7
|
|
|
|
|
2.9
|
|
|
|
|
-
|
|
|
U.S. taxation of foreign earnings
|
|
|
3.5
|
|
|
|
|
5.3
|
|
|
|
|
6.0
|
|
|
Tax credits
|
|
|
(0.2
|
)
|
|
|
|
(2.6
|
)
|
|
|
|
(2.1
|
)
|
|
Change in tax rates
|
|
|
1.3
|
|
|
|
|
1.7
|
|
|
|
|
-
|
|
|
All other items – net
|
|
|
1.8
|
|
|
|
|
(4.7
|
)
|
|
|
|
0.6
|
|
|
|
|
|
63.6
|
|
%
|
|
|
48.6
|
|
%
|
|
|
(289.4
|
)
|
%
|
63
RESIDEO TECHNOLOGIES, INC.
Deferred tax assets (liabilities)
The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Pension
|
|
$
|
37
|
|
|
|
$
|
27
|
|
Other asset basis differences
|
|
|
70
|
|
|
|
|
70
|
|
Operating lease liabilities
|
|
|
34
|
|
|
|
|
33
|
|
Accruals and reserves
|
|
|
61
|
|
|
|
|
61
|
|
Net operating and capital losses
|
|
|
47
|
|
|
|
|
32
|
|
Other
|
|
|
-
|
|
|
|
|
6
|
|
Gross deferred tax assets
|
|
|
249
|
|
|
|
|
229
|
|
Valuation allowance
|
|
|
(60
|
)
|
|
|
|
(32
|
)
|
Total deferred tax assets
|
|
$
|
189
|
|
|
|
$
|
197
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
$
|
(44
|
)
|
|
|
$
|
(42
|
)
|
Property, plant and equipment
|
|
|
(25
|
)
|
|
|
|
(22
|
)
|
Operating lease assets
|
|
|
(32
|
)
|
|
|
|
(32
|
)
|
Other
|
|
|
(13
|
)
|
|
|
|
(12
|
)
|
Total deferred tax liabilities
|
|
|
(114
|
)
|
|
|
|
(108
|
)
|
Net deferred tax asset
|
|
$
|
75
|
|
|
|
$
|
89
|
|
Deferred tax assets:
The Company maintains a valuation allowance of $60 million against a portion of the non-U.S. gross deferred tax assets. Valuation allowances principally relate to foreign net operating loss carryforwards where the future potential benefits do not meet the more-likely-than-not realization test. Changes in valuation allowance positions related to historic losses resulted in increases of $20 million and $3 million to tax expense in 2020 and 2019, respectively. The remaining changes in valuation allowances relate primarily to current year net operating losses on entities from which the company already maintains valuation allowances and does not expect to receive tax benefits. In the event the Company determines that it will not be able to realize its net deferred tax assets in the future, it will reduce such amounts through an increase to tax expense in the period such determination is made. Conversely, if the Company determines that it will be able to realize net deferred tax assets in excess of the carrying amounts, it will decrease the recorded valuation allowance through a reduction to tax expense in the period that such determination is made.
The Company has not provided deferred taxes on unremitted earnings of its foreign affiliates that exist at December 31, 2020 as the earnings are considered permanently reinvested. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of the Company’s approximately $1.6 billion of undistributed earnings from foreign subsidiaries to the United States. It is impracticable to calculate the tax cost of repatriating the Company’s unremitted earnings which are considered indefinitely reinvested.
As of December 31, 2020, the Company has federal tax credit carryforwards of $1 million, federal net operating loss carryforwards of $2 million, and foreign net operating loss carryforwards of $196 million. The federal tax credit carryforwards expire in 2029. The federal net operating loss carryforwards expire in 2027. $178 million of foreign net operating losses can be carried forward indefinitely with the remainder expiring between 2021 and 2030.
Many jurisdictions impose limitations on the timing and utilization of net operating loss carryforwards. In those instances where the net operating loss or tax credit carryforward will not be utilized in the carryforward period due to the limitation, the deferred tax asset and amount of the carryforward have been reduced.
64
RESIDEO TECHNOLOGIES, INC.
As of December 31, 2020, 2019, and 2018 there were $10 million, $6 million, and $2 million of unrecognized tax benefits, respectively, that if recognized would be recorded as a component of Income tax expense. The change in unrecognized tax benefits resulted in increases (decreases) of $4 million, $4 million, and ($18) million to tax expense in 2020, 2019, and 2018, respectively. The decrease in 2018 was primarily driven by the reclassification of unrecognized tax benefits attributable to periods prior to the consummation of the Spin-Off to the indemnity payable to Honeywell under the terms of the Tax Matters Agreement.
As of December 31, 2020, 2019 and 2018 there were no unrecognized tax benefits related to examinations in progress. An immaterial amount of estimated interest and penalties related to the underpayment of income taxes is included in the liability for unrecognized tax benefits, both of which are included as a component of Income tax expense in the Consolidated and Combined Statements of Operations. The Company does not anticipate significant changes in total unrecognized tax benefits during the next twelve months.
The Company files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. The Company’s US federal returns are no longer subject to income tax examinations for taxable years before 2016. With limited exception, state, local, and foreign income tax returns for taxable years before 2015 are no longer subject to examination.
On December 22, 2017, the U.S. government enacted U.S. Tax Reform, which included changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The U.S. Tax Reform also included a permanent reduction in the corporate tax rate, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax was imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates.
As described in the Combined Financial Statements for the year ended December 31, 2017, the Company reasonably estimated certain effects of U.S. Tax Reform and, therefore, recorded provisional amounts, including the deemed repatriation transition tax and withholding taxes on undistributed earnings. For the year ended December 31, 2018, the Company recorded an adjustment to the provisional tax amount related to the deemed repatriation transition tax and taxes on undistributed earnings of $(85.4) million and $(234.7) million, respectively. This adjustment resulted in a decrease to the effective tax rate for the year ended December 31, 2018 of 307.8%. The adjustment reflects the revised determination of the fair value of assets and liabilities of legal entities included in the Company’s business. The accounting for the income tax effects of the U.S. Tax Reform was complete as of December 31, 2018.
Note 10. Accounts Receivable — Net
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable
|
|
$
|
875
|
|
|
$
|
834
|
|
Allowance for doubtful accounts
|
|
|
(12
|
)
|
|
|
(17
|
)
|
|
|
$
|
863
|
|
|
$
|
817
|
|
Note 11. Inventories — Net
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
127
|
|
|
$
|
121
|
|
Work in process
|
|
|
19
|
|
|
|
17
|
|
Finished products
|
|
|
526
|
|
|
|
533
|
|
|
|
$
|
672
|
|
|
$
|
671
|
|
The expense related to inventory was $31 million, $56 million and $10 million for the years ended December 31, 2020, 2019 and 2018, respectively.
65
RESIDEO TECHNOLOGIES, INC.
Note 12. Property, Plant and Equipment — Net
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Machinery and equipment
|
|
$
|
598
|
|
|
$
|
562
|
|
Buildings and improvements
|
|
|
289
|
|
|
|
260
|
|
Construction in progress
|
|
|
46
|
|
|
|
57
|
|
Others
|
|
|
14
|
|
|
|
16
|
|
|
|
|
947
|
|
|
|
895
|
|
Accumulated depreciation
|
|
|
(629
|
)
|
|
|
(579
|
)
|
|
|
$
|
318
|
|
|
$
|
316
|
|
Depreciation expense was $56 million, $50 million and $45 million in 2020, 2019 and 2018, respectively.
Note 13. Goodwill and Other Intangible Assets — Net
Goodwill as of December 31, 2020 and 2019 for Products & Solutions was $2,037 million and $2,004 million, respectively. The increase relates to foreign currency translation adjustments. Goodwill as of December 31, 2020 and 2019 for ADI Global Distribution was $654 million and $639 million, respectively. The carrying value of goodwill increased by $4 million due to an acquisition during the year. The remainder of the increase relates to foreign currency translation adjustments.
Other intangible assets with finite lives are comprised of:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Patents and technology
|
|
$
|
37
|
|
|
$
|
(23
|
)
|
|
$
|
14
|
|
|
$
|
35
|
|
|
$
|
(19
|
)
|
|
$
|
16
|
|
Customer relationships
|
|
|
192
|
|
|
|
(122
|
)
|
|
|
70
|
|
|
|
170
|
|
|
|
(106
|
)
|
|
|
64
|
|
Trademarks
|
|
|
15
|
|
|
|
(8
|
)
|
|
|
7
|
|
|
|
9
|
|
|
|
(7
|
)
|
|
|
2
|
|
Software
|
|
|
146
|
|
|
|
(102
|
)
|
|
|
44
|
|
|
|
139
|
|
|
|
(94
|
)
|
|
|
45
|
|
|
|
$
|
390
|
|
|
$
|
(255
|
)
|
|
$
|
135
|
|
|
$
|
353
|
|
|
$
|
(226
|
)
|
|
$
|
127
|
|
Other intangible assets amortization expense was $31 million, $30 million and $21 million in 2020, 2019 and 2018, respectively. Estimated intangible asset amortization expense for each of the next five years approximates $28 million in 2021, $22 million in 2022, $19 million in 2023, $17 million in 2024 and $16 million in 2025.
Note 14. Accrued Liabilities
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Obligations payable under Indemnification Agreements
|
|
$
|
140
|
|
|
$
|
140
|
|
Taxes payable
|
|
|
62
|
|
|
|
66
|
|
Compensation, benefit and other employee-related
|
|
|
105
|
|
|
|
66
|
|
Customer rebate reserve
|
|
|
91
|
|
|
|
78
|
|
Other
|
|
|
197
|
|
|
|
202
|
|
|
|
$
|
595
|
|
|
$
|
552
|
|
Refer to Note 19. Commitments and Contingencies for further details on Obligations payable under Indemnification Agreements.
66
RESIDEO TECHNOLOGIES, INC.
Note 15. Long-term Debt and Credit Agreement
The Company’s debt at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
6.125% notes due 2026
|
|
$
|
400
|
|
|
$
|
400
|
|
Five-year variable rate term loan A due 2023
|
|
|
315
|
|
|
|
333
|
|
Seven-year variable rate term loan B due 2025
|
|
|
465
|
|
|
|
470
|
|
Unamortized deferred financing costs
|
|
|
(18
|
)
|
|
|
(23
|
)
|
Total outstanding indebtedness
|
|
|
1,162
|
|
|
|
1,180
|
|
Less: Amounts expected to be paid within one year
|
|
|
7
|
|
|
|
22
|
|
Total long-term debt due after one year
|
|
$
|
1,155
|
|
|
$
|
1,158
|
|
Scheduled principal repayments under the Senior Credit Facilities (defined below) and Senior Notes (defined below) subsequent to December 31, 2020 are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
2021
|
|
$
|
40
|
|
2022
|
|
|
57
|
|
2023
|
|
|
232
|
|
2024
|
|
|
5
|
|
2025
|
|
|
446
|
|
Thereafter
|
|
|
400
|
|
|
|
|
1,180
|
|
Amounts expected to be paid within one year
|
|
|
7
|
|
|
|
$
|
1,173
|
|
Subsequent to December 31, 2020, the Company entered into a refinancing agreement which modified the scheduled principal repayments related to the Company’s long-term debt as described in Note 24. Subsequent Events. Among other changes, the refinancing agreement resulted in a reduction of principal repayments to be made in 2021 to $7 million which represents the Current maturities of debt in the Consolidated Balance Sheet as of December 31, 2020.
At December 31, 2020 and 2019, the interest rate for the Term Loans (defined below) was 2.51% and 4.36%, respectively. At December 31, 2020, there were no borrowings and no letters of credit issued under the $350 million Revolving Credit Facility (defined below). Interest expense presented in the Statements of Operations is from the Senior Notes and Senior Credit Facilities, which includes the amortization of debt issuance cost and debt discounts.
Senior Notes
In October of 2018, the Company issued $400 million in principal amount of 6.125% senior unsecured notes due in 2026 (the "Senior Notes"). The Senior Notes are senior unsecured and unsubordinated obligations of Resideo and rank equally with all of Resideo’s existing and future senior unsecured debt and senior to all of Resideo’s subordinated debt.
Resideo may, at its option, redeem the Senior Notes in whole or part prior to November 1, 2021, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest, if any, plus a “make-whole” premium. On or after November 1, 2021 Resideo may, at its option, redeem the Senior Notes in whole or in part plus accrued and unpaid interest, plus a fixed redemption percentage on the principal amount of the Senior Notes redeemed of (i) 104.594% if redeemed during the twelve-month period beginning on November 1, 2021 (ii) 103.063% if redeemed during the twelve-month period beginning on November
67
RESIDEO TECHNOLOGIES, INC.
1, 2022, (iii) 101.531% if redeemed during the twelve-month period beginning on November 1, 2023, or (iv) 100% if redeemed on or after November 1, 2024.
Credit Agreement
On October 25, 2018, in connection with the consummation of the Spin-Off, the Company as the borrower, entered into a credit agreement with JP Morgan Chase Bank N.A. as administrative agent (the “Credit Agreement”), which was subsequently amended on November 26, 2019 (the “Credit Agreement First Amendment”) and on November 16, 2020 (the “Credit Agreement Second Amendment”).
The Credit Agreement provides for a seven-year LIBOR plus 2.25% senior secured first-lien term B loan facility in an aggregate principal amount of $475 million (the "Term B Facility") and a five-year LIBOR plus 2.25% senior secured first-lien term A loan facility in an aggregate principal amount of $350 (the "Term A Facility" and, together with the Term B Facility, the “Term Loans” or "Term Loan Facilities”). The Company is obligated to make quarterly principal payments throughout the term of the Term Loan Facilities according to the amortization provisions in the Credit Agreement. Borrowings under the Credit Agreement are able to 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. Amounts repaid or prepaid in respect of Term Loan Facilities may not be re-borrowed.
The Credit Agreement also established a five-year senior secured first-lien revolving credit facility to be used for the Company’s working capital and other cash needs from time to time in an aggregate principal amount of $350 million (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Senior Credit Facilities"). The interest rate on the Revolving Credit Facility borrowings are based on, at the option of the Company, either, (i) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (ii) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.75% and (iii) the one month adjusted LIBOR rate, plus 1.25% per annum. If the Company chooses to make a LIBOR borrowing on a one, two, three or six-month basis, the interest rate will be based on an adjusted LIBOR rate (which shall not be less than zero) based on the interest period for the borrowing. The applicable margin for the Term B Facility is (i) on or prior to the Credit Agreement First Amendment 2.00% per annum (for Libor loans) and 1.00% per annum (for base rate loans) and (ii) after the Credit Agreement First Amendment 2.25% per annum (for LIBOR loans) and 1.25% per annum (for base rate loans). The applicable margin for each of the Term A Facility and the Revolving Credit Facility varies (i) on or prior to the Credit Agreement First Amendment from 2.00% per annum to 1.50% per annum (for Libor loans) and 1.00% to 0.50% per annum (for base rate loans) and (ii) after the credit Agreement First Amendment 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. Accordingly, the interest rates for the Senior Credit Facilities will fluctuate during the term of the Credit Agreement based on changes in the base rate, LIBOR or future changes in the Company’s leverage ratio. Interest payments with respect to the borrowings are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. The Revolving Credit Facility has a quarterly commitment fee based on the unused portion, which is determined by the Company’s leverage ratio and ranges from 0.25% to 0.35% per annum.
The net proceeds from the borrowings under the Credit Agreement and the offering of the Senior Notes were used as part of the financing for the Spin-Off. For the year ended December 31, 2018, the Company incurred approximately $16 million in debt issuance costs related to the Term Loans, $5 million in costs related to the Revolving Credit Facility and $8 million in costs related to the Senior Notes. The debt issuance costs associated with the Term Loans and Senior Notes were recorded as a reduction of the principal balance of the debt, and the Revolving Credit Facility costs were capitalized in Other assets. The issuance costs are being amortized through Interest expense for the duration of each respective debt facility.
68
RESIDEO TECHNOLOGIES, INC.
The Credit Agreement and Senior Notes contain customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets.
The Credit Agreement First Amendment amended the Credit Agreement to: (i) increase the levels of the maximum consolidated total leverage ratio under the Credit Agreement, to not greater than 5.25 to 1.00 for the quarter ended December 31, 2019, with step-downs to 4.75 to 1.00 starting in the quarter ending December 31, 2020, 4.25 to 1.00 starting in the quarter ending December 31, 2021, and 3.75 to 1.00 starting in the quarter ending December 31, 2022; (ii) increase each applicable interest rate margin on loans outstanding after the first amendment effective date by 25 basis points per annum, 2.25% per annum (for LIBOR loans) and 1.25% per annum (for ABR loans) in respect of the Term B Loan Facility, and based on the Company’s leverage ratio, from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for ABR loans) for the Term A Loan Facility and the Revolving Credit Facility; and (iii) modify the defined terms “Consolidated EBITDA” and “Pro Forma Basis” set forth in the Credit Agreement. In connection with the Credit Agreement First Amendment, the Company incurred costs of approximately $4 million. The Term Loan costs were recorded as a reduction of the principal balance of the debt and the Revolving Credit Facility costs were capitalized in Other assets.
The Credit Agreement Second Amendment amended the Credit agreement to permit the sale and leaseback transactions in an aggregate amount not to exceed $150 million for all such sale and leaseback transactions, provided that (x) each sale and leaseback transactions is undertaken on arm’s length commercial terms and (y) no Event of Default (as defined in the Credit Agreement) has occurred and is continuing or would result therefrom.
As of December 31, 2020, the Company was in compliance with all covenants related to the Credit Agreement and Senior Notes.
Note 16. Leases
As discussed in Note 2, the Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019. The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment. Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation, and certain automobile lease agreements include rental payments which fluctuate based on mileage. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company’s operating lease costs for the years ended December 31, 2020 and 2019 consisted of the following:
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Selling, general and administrative expenses
|
|
$
|
44
|
|
|
$
|
37
|
|
Cost of goods sold
|
|
|
17
|
|
|
|
16
|
|
Total operating lease costs
|
|
$
|
61
|
|
|
$
|
53
|
|
Total operating lease costs include variable lease costs of $16 million and $11 million for the years ended December 31, 2020 and 2019, respectively. Total operating lease costs also include offsetting sub-lease income which is immaterial for the years ended December 31, 2020 and 2019.
69
RESIDEO TECHNOLOGIES, INC.
The Company recognized the following related to its operating leases:
|
|
Financial
Statement
Line Item
|
|
At December 31,
2020
|
|
At December 31,
2019
|
Operating right-of-use assets
|
|
Other assets
|
|
$133
|
|
$137
|
Operating lease liabilities - current
|
|
Accrued liabilities
|
|
$33
|
|
$31
|
Operating lease liabilities - non-current
|
|
Other liabilities
|
|
$107
|
|
$111
|
Maturities of the Company’s operating lease liabilities were as follows:
|
|
At December 31,
2020
|
|
2021
|
|
$
|
40
|
|
2022
|
|
|
36
|
|
2023
|
|
|
29
|
|
2024
|
|
|
18
|
|
2025
|
|
|
12
|
|
Thereafter
|
|
|
30
|
|
Total lease payments
|
|
|
165
|
|
Less: Imputed interest
|
|
|
25
|
|
Present value of operating lease liabilities
|
|
$
|
140
|
|
Weighted-average remaining lease term (years)
|
|
|
5.43
|
|
Weighted-average incremental borrowing rate
|
|
|
5.88
|
%
|
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Operating cash outflows
|
|
|
|
$
|
30
|
|
|
$
|
35
|
|
Operating right-of-use assets obtained in exchange for operating lease liabilities
|
|
|
|
$
|
26
|
|
|
$
|
60
|
|
As of December 31, 2020, the Company has additional operating leases that have not yet commenced. Obligations under these leases are not material. Additionally, as a lessor, the Company leases all or a portion of certain owned properties. Rental income for the years ended December 31, 2020 and 2019 was not material.
Note 17. Financial Instruments and Fair Value Measures
Credit and Market Risk—The Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The terms and conditions of credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.
Foreign Currency Risk Management—The Company conducts its business on a multinational basis in a wide variety of foreign currencies. It is exposed to market risks from changes in currency exchange rates. These exposures may impact future earnings and/or operating cash flows. The 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. The Company relies primarily on natural offsets to address the exposures and may supplement this approach from time to time by entering into forward and option hedging contracts. As of December 31, 2020 and 2019, the Company had no forward or hedging contracts.
70
RESIDEO TECHNOLOGIES, INC.
Senior Notes and Credit Agreement—As of December 31, 2020, the Company assessed the amount recorded under the Term Loans, the Senior Notes, and the Revolving Credit Facility. The Term A Loan Facility, Term B Loan Facility and the Senior Notes’ fair values are approximately $305 million, $461 million and $422 million, respectively. The Company determined that the Revolving Credit Facility approximated fair value. The fair values of the debt are based on the quoted inactive prices and are therefore classified as Level 2 within the valuation hierarchy.
The carrying value of cash and cash equivalents, accounts receivables - net, and accounts payables contained in the Consolidated Balance Sheets approximates fair value.
Fair Value of Financial Instruments—The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB’s guidance classifies the inputs used to measure fair value into the following hierarchy:
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities;
|
|
Level 2
|
Observable inputs other than the quoted prices in active markets for identical assets and liabilities; and
|
|
Level 3
|
Unobservable inputs for which there is little or no market data, which require the Company to develop assumptions of what market participants would use in pricing the asset or liability.
|
Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Note 18. Stock-Based Compensation Plans
On October 29, 2018, the Board adopted, and Honeywell, as the Company’s sole shareholder, approved, 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”). On or about December 21, 2018, the Board adopted the Amended and Restated 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates. The Stock Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, other stock-based awards and cash-based awards. The maximum aggregate number of shares of the Company’s common stock that may be issued under awards granted under the Stock Incentive Plan is 16 million. As of December 31, 2020, 7,664,452 shares of the Company’s common stock were available to be granted under the Stock Incentive Plan.
Summary of Restricted Stock Unit Activity
Restricted stock unit (“RSU”) awards entitle the holder to receive one share of common stock for each unit when the units vest. RSUs are issued to certain key employees and to non-employee directors. RSUs typically become fully vested over periods ranging from one to seven years and are payable in Resideo common stock upon vesting.
Since the Spin-Off on October 29, 2018 through December 31, 2018, the Company granted the following awards:
|
•
|
1,809,644 RSUs were granted to employees of Resideo with four-year vesting periods in accordance with the Stock Incentive Plan
|
|
•
|
Honeywell stock options, RSUs, and performance-based awards held by certain of the key employees who would otherwise forfeit prior Honeywell awards as a result of the Spin-Off were issued replacement grants in the amount of 1,411,395 RSUs with substantially the same vesting schedule as the forfeited awards. Compensation expense for these awards will continue to be recognized ratably over the remaining term of the unvested awards, which ranged from one to four years as of the date of the Spin-Off.
|
|
•
|
117,145 RSUs were granted to members of the Board of Directors for annual director compensation with one to four-year vesting periods in accordance with the Stock Incentive Plan
|
71
RESIDEO TECHNOLOGIES, INC.
The following table summarizes RSU activity related to the Stock Incentive Plan during the years ended December 31, 2020 and 2019:
|
|
RSUs
|
|
|
|
Number of
Restricted
Stock Units
|
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
|
Non-vested as of January 1, 2019
|
|
|
3,338,184
|
|
|
$
|
24.05
|
|
Granted
|
|
|
1,607,204
|
|
|
|
21.83
|
|
Vested
|
|
|
(509,366
|
)
|
|
|
23.78
|
|
Forfeited
|
|
|
(641,491
|
)
|
|
|
24.07
|
|
Non-vested as of December 31, 2019
|
|
|
3,794,531
|
|
|
|
23.14
|
|
Granted
|
|
|
3,057,775
|
|
|
|
9.45
|
|
Vested
|
|
|
(921,060
|
)
|
|
|
21.07
|
|
Forfeited
|
|
|
(731,482
|
)
|
|
|
18.57
|
|
Non-vested as of December 31, 2020
|
|
|
5,199,764
|
|
|
$
|
16.10
|
|
As of December 31, 2020, there was approximately $22 million of total unrecognized compensation cost related to non-vested RSUs granted under the Stock Incentive Plan, which is expected to be recognized over a weighted-average period of 1.6 years. The fair value of RSUs that vested during the year ended December 31, 2020 is $9 million. Included in the outstanding RSUs are 867,732 performance-based RSU's as of December 31, 2020 and the related expense was $2 million during the year ended December 31, 2020.
Summary of Stock Option Activity
Stock option awards entitle the holder to purchase shares of common stock at a specific price when the options vest. Stock options typically vest over three years from the date of grant and expire seven years from the grant date.
The fair value of stock options was calculated using the following assumptions in the Black-Scholes model:
|
|
December 31,
|
|
|
2020
|
|
2019
|
Expected stock price volatility
|
|
31% - 37%
|
|
30% - 32%
|
Expected term of options
|
|
4.5 years
|
|
4.5 years
|
Expected dividend yield
|
|
—
|
|
—
|
Risk-free interest rate
|
|
0.25% - 1.41%
|
|
2.22% - 2.47%
|
The aggregate intrinsic value disclosed below represents the total intrinsic value (the difference between the fair market value of the Company’s common stock as of December 31, 2020, and the exercise price, multiplied by the number of in-the-money service-based stock options) that would have been received by the option holders had all option holders exercised their options on December 31, 2020. This amount is subject to change based on changes to the fair market value of the Company’s common stock.
72
RESIDEO TECHNOLOGIES, INC.
The following table summarizes stock option activity related to the Stock Incentive Plan during the year ended December 31, 2020:
|
|
Stock Options
|
|
|
|
Number of
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Stock Options outstanding as of January 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,155,566
|
|
|
|
24.37
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(165,312
|
)
|
|
|
24.39
|
|
|
|
|
|
|
|
|
|
Stock Options outstanding as of December 31, 2019
|
|
|
990,254
|
|
|
|
24.36
|
|
|
|
6.0
|
|
|
|
-
|
|
Granted
|
|
|
1,083,665
|
|
|
|
9.17
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(348,696
|
)
|
|
|
18.39
|
|
|
|
|
|
|
|
|
|
Stock Options outstanding as of December 31, 2020
|
|
|
1,725,223
|
|
|
|
15.98
|
|
|
|
4.9
|
|
|
|
12
|
|
Vested and expected to vest at December 31, 2020
|
|
|
1,446,606
|
|
|
|
16.97
|
|
|
|
4.7
|
|
|
|
9
|
|
Exercisable at December 31, 2020
|
|
|
442,013
|
|
|
$
|
23.13
|
|
|
|
2.3
|
|
|
$
|
-
|
|
Stock options granted during the year ended December 31, 2020 had a weighted average grant date fair value per share of $2.61. As of December 31, 2020, there was approximately $1 million of total unrecognized compensation cost related to non-vested stock options granted under the Stock Incentive Plan, which is expected to be recognized over a weighted-average period of 1.5 years. No stock options were exercised during the year ended December 31, 2020.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits under the Company’s plans:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Stock-based compensation expense before income taxes
|
|
$
|
29
|
|
|
$
|
25
|
|
|
$
|
20
|
|
Less: Income tax expense (benefit)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(5
|
)
|
Stock-based compensation expense, net of income taxes
|
|
$
|
30
|
|
|
$
|
24
|
|
|
$
|
15
|
|
Certain share-based compensation expense relates to stock-based awards awarded to key employees of the Company as part of Honeywell’s incentive compensation plans prior to the Spin-Off. Such share-based compensation expense was $16 million for the period from January 1, 2018 until October 29, 2018.
Note 19. 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. It believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that its handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. The Company has incurred remedial response and voluntary cleanup costs for site contamination and is a party to claims associated with environmental and safety matters, including products containing hazardous substances. Additional claims and costs involving environmental matters are likely to continue to arise in the future.
73
RESIDEO TECHNOLOGIES, INC.
With respect to environmental matters involving site contamination, the Company continually conducts studies, individually or jointly with other potentially responsible parties, to determine the feasibility of various remedial techniques. It is its policy to record appropriate liabilities for environmental matters when remedial efforts or damage claim payments are probable and the costs can be reasonably estimated. Such liabilities are based on the best estimate of the undiscounted future costs required to complete the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other potentially responsible parties, technology and information related to individual sites, the Company does not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of the Company’s recorded liabilities. The Company expects to fund expenditures for these matters from operating cash flow. The timing of cash expenditures depends on a number of factors, including the timing of remedial investigations and feasibility studies, the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, remedial techniques to be utilized, and agreements with other parties.
The Company 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 in the Consolidated and Combined Statements of Operations. Prior to the Spin-Off, expenses related to Honeywell Sites now under the Reimbursement Agreement were presented within Other expense, net in the Consolidated and Combined Statements of Operations.
The following table summarizes information concerning the recorded liabilities for environmental costs for the year ended December 31, 2020, 2019 and 2018. On October 29, 2018, upon the consummation of the Spin-Off, certain environmental liabilities became subject to the Reimbursement Agreement and were reclassified to Obligations payable under Indemnification Agreements. For additional information, see Reimbursement Agreement below.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
22
|
|
|
$
|
20
|
|
|
$
|
537
|
|
Accruals for environmental matters deemed probable and reasonably estimable
|
|
|
1
|
|
|
|
2
|
|
|
|
340
|
|
Less: Environmental liability payments
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(179
|
)
|
Less: Change due to the Reimbursement Agreement payments
|
|
|
-
|
|
|
|
-
|
|
|
|
(86
|
)
|
Less: Liabilities subject to the Reimbursement Agreement payments
|
|
|
-
|
|
|
|
-
|
|
|
|
(592
|
)
|
Ending balance
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
20
|
|
The $86 million change for the year ended December 31, 2018 due to the Reimbursement Agreement represents a reduction in the estimated liability driven by the terms of Reimbursement Agreement at October 29, 2018. Pursuant to the Reimbursement Agreement, the Company is responsible to indemnify Honeywell in amounts equal to 90% of the environmental-liability payments of certain sites, 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. Prior to the Spin-Off, the Company’s estimated liability for resolution of the same pending and future environmental-related liabilities was calculated as if it was responsible for 100% of the environmental-liability payments. In addition, prior to the Spin-Off, these costs were calculated on the gross basis, excluding any insurance receipts or proceeds received by Honeywell.
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 consolidated and combined results of operations and operating cash flows in the periods recognized or paid.
74
RESIDEO TECHNOLOGIES, INC.
Obligations Payable Under Indemnification Agreements
In connection with the Spin-Off, the Company entered into a Reimbursement Agreement and a tax matters agreement (the “Tax Matters Agreement”) (collectively, the “Indemnification Agreements”) which are further described below.
Reimbursement Agreement
On October 29, 2018, in connection with the Spin-Off, the Company entered into the Reimbursement Agreement pursuant to which the Company has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed (“payments”), less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the “recoveries”). The amount payable by the Company in respect of such liabilities arising in respect of any given year is subject to a cap of $140 million.
Payments in respect of the liabilities arising in a given year will be made quarterly throughout such year on the basis of an estimate of the liabilities and recoveries provided by Honeywell. Following the end of any such year, Honeywell will provide the Company with a calculation of the amount of payments and the recoveries actually received.
Payment amounts under the Reimbursement Agreement will be deferred to the extent that a specified event of default has occurred and is continuing under certain indebtedness, including under the Credit Agreement, or the payment thereof causes the Company to not be compliant with certain financial covenants in certain indebtedness, including the Company’s Credit Agreement on a pro forma basis, including the maximum total leverage ratio (ratio of consolidated debt to consolidated EBITDA, which excludes any amounts owed to Honeywell under the Reimbursement Agreement), and the minimum interest coverage ratio.
The obligations under the Reimbursement Agreement will continue until the earlier of: (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.
During the year, the Company and Honeywell entered into several amendments to the Reimbursement Agreement. These amendments included modifications of certain covenants in Exhibit G to conform to the amended covenants included in the Credit Agreement First Amendment, deferment of certain payments under the Reimbursement Agreement to later in the year, and amendment of Exhibit G to, among other things, permit sale and leaseback transaction. An aggregate amount of up to $150 million would be permitted thereunder so long as the same conditions that are applicable under the Credit Agreement are satisfied.
On February 12, 2021, the Company entered into another amendment with Honeywell. See Note 24. Subsequent Events for a further discussion of this amendment.
The following table summarizes information concerning the Company’s Reimbursement Agreement liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
585
|
|
|
$
|
616
|
|
|
$
|
-
|
|
Liabilities subject to the Reimbursement Agreement payments
|
|
|
-
|
|
|
|
-
|
|
|
|
592
|
|
Accruals for indemnification liabilities deemed probable and reasonably estimable
|
|
|
146
|
|
|
|
179
|
|
|
|
49
|
|
Reduction (1)
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
-
|
|
Indemnification payment
|
|
|
(140
|
)
|
|
|
(139
|
)
|
|
|
(25
|
)
|
Ending balance(2)
|
|
$
|
591
|
|
|
$
|
585
|
|
|
$
|
616
|
|
75
RESIDEO TECHNOLOGIES, INC.
(1)
|
Reduction in indemnification liabilities relates to a provision in the Reimbursement Agreement that reduces the obligation due to Honeywell for any proceeds received by Honeywell from a property sale of a site under the agreement.
|
(2)
|
Reimbursement Agreement liabilities deemed probable and reasonably estimable, however, it is possible the Company could pay $140 million per year (exclusive of any late payment fees up to 5% per annum) until the earlier of (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.
|
Reimbursement Agreement liabilities are included in the following balance sheet accounts:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued liabilities
|
|
$
|
140
|
|
|
$
|
140
|
|
Obligations payable under Indemnification Agreements
|
|
|
451
|
|
|
|
445
|
|
|
|
$
|
591
|
|
|
$
|
585
|
|
The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to the Company’s consolidated and combined results of operations and operating cash flows in the periods recognized or paid.
Independent of the Company’s payments under the Reimbursement Agreement, the Company will have ongoing liability for certain environmental claims which are part of the Company’s going forward business.
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 all taxes, including income taxes, sales taxes, VAT and payroll taxes, relating to the business for all periods, including periods prior to the consummation of the Spin-Off. In addition, the Tax Matters Agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the Spin-Off.
In addition, the Tax Matters Agreement provides that the Company is required to indemnify Honeywell for any taxes (and reasonable expenses) resulting from the failure of the Spin-Off and related internal transactions to qualify for their intended tax treatment under U.S. federal, state and local income tax law, as well as foreign tax law, where such taxes result from (a) breaches of covenants and representations it makes and agrees to in connection with the Spin-Off, (b) the application of certain provisions of U.S. federal income tax law to these transactions or (c) any other action or omission (other than actions expressly required or permitted by the Separation and Distribution Agreement, the Tax Matters Agreement or other ancillary agreements) the Company takes after the consummation of the Spin-Off that gives rise to these taxes.
As of December 31, 2020, and 2019, the Company had an indemnity outstanding to Honeywell for future tax payments of $139 million and $149 million, which is included in Obligations payable under Indemnification Agreements.
Trademark Agreement
The Company and Honeywell entered into a 40-year Trademark License Agreement (the “Trademark Agreement”) that authorizes the Company’s use of certain licensed trademarks in the operation of Resideo’s business for the advertising, sale and distribution of certain licensed products. In exchange, the Company will pay 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 Consolidated and Combined Statements of Operations. For the years ended December 31, 2020, 2019, and 2018, royalty fees were $26 million, $27 million, and $4 million, net of a one-time credit of $2 million received in December 31, 2018 for inventory on hand as of the Spin-Off, respectively.
76
RESIDEO TECHNOLOGIES, INC.
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 for 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 class action securities suit with the class defined as all persons or entities who purchased or otherwise acquired common stock of Resideo during the class period of October 29, 2018 to November 6, 2019. The complaint asserts claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, broadly alleging, among other things, that the defendants (or some of them) made false and misleading statements regarding, among other things, Resideo’s business, performance, the efficiency of its supply chain, operational and administrative issues resulting from the spin-off from Honeywell, certain business initiatives, and financial guidance in 2019. The defendants filed a motion to dismiss the complaint on July 10, 2020. The motion to dismiss has been fully briefed and a hearing was held on the motion on December 1, 2020. The court has not yet issued its decision regarding the motion to dismiss. The Company and the plaintiffs are scheduled to participate in a mediation on February 25, 2021, in an effort to settle the Securities Litigation. There can be no assurance that a settlement will be reached. If a settlement cannot be reached, the Company intends to vigorously defend against the allegations in the Securities Litigation. However, there can be no assurance that the defense will be successful.
On July 7, 2020, Jawad A. Ayaz as Trustee of the Shiv Venkatasetty 2016 Trust (“Derivative Plaintiff”) filed a shareholder derivative complaint (the “Derivative Complaint”) against certain current or former directors and officers of the Company (“Derivative Defendants”) in the District Court for the District of Delaware, captioned Ayaz v. Nefkens, 20-cv-00915. Derivative Plaintiff alleges generally that Derivative Defendants breached fiduciary duties owed to the Company by allegedly causing or allowing the Company to make materially false and misleading statements to the public regarding the Company’s business operations and financial prospects. Derivative Plaintiff also alleges that the Company’s 2019 proxy statement was materially false and misleading, in violation of Section 14(a) of the Securities Exchange Act of 1934, and asserts claims of corporate waste and unjust enrichment, among other allegations, and relies on a similar set of facts as alleged in the Securities Litigation. The Derivative Complaint seeks declaratory relief and unspecified money damages on behalf of the Company. On July 28, 2020, certain of the Derivative Defendants filed a stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation. An additional shareholder derivative complaint was filed on August 12, 2020, by Plaintiff Daniel Sanclemente (the “Sanclemente Action”) on behalf of the Company in the District Court for the District of Delaware, captioned Sanclemente v. Nefkens, 20-cv-1062, alleging substantially the same facts and making substantially the same claims against the same defendants as in the Derivative Complaint. The 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 has 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. The Company intends to defend this action vigorously, but there can be no assurance that the defense will be successful.
77
RESIDEO TECHNOLOGIES, INC.
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.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
25
|
|
|
$
|
26
|
|
|
$
|
17
|
|
Accruals for warranties/guarantees issued during the year
|
|
|
21
|
|
|
|
15
|
|
|
|
17
|
|
Adjustment of pre-existing warranties/guarantees
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Settlement of warranty/guarantee claims
|
|
|
(17
|
)
|
|
|
(16
|
)
|
|
|
(7
|
)
|
Ending balance
|
|
$
|
22
|
|
|
$
|
25
|
|
|
$
|
26
|
|
Purchase Commitments
The Company’s unconditional purchase obligations include purchase commitments with suppliers and other obligations entered in to during the normal course of business regarding the purchase of goods and services. As of December 31, 2020, the Company’s estimated minimum obligations associated with unconditional purchase obligations, which are not recognized in the Company’s Consolidated Balance Sheet, were $16 million in 2021, $17 million in 2022, $9 million in 2023 and $3 million in 2024. For the years ended December 31, 2020 and 2019, purchases related to these obligations were $15 million and $26 million, respectively. Purchases under these obligations were not material for the year ended December 31, 2018.
Note 20. Pension
Prior to the Spin-Off, certain of Resideo’s employees participated in multiple U.S. and non-U.S. defined benefit pension plans (the “Shared Plans”) sponsored by Honeywell, which includes participants from other Honeywell subsidiaries and operations. The Company accounted for participation in the Shared Plans as if the Shared Plans were a multiemployer benefit plan. Accordingly, it did not record an asset or liability to recognize the funded status of the Shared Plans.
The related pension expense was allocated based on annual service cost of active participants and reported within Costs of goods sold and Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. The pension expense related to participation in the Shared Plans for the period from January 1, 2018 until October 29, 2018 and the year ended December 31, 2018 was $11 million and $16 million, respectively.
As of the date of separation from Honeywell, these employees’ and certain former Honeywell employees’ entitlement to benefits in Honeywell’s plans were transferred to Resideo sponsored plans.
The Resideo defined benefit pension plans have substantially similar benefit formulas as the Honeywell defined benefit pension plans. Moreover, vesting service, benefit accrual service and compensation credited under the Honeywell defined benefit pension plans apply to the determination of pension benefits under the Resideo defined benefit pension plan.
The Company sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of its U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit plans. It also sponsors defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in certain jurisdictions, principally Germany, Austria, Belgium, France, India, Switzerland, and the Netherlands.
78
RESIDEO TECHNOLOGIES, INC.
The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with the pension plans.
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year (1)
|
|
$
|
344
|
|
|
$
|
286
|
|
|
$
|
279
|
|
|
$
|
137
|
|
|
$
|
93
|
|
|
$
|
95
|
|
Service cost
|
|
|
7
|
|
|
|
5
|
|
|
|
1
|
|
|
|
7
|
|
|
|
5
|
|
|
|
1
|
|
Interest cost
|
|
|
11
|
|
|
|
13
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
Actuarial losses (gains)
|
|
|
38
|
|
|
|
51
|
|
|
|
5
|
|
|
|
6
|
|
|
|
27
|
|
|
|
(3
|
)
|
Net benefits paid
|
|
|
(4
|
)
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Settlements
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
13
|
|
|
-
|
|
Exchange rate adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
Benefit obligation at end of year
|
|
|
374
|
|
|
|
344
|
|
|
|
286
|
|
|
|
161
|
|
|
|
137
|
|
|
|
93
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year (1)
|
|
|
331
|
|
|
274
|
|
|
279
|
|
|
|
27
|
|
|
20
|
|
|
20
|
|
Actual return (loss) on plan assets
|
|
|
35
|
|
|
|
70
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
Contributions
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
Net benefits paid
|
|
|
(4
|
)
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Settlements
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
Other
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
5
|
|
|
|
-
|
|
Exchange rate adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Fair value of plan assets at end of year
|
|
|
340
|
|
|
331
|
|
|
274
|
|
|
|
28
|
|
|
27
|
|
|
20
|
|
Funded status of plans (non-current)
|
|
$
|
(34
|
)
|
|
$
|
(13
|
)
|
|
$
|
(12
|
)
|
|
$
|
(133
|
)
|
|
$
|
(110
|
)
|
|
$
|
(73
|
)
|
(1)
|
2018 "Beginning of year" is the Spin-Off date, October 29, 2018.
|
The benefit obligation generated a global net actuarial loss of $44 million for the year ended December 31, 2020. A global decrease in discount rates over the course of the year was the main driver, generating a total loss of $50 million across all plans, partially offset by gains on inflation related assumptions of approximately $5 million (driven primarily by inflation/pension increase assumption in the Germany, which resulted in a gain of $5 million), and by gains on demographic assumptions of approximately $2 million (driven primarily by change in mortality assumption in the U.S., which resulted in a gain of $2 million). Experience losses added $1 million of net actuarial loss globally, while losses from other assumption changes were not significant.
Actual return on plan assets for the year ended December 31, 2020 was higher than expected due to equity and bonds performance being above expectations leading to an additional asset gain of $17 million globally, for a total asset return of $35 million globally.
Amounts recognized in Accumulated other comprehensive (loss) associated with pension plans at December 31, 2020 and 2019 are as follows:
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
Prior service credit
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Net actuarial loss
|
|
|
30
|
|
|
|
12
|
|
|
|
14
|
|
|
|
13
|
|
Net amount recognized
|
|
$
|
28
|
|
|
$
|
9
|
|
|
$
|
14
|
|
|
$
|
13
|
|
79
RESIDEO TECHNOLOGIES, INC.
The components of net periodic benefit cost and other amounts recognized in Comprehensive income for pension plans include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2020
|
|
|
|
2019
|
|
|
2018 (1)
|
|
|
2020
|
|
|
|
2019
|
|
|
2018 (1)
|
|
Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
1
|
|
Interest cost
|
|
|
11
|
|
|
|
13
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
Expected return on plan assets
|
|
|
(17
|
)
|
|
|
(16
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
Amortization of prior service credit
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mark to market adjustment
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
6
|
|
|
|
16
|
|
|
|
-
|
|
Other
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
Net periodic benefit cost
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
13
|
|
|
$
|
24
|
|
|
$
|
1
|
|
(1)
|
2018 begins at the Spin-Off date, October 29, 2018. Activity before the Spin-Off date was recognized under the Shared Plans.
|
The components of net periodic benefit cost other than the service cost are included in Other expense, net in the Consolidated and Combined Statements of Operations for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2020
|
|
|
|
2019
|
|
|
2018 (1)
|
|
|
2020
|
|
|
|
2019
|
|
|
2018 (1)
|
|
Other Changes in Plan Assets and Benefits Obligations Recognized in Other Comprehensive Loss (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses (gains)
|
|
$
|
38
|
|
|
$
|
51
|
|
|
$
|
12
|
|
|
$
|
6
|
|
|
$
|
26
|
|
|
$
|
(3
|
)
|
Excess return on plan assets(2)
|
|
|
(17
|
)
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
Actuarial gains recognized during the year
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Total recognized in other comprehensive loss (income)
|
|
$
|
19
|
|
|
$
|
(3
|
)
|
|
$
|
12
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
(3
|
)
|
Total recognized in net periodic benefit cost and other comprehensive loss (income)
|
|
$
|
22
|
|
|
$
|
(1
|
)
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
32
|
|
|
$
|
(2
|
)
|
|
(1)
|
2018 begins at the Spin-Off date, October 29, 2018. Activity before the Spin-Off date was recognized under the Shared Plans.
|
|
(2)
|
Represents actual return on plan assets in excess of the expected return.
|
80
RESIDEO TECHNOLOGIES, INC.
Significant actuarial assumptions used in determining the benefit obligations and net periodic benefit (income) cost for benefit plans are presented in the following table as weighted averages.
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
Actuarial assumptions used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.7
|
%
|
|
|
3.3
|
%
|
|
|
4.5
|
%
|
|
|
0.7
|
%
|
|
|
1.1
|
%
|
|
|
1.9
|
%
|
Interest crediting rate
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
Expected annual rate of compensation increase
|
|
|
3.5
|
%
|
|
|
3.4
|
%
|
|
|
3.4
|
%
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
Actuarial assumptions used to determine net periodic benefit cost for the twelve months ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate - benefit obligation
|
|
|
3.3
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
1.1
|
%
|
|
|
2.0
|
%
|
|
|
1.9
|
%
|
Interest crediting rate
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
Expected rate of return on plan assets
|
|
|
5.4
|
%
|
|
|
5.7
|
%
|
|
|
5.7
|
%
|
|
|
2.7
|
%
|
|
|
2.8
|
%
|
|
|
3.3
|
%
|
Expected annual rate of compensation increase
|
|
|
3.4
|
%
|
|
|
3.4
|
%
|
|
|
3.4
|
%
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
The discount rate for the U.S. pension plans reflects the current rate at which the associated liabilities could be settled at the measurement date of December 31. To determine discount rates for the U.S. pension plans, the Company uses a modeling process that involves matching the expected cash outflows of its benefit plans to a yield curve constructed from a portfolio of high-quality, fixed income debt instruments. The Company uses the single weighted-average yield of this hypothetical portfolio as a discount rate benchmark.
The expected rate of return on U.S. plan assets of 5.4% is a long-term rate based on historical plan asset returns over varying long-term periods combined with current market conditions and broad asset mix considerations. The Company reviews the expected rate of return on an annual basis and revises it as appropriate.
For non-U.S. benefit plans, actuarial assumptions reflect economic and market factors relevant to each country.
The following amounts relate to pension plans with accumulated benefit obligations exceeding the fair value of plan assets.
|
|
December 31,
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
2019
|
|
Projected benefit obligation
|
|
$
|
374
|
|
|
$
|
344
|
|
|
$
|
161
|
|
|
$
|
137
|
|
Accumulated benefit obligation
|
|
$
|
358
|
|
|
$
|
332
|
|
|
$
|
139
|
|
|
$
|
116
|
|
Fair value of plan assets
|
|
$
|
340
|
|
|
$
|
331
|
|
|
$
|
28
|
|
|
$
|
27
|
|
The Company utilized a third-party investment management firm to serve as its Outsourced Chief Investment Officer; however, the Company has appointed an internal fiduciary committee that monitors adherence to the investment guidelines the firm will follow.
The Company employs an investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and plan funded status. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate and hedge funds may be used to improve portfolio diversification.
The non-U.S. investment policies are different for each country as local regulations, funding requirements, and financial and tax considerations are part of the funding and investment allocation process in each country.
81
RESIDEO TECHNOLOGIES, INC.
A majority of the U.S. pension plan assets as of December 31, 2020 do not have published pricing and are valued using Net Asset Value (“NAV”) which approximates fair value. NAV by asset category and fair value by asset category are as follows for December 31, 2020 and 2019:
|
|
U.S. Plans
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Total
|
|
|
NAV
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
NAV
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity
|
|
|
105
|
|
|
|
105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Investment funds
|
|
|
14
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
U.S. treasury obligations
|
|
|
16
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Government bonds
|
|
|
41
|
|
|
|
41
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds
|
|
|
126
|
|
|
|
126
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate / property
|
|
|
32
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
340
|
|
|
$
|
335
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
331
|
|
|
$
|
327
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The fair values of the non-U.S. pension plan assets as by asset category are as follows:
|
|
Non-U.S. Plans
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Equity
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Government bonds
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Insurance contracts
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Other
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
Total assets at fair value
|
|
$
|
28
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
26
|
|
|
$
|
27
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
24
|
|
5
The following table summarizes changes in the fair value of Level 3 assets for Non-U.S. plans:
|
|
Non-U.S. Plans
|
|
Balance at October 29, 2018
|
|
$
|
5
|
|
Return on plan assets
|
|
|
1
|
|
Purchases, sales and settlements, net
|
|
|
-
|
|
Balance at December 31, 2018
|
|
|
6
|
|
Return on plan assets
|
|
|
2
|
|
Purchases, sales and settlements, net
|
|
|
15
|
|
Other
|
|
|
1
|
|
Balance at December 31, 2019
|
|
|
24
|
|
Return on plan assets
|
|
|
-
|
|
Purchases, sales and settlements, net
|
|
|
(1
|
)
|
Other
|
|
|
3
|
|
Balance at December 31, 2020
|
|
$
|
26
|
|
82
RESIDEO TECHNOLOGIES, INC.
Corporate Bonds and Government Bonds held as of December 31, 2020 and 2019 are valued either by using pricing models, bids provided by brokers or dealers, quoted prices of securities with similar characteristics or discounted cash flows and as such include adjustments for certain risks that may not be observable such as credit and liquidity risks. Other investments as of December 31, 2020 and 2019 and Insurance Contracts are classified as Level 3 as there are neither quoted prices nor other observable inputs for pricing. Insurance Contracts are issued by insurance companies and are valued at cash surrender value, which approximates the contract fair value. Other investments consist of a collective pension foundation that is valued and allocated by the plan administrator.
The Company utilizes the services of retirement and investment consultants to actively manage the assets of the Company’s pension plans. The Company has established asset allocation targets and investment guidelines based on the guidance of the consultants. The Company’s target allocations are 51% fixed income investments, 29% global equity investments, 10% global real estate investments and 10% cash and other investments.
The Company’s general funding policy for qualified defined benefit pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. In 2020, it was not required to make contributions to the U.S. pension plans, however $1 million of contributions were made. There is no requirement to make any contributions to the U.S. pension plans in 2021. In 2020, contributions of $2 million were made to the non-U.S. pension plans to satisfy regulatory funding requirements. In 2021, the Company expects to make contributions of cash and/or marketable securities of approximately $2 million to the non-U.S. pension plans to satisfy regulatory funding standards. Contributions for both the U.S. and non-U.S. pension plans do not reflect benefits paid directly from Company assets.
Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
2021
|
|
$
|
19
|
|
|
$
|
2
|
|
2022
|
|
$
|
20
|
|
|
$
|
2
|
|
2023
|
|
$
|
21
|
|
|
$
|
2
|
|
2024
|
|
$
|
23
|
|
|
$
|
3
|
|
2025
|
|
$
|
23
|
|
|
$
|
3
|
|
2026-2030
|
|
$
|
114
|
|
|
$
|
21
|
|
Note 21. 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 fourth quarter 2020 presentation.
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 wholesale distributor of low-voltage security products including intrusion, access control and video products and participates significantly in
83
RESIDEO TECHNOLOGIES, INC.
the broader related markets of smart home, fire, access control, power, audio, ProAV, networking, communications, wire and cable, enterprise connectivity, and structured wiring products.
Corporate—Corporate includes headquarter type 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.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Products & Solutions revenue
|
|
$
|
2,488
|
|
|
$
|
2,487
|
|
|
$
|
2,474
|
|
Less: Intersegment revenue
|
|
|
367
|
|
|
|
312
|
|
|
|
305
|
|
External Products & Solutions revenue
|
|
|
2,121
|
|
|
|
2,175
|
|
|
|
2,169
|
|
External ADI Global Distribution revenue
|
|
|
2,950
|
|
|
|
2,813
|
|
|
|
2,658
|
|
Total revenue
|
|
$
|
5,071
|
|
|
$
|
4,988
|
|
|
$
|
4,827
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions
|
|
$
|
407
|
|
|
$
|
327
|
|
|
$
|
591
|
|
ADI Global Distribution
|
|
|
194
|
|
|
|
210
|
|
|
|
205
|
|
Corporate
|
|
|
(290
|
)
|
|
|
(279
|
)
|
|
|
(303
|
)
|
Total
|
|
$
|
311
|
|
|
$
|
258
|
|
|
$
|
493
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions
|
|
$
|
63
|
|
|
$
|
62
|
|
|
$
|
48
|
|
ADI Global Distribution
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
Corporate
|
|
|
11
|
|
|
|
8
|
|
|
|
8
|
|
Total
|
|
$
|
86
|
|
|
$
|
80
|
|
|
$
|
66
|
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions
|
|
$
|
41
|
|
|
$
|
71
|
|
|
$
|
61
|
|
ADI Global Distribution
|
|
|
15
|
|
|
|
5
|
|
|
|
5
|
|
Corporate
|
|
|
14
|
|
|
|
19
|
|
|
|
15
|
|
Total
|
|
$
|
70
|
|
|
$
|
95
|
|
|
$
|
81
|
|
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.
84
RESIDEO TECHNOLOGIES, INC.
Note 22. Geographic Areas—Financial Data
|
|
Net Revenue (1)
Years Ended December 31,
|
|
|
Long-lived Assets (2)
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
3,543
|
|
|
$
|
3,423
|
|
|
$
|
3,289
|
|
|
$
|
260
|
|
|
$
|
272
|
|
|
$
|
184
|
|
Europe
|
|
|
1,121
|
|
|
|
1,117
|
|
|
|
1,138
|
|
|
|
144
|
|
|
|
136
|
|
|
|
91
|
|
Other International
|
|
|
407
|
|
|
|
448
|
|
|
|
400
|
|
|
|
47
|
|
|
|
45
|
|
|
|
25
|
|
|
|
$
|
5,071
|
|
|
$
|
4,988
|
|
|
$
|
4,827
|
|
|
$
|
451
|
|
|
$
|
453
|
|
|
$
|
300
|
|
(1)
|
Revenue between geographic areas approximate market and is not significant. Net revenue is classified according to their country of origin. Included in United States net revenue are export sales of $21 million, $27 million and $31 million in 2020, 2019 and 2018, respectively.
|
(2)
|
Long-lived assets are comprised of Property, plant and equipment – net and lease right-of-use assets. The Company has restated long-lived assets as of December 31, 2019 to include lease right-of-use assets, resulting in an increase in long-lived assets of $86 million in the United states, $33 million in Europe and $18 million in Other International.
|
Note 23. Unaudited Quarterly Financial Information
The following tables show selected unaudited quarterly results of operations for 2020 and 2019. The quarterly data have been prepared on the same basis as the audited annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the results of operations for these periods.
|
|
2020
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year Ended
December 31,
|
|
Net revenue
|
|
$
|
1,179
|
|
|
$
|
1,029
|
|
|
$
|
1,362
|
|
|
$
|
1,501
|
|
|
$
|
5,071
|
|
Gross profit
|
|
|
284
|
|
|
|
236
|
|
|
|
370
|
|
|
|
423
|
|
|
|
1,313
|
|
Net (loss) income
|
|
|
(21
|
)
|
|
|
(76
|
)
|
|
|
75
|
|
|
|
59
|
|
|
|
37
|
|
Earnings (loss) per share -basic
|
|
|
(0.17
|
)
|
|
|
(0.62
|
)
|
|
|
0.61
|
|
|
|
0.45
|
|
|
|
0.30
|
|
Earnings (loss) per share - diluted
|
|
|
(0.17
|
)
|
|
|
(0.62
|
)
|
|
|
0.60
|
|
|
|
0.44
|
|
|
|
0.29
|
|
|
|
2019
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year Ended
December 31,
|
|
Net revenue
|
|
$
|
1,216
|
|
|
$
|
1,242
|
|
|
$
|
1,226
|
|
|
$
|
1,304
|
|
|
$
|
4,988
|
|
Gross profit
|
|
|
332
|
|
|
|
323
|
|
|
|
309
|
|
|
|
313
|
|
|
|
1,277
|
|
Net income (loss)
|
|
|
48
|
|
|
|
(11
|
)
|
|
|
8
|
|
|
|
(9
|
)
|
|
|
36
|
|
Earnings (loss) per share - basic
|
|
|
0.39
|
|
|
|
(0.09
|
)
|
|
|
0.07
|
|
|
|
(0.07
|
)
|
|
|
0.29
|
|
Earnings (loss) per share - diluted
|
|
|
0.39
|
|
|
|
(0.09
|
)
|
|
|
0.06
|
|
|
|
(0.07
|
)
|
|
|
0.29
|
|
Note 24. Subsequent Events
Amended and Restated Credit Agreement
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 Term Loan Facilities, the “A&R Senior Credit Facilities”).
The Company is obligated to make quarterly principal payments of approximately $2.4 million throughout the term of the A&R Term B Facility according to the amortization provisions in the A&R Credit Agreement. In addition to paying interest on outstanding borrowings under the A&R Revolving Credit Facility, the Company is
85
RESIDEO TECHNOLOGIES, INC.
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. Accordingly, the interest rates for A&R the Senior Credit Facilities will fluctuate during the term of the A&R Credit Agreement based on changes in the base rate, LIBOR rate or future changes in the Company’s leverage ratio. Interest payments with respect to the borrowings are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months.
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. The A&R Credit Agreement contains customary events of default, including with respect to a failure to make payments under the A&R Senior Credit Facilities, cross-default, certain bankruptcy and insolvency events and customary change of control events.
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 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. The Company and the Guarantors entered into security documents concurrently with effectiveness of the A&R Credit Agreement.
Senior Notes
On February 16, 2021 the Company redeemed $140 million in principal amount of the Senior Notes at a redemption price of 106.125% of par plus accrued interest.
Amendment to Reimbursement Agreement
On February 12, 2021, in connection with entering into the A&R Credit Agreement, the Company entered into a Fourth Amendment to the Reimbursement Agreement. The covenants in Exhibit G of the Reimbursement Agreement were amended and restated in their entirety to substantially conform to the affirmative and negative covenants contained in the A&R Credit Agreement.
86
RESIDEO TECHNOLOGIES, INC.