The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in millions, unless otherwise noted)
(Unaudited)
Note 1. Organization, Operations and Basis of Presentation
Business Description
Resideo Technologies, Inc. (“Resideo” or “the Company”), is a global provider of products, software, solutions and technologies that help homeowners stay connected and in control of their comfort, security and energy use. The Company is a leader in the home heating, ventilation and air conditioning controls and security markets, and a leading global distributor of low-voltage electronic and security products.
The Company was incorporated in Delaware on April 24, 2018. The Company separated from Honeywell International Inc. (“Honeywell”) on October 29, 2018, becoming an independent publicly traded company as a result of a pro rata distribution of the Company’s common stock to shareholders of Honeywell (the “Spin-Off”).
Basis of Presentation
The Company’s financial statements are presented on a consolidated basis (collectively, the “Interim Financial Statements”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions have been eliminated for all periods presented. The Interim Financial Statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods.
In periods subsequent to the Spin-Off, we have made adjustments to balances transferred at the Spin-Off, including adjustments to the classification of assets or liabilities transferred. Any such adjustments are recorded directly to equity in Adjustments due to the Spin-Off and are considered immaterial.
The Company reports financial information on a fiscal quarter basis using a “modified” 4-4-5 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31) that requires its businesses to close their first, second and third quarter books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. In the event that differences in closing dates are material to year-over-year comparisons of quarterly or year-to-date results, the Company will provide appropriate disclosures.
Reclassification
On January 1, 2020, the Company changed its classification of research and development expenses in the Consolidated Interim Statements of Operations from Cost of goods sold to Selling, general and administrative expenses, such that research and development expenses are excluded from the calculation of Gross profit. The impact on the September 28, 2019 Consolidated Interim Statement of Operations is a reduction of Cost of goods sold, an increase in Gross profit and an increase in Selling, general and administrative expenses for the three and nine months ended September 28, 2019 of $20 million and $66 million, respectively. The impact of the reclassification for the three and nine months ended September 28, 2019 is also reflected in “Note 6. Restructuring and Other Charges”. This reclassification had no effect on the previously reported Net income (loss) or the Company’s Consolidated Interim Statements of Comprehensive Income (Loss), Consolidated Interim Statements of Cash Flows, or Consolidated Interim Balance Sheets.
10
Note 2. Summary of Significant Accounting Policies
The Company’s accounting policies are set forth in “Note 2. Summary of Significant Accounting Policies” of the Company’s Notes to Consolidated and Combined Financial Statements included in the 2019 Annual Report on Form 10-K. Included herein are certain updates to those policies.
The World Health Organization (“WHO”) declared the novel coronavirus disease ("COVID-19") a pandemic in March 2020. Starting at the end of the first quarter and throughout the second quarter, the Company experienced constrained supply and slowed customer demand that adversely impacted the Company’s business, results of operations and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, during the third quarter customer demand improved and cost actions taken during the first half of the year contributed to improvements in the Company’s results of operations and overall financial performance. As there remains uncertainty around the impacts of the COVID-19 pandemic, the Company addresses and evaluates the impacts frequently. At September 26, 2020, the Company believes that the accounting policies most likely to be affected by the COVID-19 pandemic are the following:
Use of Estimates—The preparation of the Company’s Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and related disclosures in the accompanying Notes to Consolidated Financial Statements. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed, and the effects of changes are reflected in the Consolidated Financial Statements in the period they are determined to be necessary. Estimates are used when accounting for stock-based compensation, pension benefits, contingent consideration, indemnification liabilities, goodwill and intangible assets, and valuation allowances for accounts receivable, inventory, deferred tax assets, and the amounts of revenue and expenses reported during the period. The Company has used information available to identify potential impacts caused by the COVID-19 pandemic at September 26, 2020 in these estimates.
Goodwill— The Company has determined that it is likely that the carrying value of goodwill exceeds the fair value at September 26, 2020. However, the extent to which COVID-19 may adversely impact our business depends on future developments, which are uncertain and unpredictable, depending upon the severity and duration of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time but may adversely affect our business and financial results. It is likely that, during the remainder of 2020 and into 2021, macroeconomic conditions will be volatile and could impact our business. If there is an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. Specifically, the fair value of our Products & Solutions reporting unit, with goodwill of approximately $2,012 million at September 26, 2020, exceeded its' carrying value by 10% in the 2019 annual impairment test and therefore is highly sensitive to adverse changes in the facts and circumstances that could result in a possible future impairment. Should the fair value of the Company’s reporting units fall below its' carrying amount because of reduced operating performance, market declines, changes in the discount rate, a more significant impact than expected from the COVID-19 pandemic, or other conditions, charges for impairment may be necessary. The Company regularly monitors its reporting units to determine if there is an indicator of potential impairment. The Company will perform its annual goodwill impairment assessment during the fourth quarter.
Recent Accounting Pronouncements—The Company considers the applicability and impact of all recent accounting standards updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s consolidated financial position or results of operations.
In August 2018, the FASB issued guidance that amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans and allows for the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020 and allows for early adoption. The Company will adopt on January 1, 2021 and does not expect this new standard to have a significant impact to its disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in
11
the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combinations that result in a step-up in the tax basis of goodwill. The transition requirements are primarily prospective and the effective date for Resideo is January 1, 2021, with early adoption permitted. The Company early adopted the provisions of this guidance on January 1, 2020. Adoption of this guidance did not have a material financial statement impact.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is optional guidance related to reference rate reform that provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our Term Loans and Revolving Credit Facility, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. Refer to “Note 10. Long-term Debt and Credit Agreement” for further details on our Term Loans and Revolving Credit Facility. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
Note 3. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings per share (dollars in millions except shares in thousands and per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
75
|
|
|
$
|
8
|
|
|
$
|
(22
|
)
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share
|
|
|
123,421
|
|
|
|
122,770
|
|
|
|
123,194
|
|
|
|
122,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents
|
|
|
1,814
|
|
|
|
474
|
|
|
|
-
|
|
|
|
723
|
|
Shares used in computing diluted earnings per share
|
|
|
125,235
|
|
|
|
123,244
|
|
|
|
123,194
|
|
|
|
123,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.07
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.06
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.36
|
|
Diluted earnings per share is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the three and nine months ended September 26, 2020 and September 28, 2019. In periods where the Company has a net loss, no dilutive common shares are included in the calculation for diluted shares as they are considered anti-dilutive. For the three and nine months ended September 26, 2020, average options and other rights to purchase approximately 1.1 million and 3.6 million shares of common stock, respectively, were outstanding, all of which were anti-dilutive during the three and nine months ended September 26, 2020, and therefore excluded from the computation of diluted earnings per common share. In addition, an average of approximately 0.8 million and 0.6 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and nine months ended September 26, 2020 as the contingency has not been satisfied. For the three and nine months ended September 28, 2019, options and other rights to purchase approximately 3.8 million and 1.5 million shares of common stock, respectively, were outstanding, all of which were anti-dilutive during the three and nine months ended September 28, 2019, and therefore excluded from the computation of diluted income per common share. An average of approximately 0.3 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three and nine months ended September 28, 2019, as the contingency has not been satisfied.
12
Note 4. Acquisitions
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. The Company is substantially complete with the allocation of purchase price, however, amounts are still subject to finalization. Pro-forma disclosures are not provided as the acquisition has an immaterial financial statement impact.
Note 5. Revenue Recognition
Disaggregated Revenue
Revenues by geography and business line are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Comfort
|
|
$
|
297
|
|
|
$
|
256
|
|
|
$
|
725
|
|
|
$
|
799
|
|
Security
|
|
|
142
|
|
|
|
128
|
|
|
|
379
|
|
|
|
397
|
|
Residential Thermal Solutions
|
|
|
133
|
|
|
|
128
|
|
|
|
341
|
|
|
|
404
|
|
Products & Solutions
|
|
|
572
|
|
|
|
512
|
|
|
|
1,445
|
|
|
|
1,600
|
|
U.S. and Canada
|
|
|
650
|
|
|
|
590
|
|
|
|
1,758
|
|
|
|
1,705
|
|
EMEA (1)
|
|
|
129
|
|
|
|
109
|
|
|
|
338
|
|
|
|
336
|
|
APAC (2)
|
|
|
11
|
|
|
|
15
|
|
|
|
29
|
|
|
|
43
|
|
ADI Global Distribution
|
|
|
790
|
|
|
|
714
|
|
|
|
2,125
|
|
|
|
2,084
|
|
Net revenue
|
|
$
|
1,362
|
|
|
$
|
1,226
|
|
|
$
|
3,570
|
|
|
$
|
3,684
|
|
(1)
|
EMEA represents Europe, the Middle East and Africa.
|
(2)
|
APAC represents Asia and Pacific countries.
|
The Company recognizes the majority of its revenue from performance obligations outlined in contracts with its customers that are satisfied at a point in time. Approximately 3% of the Company’s revenue is satisfied over time. As of September 26, 2020 and September 28, 2019, contract assets and liabilities were not material.
Note 6. Restructuring and Other Charges
During the fourth quarter of 2019, the Company announced commencement of a comprehensive financial and operational review focused on product cost, gross margin improvement, and general and administrative expense simplification. The review is being overseen by the Strategic and Operational Committee of the board, comprised of independent directors. The Company retained industry-recognized experts in supply chain optimization and organizational excellence to assist in the review. Certain restructuring actions have been and are continuing to be implemented under this program as well as previous programs. Products & Solutions segment restructuring and related expenses for the three and nine months ended September 26, 2020 were $7 million and $24 million, respectively, and for the three and nine months ended September 28, 2019, restructuring and related expense were $9 million and $28 million, respectively. ADI Global Distribution segment restructuring and related expenses for the three and nine months ended September 26, 2020 were $0 million and $3 million, respectively, and for the three and nine months ended September 28, 2019, restructuring and related expenses were $0 million and $6 million, respectively. Restructuring and related expenses for all periods are primarily related to severance.
13
The Company's restructuring expenses for the three and nine months ended September 26, 2020 and September 28, 2019:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of goods sold
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
11
|
|
Selling, general and administrative expenses
|
|
|
5
|
|
|
|
5
|
|
|
|
20
|
|
|
|
23
|
|
|
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
27
|
|
|
$
|
34
|
|
The following table summarizes the status of total restructuring reserves related to severance cost included in Accrued liabilities in the unaudited Consolidated Balance Sheets:
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
|
2020
|
|
Beginning of period
|
|
$
|
19
|
|
Charges
|
|
|
27
|
|
Usage – cash payments
|
|
|
(23
|
)
|
End of period
|
|
$
|
23
|
|
Note 7. Income Taxes
The Company recorded a tax expense of $7 million and $26 million for the three and nine months ended September 26, 2020, respectively.
For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by our forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where we expect to report losses for which we do not expect to receive tax benefits, we are required to apply separate forecasted effective tax rates to those jurisdictions rather than including them in the consolidated forecasted effective tax rate.
For the three months ended September 26, 2020, the net tax expense of $7 million was driven by interim period tax expense of $7 million based on year-to-date actual amounts. Tax expense specific to the period was $0. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
For the nine months ended September 26, 2020, net tax expense of $26 million consisted primarily of interim period tax expense of $11 million based on year-to-date actual amounts, and tax expense specific to the period of approximately $15 million, consisting primarily of $15 million for valuation allowances in foreign jurisdictions, $2 million related to the estimated tax impact of the CARES Act on prior years, and share-based excess cost of $1 million, partially offset by a $3 million tax benefit for changes in estimates related to prior years. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.
Note 8. Inventories—Net
|
|
September 26,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
156
|
|
|
$
|
154
|
|
Work in process
|
|
|
20
|
|
|
|
18
|
|
Finished products
|
|
|
521
|
|
|
|
568
|
|
Inventory reserves
|
|
|
(79
|
)
|
|
|
(69
|
)
|
|
|
$
|
618
|
|
|
$
|
671
|
|
14
Note 9. Accrued Liabilities
|
|
September 26,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Obligations payable under Indemnification Agreements
|
|
$
|
175
|
|
|
$
|
140
|
|
Taxes payable
|
|
|
53
|
|
|
|
66
|
|
Compensation, benefit and other employee-related
|
|
|
82
|
|
|
|
66
|
|
Customer rebate reserve
|
|
|
71
|
|
|
|
78
|
|
Other
|
|
|
225
|
|
|
|
202
|
|
|
|
$
|
606
|
|
|
$
|
552
|
|
Refer to “Note 13. Commitments and Contingencies” for further details on Obligations payable under Indemnification Agreements.
Note 10. Long-term Debt and Credit Agreement
The Company’s debt at September 26, 2020 and December 31, 2019 consisted of the following:
|
|
September 26,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
6.125% notes due 2026
|
|
$
|
400
|
|
|
$
|
400
|
|
Five-year variable rate term loan A due 2023
|
|
|
324
|
|
|
|
333
|
|
Seven-year variable rate term loan B due 2025
|
|
|
468
|
|
|
|
470
|
|
Revolving Credit Facility
|
|
|
150
|
|
|
|
-
|
|
Unamortized deferred financing costs and debt discounts
|
|
|
(20
|
)
|
|
|
(23
|
)
|
Total outstanding indebtedness
|
|
|
1,322
|
|
|
|
1,180
|
|
Less: amounts due within one year
|
|
|
181
|
|
|
|
22
|
|
Total long-term debt due after one year
|
|
$
|
1,141
|
|
|
$
|
1,158
|
|
On November 26, 2019, the Company entered into a First Amendment to the Credit Agreement (the “Credit Agreement Amendment”). The Credit Agreement Amendment amended the five-year variable rate term loan A due 2023 (the “Term A Loan Facility”), the seven-year variable rate term loan B due 2025 (the “Term B Loan Facility” and together, the “Term Loans”) and the five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility”) credit agreement (the “Credit Agreement”) to, among other things: (i) increase the levels of the maximum consolidated total leverage ratio under the Credit Agreement, to not greater than 5.25 to 1.00 for the quarter ended December 31, 2019, with step-downs to 4.75 to 1.00 starting in 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 Credit Agreement Amendment effective date by 25 basis points per annum, 2.25% per annum (for LIBOR loans) and 1.25% per annum (for ABR loans) in respect of the Term B Loan Facility, and based on our leverage ratio, from 2.25% per annum to 1.75% per annum (for LIBOR loans) and 1.25% to 0.75% per annum (for ABR loans) for the Term A Loan Facility and the Revolving Credit Facility; and (iii) modify the defined terms “Consolidated EBITDA” and “Pro Forma Basis” set forth in the Credit Agreement.
As of September 26, 2020, there were $150 million of borrowings and no letters of credit issued under the Revolving Credit Facility. The Company assessed the amount recorded under the Term Loans, the 6.125% senior unsecured notes (the “Senior Notes”), and the Revolving Credit Facility. The Company determined that the Revolving Credit Facility approximated fair value. The Term A Loan Facility, Term B Loan Facility and the Senior Notes’ fair values are approximately $307, $460 and $395 million, respectively. The fair values of the debt are based on the quoted inactive prices and are therefore classified as Level 2 within the valuation hierarchy.
At September 26, 2020, the interest rate for the Term Loans was 2.56% and the weighted average interest rate for the Revolving Credit Facility was 2.41%.
15
For more information, please refer to “Note 15. Long-term Debt and Credit Agreement” in our 2019 Annual Report on Form 10-K.
Note 11. Leases
The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment. Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation, and certain automobile lease agreements include rental payments which fluctuate based on mileage. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company’s operating lease costs for the three and nine months ended September 26, 2020 and September 28, 2019 consisted of the following:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of goods sold
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
13
|
|
|
$
|
12
|
|
Selling, general & administrative
|
|
|
13
|
|
|
|
10
|
|
|
|
33
|
|
|
|
27
|
|
Total operating lease costs
|
|
$
|
18
|
|
|
$
|
14
|
|
|
$
|
46
|
|
|
$
|
39
|
|
Total operating lease costs include variable lease costs of $5 million and $12 million, respectively, for the three and nine months ended September 26, 2020. For the three and nine months ended September 28, 2019, total operating lease costs included variable lease costs of $3 million and $8 million, respectively. Total operating lease costs also include offsetting sublease income which is immaterial for the three and nine months ended September 26, 2020 and September 28, 2019.
The Company recognized the following related to its operating leases:
|
|
Financial
Statement
Line Item
|
|
At September 26,
2020
|
|
|
At December 31,
2019
|
|
Operating right-of-use assets
|
|
Other assets
|
|
$
|
134
|
|
|
$
|
137
|
|
Operating lease liabilities - current
|
|
Accrued liabilities
|
|
$
|
33
|
|
|
$
|
31
|
|
Operating lease liabilities - noncurrent
|
|
Other liabilities
|
|
$
|
109
|
|
|
$
|
111
|
|
Maturities of the Company’s operating lease liabilities were as follows:
|
|
At September 26,
2020
|
|
2020
|
|
$
|
10
|
|
2021
|
|
|
39
|
|
2022
|
|
|
35
|
|
2023
|
|
|
28
|
|
2024
|
|
|
16
|
|
Thereafter
|
|
|
39
|
|
Total lease payments
|
|
|
167
|
|
Less: imputed interest
|
|
|
25
|
|
Present value of operating lease liabilities
|
|
$
|
142
|
|
Weighted-average remaining lease term (years)
|
|
|
5.44
|
|
Weighted-average incremental borrowing rate
|
|
|
6.00
|
%
|
16
Supplemental cash flow information related to the Company’s operating leases was as follows:
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Operating cash outflows
|
|
|
|
$
|
22
|
|
|
$
|
28
|
|
Operating right-of-use assets obtained in exchange for operating lease liabilities
|
|
|
|
$
|
22
|
|
|
$
|
47
|
|
As of September 26, 2020, the Company has additional operating leases that have not yet commenced. Obligations under these leases are not material. Additionally, as a lessor, the Company leases all or a portion of certain owned properties. Rental income for the three and nine months ended September 26, 2020 and September 28, 2019 was not material.
Note 12. Stock-Based Compensation Plans
Restricted Stock Units (“RSUs”)
During the nine months ended September 26, 2020, as part of the Company’s annual long-term compensation under the 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates and the 2018 Stock Incentive Plan for Non-Employee Directors of Resideo Technologies, Inc. as may be amended from time to time (together, the “Stock Incentive Plan”), it granted 795,099 performance-based RSUs and 2,168,943 time-based RSUs to eligible employees. The weighted average grant date fair value per share for these shares was $9.18.
Stock Options
During the nine months ended September 26, 2020, as part of the Company’s annual long-term compensation under the Stock Incentive Plan, 1,083,665 stock options were granted to eligible employees at a weighted average exercise price per share of $9.17 and weighted average grant date fair value per share of $2.61.
Note 13. Commitments and Contingencies
Environmental Matters
The Company is subject to various federal, state, local and foreign government requirements relating to the protection of the environment and accrues costs related to environmental matters when it is probable that it has incurred a liability related to a contaminated site and the amount can be reasonably estimated. Environmental-related expenses for sites owned and operated by Resideo are presented within Cost of goods sold for operating sites. For the three and nine months ended September 26, 2020 and September 28, 2019, environmental expenses related to these operating sites were not material. Liabilities for environmental costs were $22 million as of September 26, 2020 and December 31, 2019.
The Company does not currently possess sufficient information to reasonably estimate the amounts of environmental liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to our unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.
17
Obligations Payable Under Indemnification Agreements
In connection with the Spin-Off, the Company entered into an indemnification and reimbursement agreement with Honeywell (the "Reimbursement Agreement") and a tax matters agreement (the "Tax Matters Agreement") (collectively, the "Indemnification Agreements") which are further described below.
Reimbursement Agreement
On October 29, 2018, in connection with the Spin-Off, the Company entered into the Reimbursement Agreement with Honeywell pursuant to which the Company has an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed (“payments”), less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the “recoveries”). The amount payable by the Company in respect of such liabilities arising in respect of any given year is subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). The scope of the Company’s current environmental remediation obligations subject to the Reimbursement Agreement relates to approximately 230 sites or groups of sites that are undergoing environmental remediation under U.S. federal or state law and agency oversight for contamination associated with Honeywell historical business operations. The ongoing environmental remediation is designed to address contaminants at upland and sediment sites, which include, among others, metals, organic compounds and polychlorinated biphenyls, through a variety of methods, which include, among others, excavation, capping, in-situ stabilization, groundwater treatment and dredging. In addition, the Company obligations subject to the Reimbursement Agreement include certain liabilities with respect to (i) hazardous exposure or toxic tort claims associated with the specified sites that arise after the Spin-Off, if any, (ii) currently unidentified releases of hazardous substances at or associated with the specified sites, (iii) other environmental claims associated with the specified sites and (iv) consequential damages.
Payments in respect of the liabilities arising in a given year will be made quarterly throughout such year on the basis of an estimate of the liabilities and recoveries provided by Honeywell. Following the end of any such year, Honeywell will provide the Company with a calculation of the amount of payments and the recoveries actually received.
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 Company’s 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 under the Reimbursement Agreement), and the minimum interest coverage ratio. A 5% late payment fee will accrue on all amounts that are not otherwise entitled to be deferred under the terms of the Reimbursement Agreement, without prejudice to any other rights that Honeywell may have for late payments.
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.
On April 21, 2020, the Company and Honeywell entered into an amendment to the Reimbursement Agreement (the "Reimbursement Agreement Amendment"). Pursuant to the Reimbursement Agreement Amendment, certain covenants in Exhibit G of the Reimbursement Agreement were modified to conform, if applicable, to the amended covenants included in the Credit Agreement Amendment. In addition, under the Reimbursement Agreement Amendment, the parties agreed to defer until no later than July 30, 2020 (which was further amended as described below) the $35 million quarterly payment otherwise payable to Honeywell on April 30, 2020. The Reimbursement Agreement Amendment expressly reserves all rights of the parties thereto and their respective affiliates in respect of the Reimbursement Agreement and each other contract or agreement between such parties or their affiliates (the “Other Agreements”), and provides that the execution of the amendment does not constitute a waiver of any claims, rights, remedies, defenses, arguments, interpretations or obligations of such parties or their affiliates under or related to the Reimbursement Agreement or any Other Agreement.
18
On July 28, 2020, the Company and Honeywell entered into the Second Reimbursement Agreement Amendment. Pursuant to the Second Reimbursement Agreement Amendment, the parties agreed to further defer until no later than October 30, 2020 the $35 million quarterly payment that was originally due thirty days following the start of the second quarter of 2020 and was previously deferred until no later than July 30, 2020 pursuant to the Reimbursement Agreement Amendment. The deferred payment was made on October 30, 2020.
The following table summarizes information concerning our Reimbursement Agreement liabilities:
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
585
|
|
|
$
|
616
|
|
Accruals for indemnification liabilities deemed probable and reasonably estimable
|
|
|
107
|
|
|
|
138
|
|
Reduction (1)
|
|
|
-
|
|
|
|
(81
|
)
|
Indemnification payment
|
|
|
(70
|
)
|
|
|
(105
|
)
|
Ending balance (2)
|
|
$
|
622
|
|
|
$
|
568
|
|
(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.
|
For the three and nine months ended September 26, 2020, net expenses related to the Reimbursement Agreement were $38 million and $107 million, respectively, and for the three and nine months ended September 28, 2019, expenses related to the Reimbursement Agreement were $35 million and $57 million, respectively, and are recorded in Other expense, net. Reimbursement Agreement liabilities are included in the following balance sheet accounts:
|
|
September 26, 2020
|
|
|
December 31, 2019
|
|
Accrued liabilities
|
|
$
|
175
|
|
|
$
|
140
|
|
Obligations payable under Indemnification Agreements
|
|
|
447
|
|
|
|
445
|
|
|
|
$
|
622
|
|
|
$
|
585
|
|
The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined although they could be material to our unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.
Tax Matters Agreement
In connection with the Spin-Off, the Company entered into the Tax Matters Agreement with Honeywell pursuant to which it is responsible and will indemnify Honeywell for all taxes, including income taxes, sales taxes, VAT and payroll taxes, relating to the business for all periods, including periods prior to the consummation of the Spin-Off. As of September 26, 2020 and December 31, 2019, the Company had an indemnity outstanding to Honeywell for future tax payments of $139 million and $149 million, respectively, which is included in Obligations payable under Indemnification Agreements.
19
Trademark Agreement
In connection with the Spin-Off, the Company and Honeywell entered into a 40-year Trademark License Agreement (the “Trademark Agreement”) that authorizes the Company’s use of certain licensed trademarks in the operation of Resideo’s business for the advertising, sale and distribution of certain licensed products. In exchange, the Company pays a royalty fee of 1.5% on net revenue to Honeywell related to such licensed products which is recorded in Selling, general and administrative expense on the unaudited Consolidated Interim Statements of Operations. For the three and nine months ended September 26, 2020, royalty fees were $7 million and $18 million, respectively. For the three and nine months ended September 28, 2019, royalty fees were $6 million and $20 million, respectively.
Other Matters
The Company is subject to lawsuits, investigations and disputes arising out of the conduct of its business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee matters, intellectual property, and environmental, health and safety matters. The Company recognizes a liability for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. No such matters are material to the Company's unaudited financial statements.
The Company, the Company’s former CEO Michael Nefkens, the Company’s former CFO Joseph Ragan, and the Company’s former CIO Niccolo de Masi are named defendants of a class action securities suit in the 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. We expect the motion to dismiss to be fully briefed in November 2020. A hearing on the motion to dismiss is currently scheduled for December 1, 2020. See “Note 19. Commitments and Contingencies” of Notes to Consolidated and Combined Financial Statements in our 2019 Annual Report on Form 10-K for further discussion. The Company intends to vigorously defend against the allegations in the Securities Litigation, but there can be no assurance that the defense will be successful.
20
On July 7, 2020, Jawad A. Ayaz as Trustee of the Shiv Venkatasetty 2016 Trust (“Derivative Plaintiff”) filed a shareholder derivative complaint (the “Derivative Complaint”) against certain current or former directors and 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 pending stipulation to stay the proceedings pending the resolution of the motion to dismiss in the Securities Litigation was granted and is applicable to the consolidated action. On August 28, 2020, Riviera Beach Police Pension Fund (“Riviera Beach”) filed a motion to intervene in the Derivative Action, noticing its intent to file a complaint at some point in the future against some or all of the Derivative Defendants. As of September 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. The Company intends to defend this action vigorously, but there can be no assurance that the defense will be successful.
Warranties and Guarantees
In the normal course of business, the Company issues product warranties and product performance guarantees. It accrues for the estimated cost of product warranties and product performance guarantees based on contract terms and historical experience at the time of sale. Adjustments to initial obligations for warranties and guarantees are made as changes to the obligations become reasonably estimable. Product warranties and product performance guarantees are included in Accrued liabilities.
The following table summarizes information concerning recorded obligations for product warranties and product performance guarantees:
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning of period
|
|
$
|
25
|
|
|
$
|
26
|
|
Accruals for warranties/guarantees issued during the year
|
|
|
13
|
|
|
|
10
|
|
Adjustment of pre-existing warranties/guarantees
|
|
|
-
|
|
|
|
(1
|
)
|
Settlement of warranty/guarantee claims
|
|
|
(12
|
)
|
|
|
(12
|
)
|
End of period
|
|
$
|
26
|
|
|
$
|
23
|
|
21
Note 14. Pension
The Company sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of its U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit plans. It also sponsors defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in certain jurisdictions, principally Germany, Austria, Belgium, France, India, Switzerland, and the Netherlands. The pension obligations as of September 26, 2020 and December 31, 2019 were $135 million and $124 million, respectively, and are included in Other liabilities in the unaudited Consolidated Interim Balance Sheets. Net periodic benefit cost recognized in Comprehensive income (loss) for the three and nine months ended September 26, 2020 is $2 million and $6 million, respectively. Net periodic benefit cost recognized in Comprehensive income (loss) for the three and nine months ended September 28, 2019 was $2 million and $5 million, respectively.
The components of net periodic benefit costs other than the service cost are included in Other expense, net in the unaudited Consolidated Interim Statements of Operations for the three and nine months ended September 26, 2020 and September 28, 2019.
Note 15. Segment Financial Data
The Company globally manages its business operations through two reportable operating segments, Products & Solutions and ADI Global Distribution:
Products & Solutions—The Products & Solutions business is a leading global provider of products, software solutions and technologies that help homeowners stay connected and in control of their comfort, security and energy use.
ADI Global Distribution—The ADI Global Distribution business is a leading global distributor of low-voltage electronic and security products.
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance.
The Company’s Chief Operating Decision Maker evaluates segment performance based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as segment net income (loss) before income taxes, net interest expense (income), depreciation and amortization plus environmental expense, Reimbursement Agreement expense, stock compensation expense, restructuring charges and other adjustments.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Products & Solutions revenue
|
|
$
|
674
|
|
|
$
|
595
|
|
|
$
|
1,715
|
|
|
$
|
1,828
|
|
Less: Intersegment revenue
|
|
|
102
|
|
|
|
83
|
|
|
|
270
|
|
|
|
228
|
|
External Products & Solutions revenue
|
|
|
572
|
|
|
|
512
|
|
|
|
1,445
|
|
|
|
1,600
|
|
External ADI Global Distribution revenue
|
|
|
790
|
|
|
|
714
|
|
|
|
2,125
|
|
|
|
2,084
|
|
Total revenue
|
|
$
|
1,362
|
|
|
$
|
1,226
|
|
|
$
|
3,570
|
|
|
$
|
3,684
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Segment Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products & Solutions
|
|
$
|
136
|
|
|
$
|
66
|
|
|
$
|
224
|
|
|
$
|
222
|
|
ADI Global Distribution
|
|
|
52
|
|
|
|
48
|
|
|
|
126
|
|
|
|
141
|
|
Segment Adjusted EBITDA
|
|
$
|
188
|
|
|
$
|
114
|
|
|
$
|
350
|
|
|
$
|
363
|
|
22
The table below provides a reconciliation of net income (loss) to Segment Adjusted EBITDA:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 26,
|
|
|
September 28,
|
|
|
September 26,
|
|
|
September 28,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
75
|
|
|
$
|
8
|
|
|
$
|
(22
|
)
|
|
$
|
45
|
|
Net interest expense (1)
|
|
|
14
|
|
|
|
16
|
|
|
|
48
|
|
|
|
49
|
|
Tax expense
|
|
|
7
|
|
|
|
-
|
|
|
|
26
|
|
|
|
36
|
|
Depreciation and amortization
|
|
|
22
|
|
|
|
19
|
|
|
|
64
|
|
|
|
55
|
|
Reimbursement Agreement expense (2)
|
|
|
38
|
|
|
|
35
|
|
|
|
107
|
|
|
|
57
|
|
Stock compensation expense (3)
|
|
|
7
|
|
|
|
8
|
|
|
|
21
|
|
|
|
22
|
|
Restructuring charges
|
|
|
7
|
|
|
|
9
|
|
|
|
27
|
|
|
|
34
|
|
Other (4)
|
|
|
18
|
|
|
|
19
|
|
|
|
79
|
|
|
|
65
|
|
Segment Adjusted EBITDA
|
|
$
|
188
|
|
|
$
|
114
|
|
|
$
|
350
|
|
|
$
|
363
|
|
(1)
|
For the three and nine months ended September 26, 2020 net interest expense consists of interest expense of $14 million and $49 million net of interest income of $0 million and $1 million, respectively. For the three and nine months ended September 28, 2019 net interest expense consists of interest expense of $16 million and $51 million net of interest income of $0 million and $2 million, respectively.
|
(2)
|
Represents recorded net expenses related to the Reimbursement Agreement.
|
(3)
|
Stock compensation expense adjustment includes only non-cash expenses.
|
(4)
|
For the three and nine months ended September 26, 2020, Other represents $9 million and $36 million of items related to the Spin-Off, $12 million and $41 million of consulting and other fees related to transformation programs, ($3) million and $1 million of non-operating (income) expense adjustment which excludes net interest (income), and $0 million and $1 million of acquisition-related expenses, respectively. For the three and nine months ended September 28, 2019, Other represents $19 million and $53 million of cost directly related to the Spin-Off, $0 million and $13 million related to developments on legal claims that arose prior to Spin-Off, and $0 million and ($1) million in non-operating (income) expense adjustment which excludes net interest (income), respectively.
|
The Company’s CODM does not use segment assets information to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
23