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Section 1: 10-Q (10-Q)

rezi-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from ______ to _____

Commission File Number 001-38635

Resideo Technologies, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-5318796

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

1985 Douglas Drive North

Golden Valley, Minnesota

 

55422

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(763) 954-5204

 

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

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

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

The number of shares outstanding of the Registrant’s common stock, par value $0.001 per share as of November 13, 2018 was 122,966,558 shares.

 

 


INDEX TO COMBINED INTERIM FINANCIAL STATEMENTS

 

Part I

 

ITEM_1_FINANCIAL_STATEMENTS

 

Page No

 

Item 1.

Financial Statements

 

 

 

 

Combined Interim Statement of Operations (unaudited) - Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

Combined Interim Statement of Comprehensive Income (unaudited) - Three and Nine Months Ended September 30, 2018 and 2017

 

5

 

 

Combined Interim Balance Sheet (unaudited) - September 30, 2018 and December 31, 2017

 

6

 

 

Combined Interim Statement of Cash Flows (unaudited) - Nine Months Ended September 30, 2018 and 2017

 

7

 

 

Notes to the Combined Interim Financial Statements (unaudited)

 

8

 

Item 2.

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

 

24

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

Item 4.

Controls and Procedures

 

38

Part II

 

Other Information

 

 

 

Item 1.

Legal Proceedings

 

39

 

Item 1A.

Risk Factors

 

39

 

Item 6.

Exhibits

 

40

 

 

Signatures

 

41


 

Cautionary Statement about Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industries and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Quarterly Report on Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to the factors discussed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Quarterly Report on Form 10-Q and the Information Statement (as defined below). These risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report on Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

3


 

PART I – Financial Information

 

The financial statements and related footnotes as of September 30, 2018 should be read in conjunction with the financial statements for the year ended December 31, 2017 contained in Exhibit 99.1 to Amendment No. 2 to the Company’s Registration Statement on Form 10 as filed with the Securities and Exchange Commission (“SEC”) on October 2, 2018, which became effective on October 3, 2018 (the “Information Statement”).

 

Item 1. Financial Statements

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM STATEMENT OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Dollars in millions except share and per share data)

 

Net sales

 

$

1,200

 

 

$

1,152

 

 

$

3,561

 

 

$

3,310

 

Cost of goods sold

 

 

853

 

 

 

816

 

 

 

2,525

 

 

 

2,355

 

Gross Profit

 

 

347

 

 

 

336

 

 

 

1,036

 

 

 

955

 

Selling, general and administrative expenses

 

 

219

 

 

 

214

 

 

 

648

 

 

 

647

 

Other expense

 

 

146

 

 

 

65

 

 

 

322

 

 

 

165

 

Interest and other charges, net

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

 

 

 

365

 

 

 

278

 

 

 

970

 

 

 

811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

 

 

(18

)

 

 

58

 

 

 

66

 

 

 

144

 

Tax expense (benefit)

 

 

(329

)

 

 

35

 

 

 

(323

)

 

 

89

 

Net income

 

$

311

 

 

$

23

 

 

$

389

 

 

$

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted (in thousands)

 

 

122,967

 

 

 

122,967

 

 

 

122,967

 

 

 

122,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted net income per share

 

$

2.53

 

 

$

0.19

 

 

$

3.16

 

 

$

0.45

 

 

The Notes to Combined Interim Financial Statements are an integral part of this statement.

 

 

4


 

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Dollars in millions)

 

Net Income

 

$

311

 

 

$

23

 

 

$

389

 

 

$

55

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

(5

)

 

 

20

 

 

 

(23

)

 

 

70

 

Changes in fair value of effective cash flow hedges

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(2

)

Total other comprehensive income (loss), net of tax

 

 

(5

)

 

 

20

 

 

 

(24

)

 

 

68

 

Comprehensive income

 

$

306

 

 

$

43

 

 

$

365

 

 

$

123

 

 

The Notes to Combined Interim Financial Statements are an integral part of this statement.

 

5


 

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM BALANCE SHEET

(Unaudited)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

184

 

 

$

56

 

Due from related parties, current

 

 

26

 

 

 

23

 

Accounts, notes and other receivables – net

 

 

783

 

 

 

779

 

Inventories

 

 

603

 

 

 

465

 

Other current assets

 

 

72

 

 

 

69

 

Total current assets

 

 

1,668

 

 

 

1,392

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment – net

 

 

276

 

 

 

265

 

Goodwill

 

 

2,638

 

 

 

2,648

 

Other intangible assets - net

 

 

138

 

 

 

140

 

Deferred income taxes

 

 

4

 

 

 

5

 

Other assets

 

 

18

 

 

 

23

 

Total assets

 

$

4,742

 

 

$

4,473

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

850

 

 

$

678

 

Due to related parties, current

 

 

162

 

 

 

60

 

Accrued liabilities

 

 

388

 

 

 

409

 

Total current liabilities

 

 

1,400

 

 

 

1,147

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

100

 

 

 

377

 

Other liabilities

 

 

557

 

 

 

346

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Invested equity

 

 

2,809

 

 

 

2,703

 

Accumulated other comprehensive (loss)

 

 

(124

)

 

 

(100

)

Total equity

 

 

2,685

 

 

 

2,603

 

Total liabilities and  equity

 

$

4,742

 

 

$

4,473

 

 

The Notes to Combined Interim Financial Statements are an integral part of this statement.

 

6


 

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

389

 

 

$

55

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

40

 

 

 

42

 

Amortization

 

 

9

 

 

 

8

 

Repositioning

 

 

5

 

 

 

21

 

Net payments for repositioning

 

 

(9

)

 

 

(11

)

Stock compensation expense

 

 

15

 

 

 

12

 

Pension expense

 

 

10

 

 

 

12

 

Deferred income taxes

 

 

(275

)

 

 

-

 

Bad debt expense

 

 

7

 

 

 

2

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(11

)

 

 

(5

)

Inventories

 

 

(142

)

 

 

(90

)

Other current assets

 

 

(4

)

 

 

(18

)

Other assets

 

 

(6

)

 

 

(2

)

Accounts payable

 

 

151

 

 

 

120

 

Accrued liabilities

 

 

(15

)

 

 

(1

)

Other Liabilities

 

 

211

 

 

 

35

 

Net cash provided by operating activities

 

 

375

 

 

 

180

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(63

)

 

 

(38

)

Proceeds received related to amounts due from related parties

 

 

7

 

 

 

13

 

Issuance related to amounts due from related parties

 

 

-

 

 

 

(13

)

Net cash used for investing activities

 

 

(56

)

 

 

(38

)

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

Net (decrease) in invested equity

 

 

(300

)

 

 

(142

)

Proceeds received related to amounts due to related parties

 

 

1

 

 

 

-

 

Payments related to amounts due to related parties

 

 

(2

)

 

 

(4

)

Net cash flows from cash pooling

 

 

115

 

 

 

10

 

Net cash used for financing activities

 

 

(186

)

 

 

(136

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(5

)

 

 

4

 

Net increase in cash and cash equivalents

 

 

128

 

 

 

10

 

Cash and cash equivalents at beginning of period

 

 

56

 

 

 

47

 

Cash and cash equivalents at end of period

 

$

184

 

 

$

57

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid (net of refunds)

 

 

33

 

 

 

86

 

 

The Notes to Combined Interim Financial Statements are an integral part of this statement.

 

7


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

Note 1. Organization, Operations and Basis of Presentation

Business Description

Resideo Technologies, Inc. (“Resideo” or “the Company”), referred to in the Information Statement as Homes and ADI Global Distribution business of Honeywell International Inc., is a leading global provider of products, software, solutions and technologies that help owners of homes stay connected and in control of their comfort, security and energy use. We are a leader in the home heating, ventilation and air conditioning controls and security markets, and a leading global distributor of security and fire protection products.

The Company was incorporated in Delaware on April 24, 2018. The Company separated from Honeywell International Inc. (“Honeywell” or the “Parent”) 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”). The Information Statement was declared effective by the SEC on October 3, 2018. On October 29, 2018, Honeywell’s shareholders of record as of October 16, 2018 (the “Record Date”) received one share of the Company’s common stock, par value $0.001 per share, for every six shares of Honeywell’s common stock, par value $1.00 per share, held as of the Record Date, and cash for any fractional shares of the Company’s common stock. The Company began trading “regular way” under the ticker symbol “REZI” on the New York Stock Exchange on October 29, 2018. References to the Company throughout these Combined Interim Financial Statements are made using the first person notations of “we,” “us” or “our.”

Basis of Presentation

These accompanying Combined Interim Financial Statements have been prepared on a carve-out basis and are derived from Honeywell’s Consolidated Financial Statements and underlying accounting records as if the Company had been a part of Honeywell for all periods presented. As noted above, the Spin-Off of Resideo was not effective until after the conclusion of the three and nine month financial reporting periods presented herein. The unaudited Combined Interim Financial Statements reflect the Company’s financial position, results of operations and cash flows as the business was operated as part of Honeywell prior to the distribution, in conformity with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”).The Combined Interim Financial Statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The unaudited Combined Interim Financial Statements should be read in conjunction with the audited Combined Financial Statements of the Company included in the Information Statement. The results of operations for the three and nine months ended September 30, 2018 and the cash flows for the nine months ended September 30, 2018 should not necessarily be taken as indicative of the entire year.

All intracompany transactions have been eliminated. As described in Note 3. Related Party Transactions with Honeywell, all significant transactions between the Company and Honeywell have been included in these unaudited Combined Interim Financial Statements and were settled in October for cash prior to the Spin-Off. These transactions are reflected in the Combined Interim Balance Sheet as Due from related parties, current or Due to related parties, current. In the Combined Interim Statements of Cash Flows, the cash flows related to related party notes receivables presented in the Combined Interim Balance Sheet in Due from related parties, current are reflected as investing activities since these balances represent amounts loaned to Parent. The cash flows related to related party notes payables presented in the Combined Interim Balance Sheet in Due to related parties, current are reflected as financing activities since these balances represent amounts financed by Parent.

 

8


 

Honeywell uses a centralized approach to cash management and financing of its operations. Historically, the majority of the Companys cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed. This arrangement is not reflective of the manner in which the Company would have been able to finance its operations had it been a stand-alone business separate from Honeywell during the periods presented. Cash transfers to and from Honeywell’s cash management accounts are reflected in the Combined Interim Balance Sheet as Due to and Due from related parties, current and in the Combined Interim Statements of Cash Flows as net financing activities.

The unaudited Combined Interim Financial Statements include certain assets and liabilities that have historically been held at the Honeywell corporate level but are 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 for any of the periods presented. Honeywell third-party debt and the related interest expense were not allocated for any of the periods presented as Honeywell’s borrowings were not directly attributable to the Company.

Historically, 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 revenues. 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 unaudited Combined Interim Financial Statements may not reflect the 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. We 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.

We report our quarterly financial information using a calendar convention; the first, second and third quarters are consistently reported as ending on March 31, June 30 and September 30. It has been Honeywell’s practice and will be our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on the last Saturday of the month in to minimize the potentially disruptive effects of quarterly closing on our 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 actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we will provide appropriate disclosures. Our actual closing dates for the three and nine months ended September 30, 2018 and 2017 were September 29, 2018 and September 30, 2017.

Note 2. Recent Accounting Pronouncements

The accounting policies of the Company are set forth in Note 2. Summary of Significant Accounting Policies to the Combined Financial Statements contained in the Company’s Combined Financial Statements for the year ended December 31, 2017, which can be found in the Information Statement. We include herein certain updates to those policies.

 

9


 

Sales RecognitionProduct and service sales are recognized when or as we transfer control of the promised products or services to our customer. Revenue is measured as the amount of consideration we expect 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 bonuses. We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include 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. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Recent Accounting Pronouncements We consider 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 combined financial position or results of operations.

In February 2016, the FASB issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We expect to adopt the requirements of the new standard effective January 1, 2019. The guidance requires the use of a modified retrospective approach. In July 2018, the FASB issued updated guidance which allows an additional transition method to adopt the new leases standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. The Company expects to elect this transition method at the adoption date of January 1, 2019. We are currently finalizing our lease portfolio analysis to determine the impact to the Combined Interim Financial Statements. We are implementing processes and information technology tools to assist in our ongoing lease data collection and analysis, and updating our accounting policies and internal controls that would be impacted by the new guidance, to ensure readiness for adoption in the first quarter of 2019.  

In August 2017, the FASB issued amendments to hedge accounting guidance. These amendments are intended to better align a company’s risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including the interim periods within those years. The guidance requires the use of a modified retrospective approach. The Company does not expect the adoption of this ASU to have a material impact on its Combined Financial Statements.

In February 2018, the FASB issued guidance that allows for an entity to elect to reclassify the income tax effects on items within accumulated other comprehensive income resulting from the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within those years. Upon adoption, the Company does not expect to elect to reclassify the stranded income tax effects of U.S. Tax Reform from accumulated other comprehensive income to retained earnings.

 

 

10


 

Note 3. Related Party Transactions with Honeywell

The unaudited Combined Interim Financial Statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Honeywell.

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 revenues. The Company and Honeywell consider the allocations to be a reasonable reflection of the benefits received by the Company. During the three months ended September 30, 2018 and 2017, the Company was allocated $66 million and $74 million, respectively, of general corporate expenses incurred by Honeywell. During the nine months ended September 30, 2018 and 2017, the Company was allocated $203 million and $211 million, respectively, of general corporate expenses incurred by Honeywell. Such amounts are included within Selling, general and administrative expenses in the Combined Interim Statements of Operations. As certain expenses reflected in the unaudited Combined Interim 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 unaudited Combined Interim Financial Statements and are considered to have been effectively settled. Sales to Honeywell during the three and nine months ended September 30, 2018 were $8 million and $23 million, respectively. Costs of goods sold to Honeywell during the three and nine months ended September 30, 2018 were $5 million and $18 million, respectively. Purchases from Honeywell during the three and nine months ended September 30, 2018 were $32 million and $149 million, respectively.

Sales to Honeywell during the three and nine months ended September 30, 2017 were $8 million and $27 million, respectively. Costs of goods sold to Honeywell during the three and nine months ended September 30, 2017 were $7 million and $22 million, respectively. Purchases from Honeywell during the three and nine months ended September 30, 2017 were $57 million and $162 million, respectively.

The total net effect of the settlement of these intercompany transactions is reflected in the Combined Interim Statements of Cash Flows as a financing activity and in the Combined Interim Balance Sheet as invested equity. Honeywell uses a centralized approach for the purpose of cash management and financing of its operations. Historically, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed. The Company operates a centralized non-interest-bearing cash pool in the U.S. and regional interest-bearing cash pools outside of the U.S.

Honeywell centrally hedges 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 the Parent as a counterparty and are used to hedge known or probable anticipated foreign currency sales and purchases. The Company designates these hedges as cash flow hedges. These hedges are marked-to-market with the effective portion of the changes in fair value of the derivatives recorded in Accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged items impact earnings.

 

11


 

Due from related parties, current consists of the following:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Cash pooling and short-term notes receivable, net

 

$

21

 

 

$

10

 

Receivables from related parties

 

 

5

 

 

 

6

 

Related party notes payables

 

 

-

 

 

 

7

 

 

 

$

26

 

 

$

23

 

 

Due to related parties, current consists of the following:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Cash pooling and short-term notes payables, net

 

$

140

 

 

$

23

 

Payables to related parties

 

 

21

 

 

 

36

 

Foreign currency exchange contracts

 

 

1

 

 

 

-

 

Related party notes payables

 

 

-

 

 

 

1

 

 

 

$

162

 

 

$

60

 

 

Net transfers to and from Honeywell are included within invested equity on the Combined Interim Statements of Equity. The components of the net transfers to and from Honeywell for the three and nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

General financing activities

 

$

(200

)

 

$

(199

)

 

$

(618

)

 

$

(465

)

Unbilled corporate allocations

 

 

66

 

 

 

74

 

 

 

203

 

 

 

211

 

Sales to Honeywell

 

 

(4

)

 

 

(2

)

 

 

(11

)

 

 

(9

)

Purchases from Honeywell

 

 

27

 

 

 

45

 

 

 

119

 

 

 

127

 

Stock compensation expense and other compensation awards

 

 

7

 

 

 

4

 

 

 

14

 

 

 

12

 

Unbilled pension expense

 

 

3

 

 

 

4

 

 

 

10

 

 

 

12

 

Net increase (decrease) in invested equity

 

$

(101

)

 

$

(74

)

 

$

(283

)

 

$

(112

)

 

Note 4. Repositioning Charges

A summary of repositioning charge follows: 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Severance

 

$

-

 

 

$

2

 

 

$

4

 

 

$

21

 

Asset impairments

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

Reserve adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Total net repositioning charge

 

$

-

 

 

$

2

 

 

$

5

 

 

$

21

 

 

 

12


 

The following table summarizes the pretax distribution of total net repositioning charges by statement of operations classification:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of goods sold

 

$

-

 

 

$

2

 

 

$

4

 

 

$

16

 

Selling, general and administrative expenses

 

 

-

 

 

 

-

 

 

 

1

 

 

 

5

 

 

 

$

-

 

 

$

2

 

 

$

5

 

 

$

21

 

 

The pretax impact of total net repositioning charges are related to the Products segment for the nine months ended September 30, 2018, and September 30, 2017.

In the three and nine months ended September 30, 2018, the Company recognized repositioning charges totaling $ - million and $ 5 million, respectively, mainly for severance costs related to separation activities.

In the three months and nine months ended September 30, 2017, the Company recognized repositioning charges totaling $2 million and $22 million, respectively, for both severance costs and asset impairment costs. The severance costs were related to workforce reductions of manufacturing and administrative positions for the nine months ended September 30, 2017. These reductions were primarily related to cost saving actions taken in connection with our productivity and ongoing functional transformation initiatives; factory transitions to more cost-effective locations; and achieving acquisition related synergies.

The following table summarizes the status of our total repositioning reserves:

 

 

 

Severance

Costs

 

 

Asset

Impairments

 

 

Total

 

Balance at December 31, 2017

 

$

22

 

 

$

-

 

 

$

22

 

Charges

 

 

4

 

 

 

1

 

 

 

5

 

Usage - cash

 

 

(4

)

 

 

-

 

 

 

(4

)

Usage - noncash

 

 

-

 

 

 

(1

)

 

 

(1

)

Balance at March 31, 2018

 

 

22

 

 

 

-

 

 

 

22

 

Charges

 

 

-

 

 

 

-

 

 

 

-

 

Usage - cash

 

 

(2

)

 

 

-

 

 

 

(2

)

Usage - noncash

 

 

-

 

 

 

-

 

 

 

-

 

Balance at June 30, 2018

 

$

20

 

 

$

-

 

 

$

20

 

Charges

 

 

-

 

 

 

-

 

 

 

-

 

Usage - cash

 

 

(3

)

 

 

-

 

 

 

(3

)

Usage - noncash

 

 

-

 

 

 

-

 

 

 

-

 

Balance at September 30, 2018

 

 

17

 

 

 

-

 

 

 

17

 

 

Certain repositioning projects in each of our reportable operating segments included exit or disposal activities, the costs related to which will be recognized in future periods when the actual liability is incurred. The remaining exit and disposal costs relating to repositioning actions as of September 30, 2018 is expected to be $9 million. 

 

13


 

Note 5. Income Taxes

The effective tax rate increased for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, primarily due to increased tax benefits attributable to internal restructuring of Resideo’s business in advance of its anticipated Spin-Off that resulted in a $79 million reduction in tax expense, currency impacts for withholding taxes on undistributed foreign earnings, adjustments to the provisional tax amount related to U.S. Tax Reform that resulted in a $259 million reduction in tax expense, and decreased income before taxes.

The effective tax rate decreased for the nine months ended September 30, 2018, as compared to the nine month September 30, 2017, primarily due to increased tax benefits attributable to internal restructuring of Resideo’s business in advance of its anticipated Spin-Off that resulted in a $97 million reduction in tax expense, currency impacts for withholding taxes on undistributed foreign earnings, adjustments to the provisional tax amount related to U.S. Tax Reform that resulted in a $262 million reduction in tax expense and decreased income before taxes.

The effective tax rate for the quarter ended September 30, 2018 was higher than the U.S. federal statutory rate of 21% primarily from tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off that resulted in a $79 million reduction in tax expense, currency impacts on withholding taxes on undistributed foreign earnings, adjustments to the provisional tax amount related to U.S. Tax Reform that resulted in a $259 million reduction in tax expense, and decreased income before taxes.

The effective tax rate for the nine months ended September 30, 2018 was lower than the U.S. federal statutory rate of 21% primarily from tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off that resulted in a $97 million, reduction in tax expense, currency impacts on withholding taxes on undistributed foreign earnings, adjustments to the provisional tax amount related to U.S. Tax Reform that resulted in a $262 million reduction in tax expense, and decreased income before taxes.

The effective tax rate for the quarter and nine months ended in September 30, 2017 was higher than the U.S. federal statutory rate of 35% as a result of non-deductible expenses.

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 to 21%, 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 our Combined Financial Statements for the year ended December 31, 2017, we 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 nine months ended September 30, 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 million and $177 million, respectively. This adjustment results in a decrease to the effective tax rate for the nine months ended September 30, 2018 of 397%. The adjustment reflects the revised determination of the fair value of assets and liabilities of legal entities included in the Company’s business, which is utilized to allocate earnings and profit for purposes of calculating the deemed repatriation tax and taxes on undistributed earnings. The Company has not finalized the accounting for the tax effects of the tax legislation, primarily related to computations of earnings and profits and deferred tax balances for tax returns, as we are continuing to gather additional information and expect to complete our accounting within the prescribed measurement period.

 

 

14


 

Note 6. Revenue Recognition and Contracts with Customers

Adoption

On January 1, 2018, the Company adopted new guidance on revenue from contracts with customers using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. As a result of adopting the new guidance, the Company determined there are no material impacts on the unaudited Combined Interim Financial Statements as the Company’s previous revenue recognition was consistent with the new standard. 

Disaggregated Revenue

Sales by channel are as follows:

 

 

 

Three Months

Ended

 

 

Nine Months

Ended

 

 

 

September 30,

2018

 

 

September 30,

2018

 

U.S. and Canada

 

$

525

 

 

$

1,579

 

EMEA (1)

 

 

107

 

 

 

338

 

India

 

 

42

 

 

 

77

 

Distribution

 

 

674

 

 

 

1,994

 

 

 

 

 

 

 

 

 

 

Comfort & Care

 

 

407

 

 

 

1,209

 

Safety & Security

 

 

119

 

 

 

358

 

Products

 

 

526

 

 

 

1,567

 

 

 

$

1,200

 

 

$

3,561

 

 

(1)

EMEA represents Europe, the Middle East and Africa.

 

We recognize the majority of our revenue from performance obligations outlined in contracts with our customers that are satisfied at a point in time. Less than 3% of our revenue is satisfied over time.

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and unbilled receivables (contract assets), reported in Accounts, notes and other receivables – net, and customer advances and deposits (contract liabilities), reported in Accrued Liabilities, on the Combined Interim Balance Sheet. Contract assets arise when situations exist where the timing of cash collected from customers that differs from the timing of revenue recognition. Contract assets are recognized when the revenue associated with the contract is recognized prior to billing and derecognized once invoiced in accordance with the terms of the contract. Contract liabilities are recorded in scenarios where we enter into arrangements where customers are contractually obligated to remit cash payments in advance of us satisfying performance obligations and recognizing revenue. Contract liabilities are derecognized when revenue is recognized, a milestone is met triggering the contractual right to bill, or the performance obligation is satisfied.    

These assets and liabilities are reported on the Combined Interim Balance Sheet on a contract-by-contract basis at the end of each reporting period.

 

15


 

The following table summarizes our contract assets and liabilities balances:

 

 

 

2018

 

Contract assets and liabilities

 

 

 

 

Contract assets - January 1

 

$

1

 

Contract assets - September 30

 

 

1

 

Change in contract assets - increase/(decrease)

 

$

-

 

 

 

 

 

 

Contract liabilities - January 1

 

$

3

 

Contract liabilities - September 30

 

 

2

 

Change in contract liabilities - increase/(decrease)

 

$

(1

)

 

The decrease in contract liabilities from January 1, 2018 to September 30, 2018 is primarily due to recognition of income from the beginning balance.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is defined as the unit of account. 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 majority of our performance obligations are satisfied as of a point in time. Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract. All performance obligations are expected to be satisfied within one year.

The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment. For some contracts, we may be entitled to receive an advance payment.

We have 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 we recognize revenue in proportion to the amount we have the right to invoice for services performed.

Note 7. Accounts, Notes and Other Receivables - Net

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Accounts, notes and other receivables

 

$

798

 

 

$

792

 

Less - Allowance for doubtful accounts

 

 

(15

)

 

 

(13

)

 

 

$

783

 

 

$

779

 

 

Note 8. Inventories

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Raw materials

 

$

139

 

 

$

108

 

Work in process

 

 

26

 

 

 

21

 

Finished products

 

 

438

 

 

 

336

 

 

 

$

603

 

 

$

465

 

 

 

16


 

Note 9. Accrued Liabilities

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Environmental costs

 

$

186

 

 

$

204

 

Compensation, benefit and other employee related

 

 

61

 

 

 

65

 

Customer rebate reserve

 

 

39

 

 

 

49

 

Repositioning

 

 

17

 

 

 

22

 

Product warranties and performance guarantees

 

 

15

 

 

 

17

 

Customer advances and deferred income

 

 

2

 

 

 

3

 

Other (primarily operating expenses)

 

 

68

 

 

 

49

 

 

 

$

388

 

 

$

409

 

 

Note 10. Accumulated Other Comprehensive Income (Loss) 

Changes in Accumulated Other Comprehensive Income (Loss) by Component

 

 

 

Foreign

Exchange

Translation

Adjustment

 

 

Changes in

Fair Value of

Effective

Cash Flow

Hedges

 

 

Total

Accumulated

Other

Comprehensive

Income (Loss)

 

Balance at December 31, 2016

 

$

(170

)

 

$

1

 

 

$

(169

)

Other comprehensive income (loss) before reclassifications

 

 

70

 

 

 

(4

)

 

 

66

 

Amounts reclassified from accumulated other comprehensive (loss)

 

 

-

 

 

 

2

 

 

 

2

 

Net current period other comprehensive income (loss)

 

 

70

 

 

 

(2

)

 

 

68

 

Balance at September 30, 2017

 

$

(100

)

 

$

(1

)

 

$

(101

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

(100

)

 

$

-

 

 

$

(100

)

Other comprehensive income (loss) before reclassifications

 

 

(23

)

 

 

(2

)

 

 

(25

)

Amounts reclassified from accumulated other comprehensive (loss)

 

 

-

 

 

 

1

 

 

 

1

 

Net current period other comprehensive income (loss)

 

 

(23

)

 

 

(1

)

 

 

(24

)

Balance at September 30, 2018

 

$

(123

)

 

$

(1

)

 

$

(124

)

 

Note 11. Commitments and Contingencies

Environmental Matters

We are subject to various federal, state, local and foreign government requirements relating to the protection of the environment. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that our handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. We have incurred remedial response and voluntary cleanup costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future.

 

17


 

With respect to environmental matters involving site contamination, we continually conduct studies, individually or jointly with other potentially responsible parties, to determine the feasibility of various remedial techniques. It is our 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 our 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, we do not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of our recorded liabilities. We expect 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.

We accrue costs related to environmental matters when it is probable that we have incurred a liability related to a contaminated site and the amount can be reasonably estimated. Environmental-related expenses are presented within Cost of goods sold for operating sites and Other expense for non-operating sites in the Combined Interim Statements of Operations.

The following table summarizes information concerning our recorded liabilities for environmental costs:

 

December 31, 2017

 

 

$

537

 

Accruals for environmental matters deemed probable and reasonably estimable

 

 

 

322

 

Environmental liability remediated

 

 

 

(124

)

September 30, 2018

 

 

$

735

 

 

Current and non-current environmental liabilities are included in the following balance sheet accounts, respectively:

 

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Accrued liabilities

 

 

$

186

 

 

$

204

 

Other liabilities

 

 

 

549

 

 

 

333

 

 

 

 

$

735

 

 

$

537

 

 

We do 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 combined results of operations and operating cash flows in the periods recognized or paid.

 

18


 

Other Matters

We are subject to other lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of 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. To date, no such matters are material to the Combined Interim Statements of Operations.  

Warranties and Guarantees

In the normal course of business we issue product warranties and product performance guarantees. We accrue for the estimated cost of product warranties and 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. Products warranties and product performance guarantees are included in Accrued liabilities. The following table summarizes information concerning our recorded obligations for product warranties and product performance guarantees.

 

December 31, 2017

 

 

$

17

 

Accruals for warranties/guarantees issued during the year

 

 

 

12

 

Adjustment of pre-existing warranties/guarantees

 

 

 

(2

)

Settlement of warranty/guarantee claims

 

 

 

(12

)

September 30, 2018

 

 

$

15

 

 

Note 12. Segment Financial Data

We globally manage our business operations through two reportable operating segments, Products and Distribution:

Products - Our Products business is a leading global provider of residential security and intrusion products, consumer thermostats, consumer HVAC and consumer awareness systems, residential thermal solutions and residential water controls that allow owners of homes to stay connected and in control of their comfort, security and energy use.

Distribution - Our Distribution business is a leading global distributor of security and low voltage fire protection products.

 

19


 

Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Companys chief operating decision maker (CODM) evaluates segment performance based on segment profit. Segment profit is measured as segment income (loss) before taxes excluding, pension expense, repositioning and other charges, other expense, and interest and other charges, net.

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Products sales

 

$

603

 

 

$

603

 

 

$

1,803

 

 

$

1,719

 

Less: Intersegment sales

 

 

77

 

 

 

84

 

 

 

236

 

 

 

258

 

External Products sales

 

 

526

 

 

 

519

 

 

 

1,567

 

 

 

1,461

 

External Distribution sales

 

 

674

 

 

 

633

 

 

 

1,994

 

 

 

1,849

 

Total sales

 

$

1,200

 

 

$

1,152

 

 

$

3,561

 

 

$

3,310

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018