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Section 1: 10-Q (10-Q)

rezi-10q_20190331.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 March 31, 2019

or

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

For the transition period from ______ to _____

Commission File Number 001-38635

Resideo Technologies, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-5318796

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

901 E 6th Street

Austin, Texas

 

78702

(Address of principal executive offices)

 

(Zip Code)

(763) 954-5204

(Registrant’s telephone number, including area code)

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 May 6th, 2019 was 122,699,925 shares.

 

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

 

Title of each class:

Trading Symbol:

Name of each exchange on which registered:

Common Stock, par value $0.001 per share

REZI

New York Stock Exchange

 

 

 

 


 

TABLE OF CONTENTS

 

 

Item

 

Page

 

 

 

 

Part I.

 

Item 1. Financial Statements

5

 

 

 

 

 

1.

Financial Statements

5

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Operations (unaudited) – Three Months Ended March 31, 2019 and 2018

5

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Comprehensive Income (unaudited) - Three Months Ended March 31, 2019 and 2018

6

 

 

 

 

 

 

Consolidated Interim Balance Sheet (unaudited) – March 31, 2019 and December 31, 2018

7

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Cash Flows (unaudited) – Three Months Ended March 31, 2019 and 2018

8

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Equity (unaudited) – Three Months Ended March 31, 2019 and 2018

9

 

 

 

 

 

 

Notes to the Consolidated and Combined Interim Financial Statements (unaudited)

10

 

 

 

 

 

2.

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

25

 

 

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

 

 

4.

Controls and Procedures

35

 

 

 

 

Part II.

1.

Legal Proceedings

36

 

 

 

 

 

1A.

Risk Factors

36

 

 

 

 

 

5.

Other Information

36

 

 

 

 

 

6.

Exhibits, Financial Statement Schedules

37

 

 

 

 

 

 

Signatures

38

 

 

 

2


 

RESIDEO TECHNOLOGIES, INC.

 

Cautionary Statement about Forward-Looking Statements

 

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

 

 

lack of operating history as an independent publicly traded company and unreliability of historical combined financial information as an indicator of our future results;

 

the level of competition from other companies;

 

ability to successfully develop new technologies and introduce new products;

 

changes in prevailing global and regional economic conditions;

 

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

 

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

 

ability to operate as an independent publicly traded company without certain benefits available to us as a part of Honeywell;

 

dependence upon investment in information technology;

 

failure or inability to comply with relevant data privacy legislation or regulations, including the European Union’s General Data Protection Regulation;

 

technical difficulties or failures;

 

work stoppages, other disruptions, or the need to relocate any of our facilities;

 

economic, political, regulatory, foreign exchange and other risks of international operations;

 

changes in legislation or government regulations or policies;

 

our growth strategy is dependent on expanding our distribution business;

 

inability to obtain necessary production equipment or replacement parts;

 

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

 

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

 

difficulty collecting receivables;

 

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

 

our inability to maintain intellectual property agreements;

 

the failure to increase productivity through sustainable operational improvements;

 

inability to grow successfully through future acquisitions;

 

inability to recruit and retain qualified personnel;

 

the operational constraints and financial distress of third parties;

 

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

 

labor disputes;

 

our ability to borrow funds and access capital markets;

 

the amount of our obligations pursuant to the Honeywell Reimbursement Agreement;

 

potential material environmental liabilities;

 

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

 

potential material litigation matters;

3


 

RESIDEO TECHNOLOGIES, INC.

 

 

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

 

U.S. federal income tax reform;

 

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

 

certain factors discussed elsewhere in this Form 10-Q.

 

These and other factors are more fully discussed in the “Risk Factors” section in our 2018 Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Annual Report on Form 10-K”) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Form 10-Q. There have been no material changes to the risk factors described in our 2018 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

 

Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

PART I

 

The financial statements and related footnotes as of March 31, 2019 should be read in conjunction with the financial statements for the year ended December 31, 2018 contained in our 2018 Annual Report on Form 10-K.

 

4


 

RESIDEO TECHNOLOGIES, INC.

 

Item 1.

Financial Statements

CONSOLIDATED AND COMBINED INTERIM STATEMENT OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions except share and per share data)

 

Net revenue

 

$

1,216

 

 

$

1,165

 

Cost of goods sold

 

 

903

 

 

 

822

 

Gross profit

 

 

313

 

 

 

343

 

Selling, general and administrative expenses

 

 

228

 

 

 

212

 

Other (income) expense, net

 

 

(16

)

 

 

52

 

Interest expense

 

 

17

 

 

 

-

 

 

 

 

229

 

 

 

264

 

Income before taxes

 

 

84

 

 

 

79

 

Tax expense

 

 

36

 

 

 

34

 

Net income

 

$

48

 

 

$

45

 

Weighted Average Number of Common Shares

   Outstanding

 

 

 

 

 

 

 

 

Basic (in thousands)

 

 

122,570

 

 

 

122,499

 

Diluted (in thousands)

 

 

123,472

 

 

 

122,499

 

Earnings Per Share

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.39

 

 

$

0.37

 

Diluted net income per share

 

$

0.39

 

 

$

0.37

 

 

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

 

 

5


 

RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED AND COMBINED

INTERIM STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Net income

 

$

48

 

 

$

45

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

6

 

 

 

31

 

Changes in fair value of effective cash flow hedges

 

 

-

 

 

 

(1

)

Total other comprehensive income, net of tax

 

 

6

 

 

 

30

 

Comprehensive income

 

$

54

 

 

$

75

 

 

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

 

 

6


 

RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED INTERIM BALANCE SHEET

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions, shares in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

212

 

 

$

265

 

Accounts receivables

 

 

838

 

 

 

821

 

Inventories

 

 

701

 

 

 

628

 

Other current assets

 

 

111

 

 

 

95

 

Total current assets

 

 

1,862

 

 

 

1,809

 

Property, plant and equipment – net

 

 

296

 

 

 

300

 

Goodwill

 

 

2,644

 

 

 

2,634

 

Other intangible assets – net

 

 

128

 

 

 

133

 

Other assets

 

 

214

 

 

 

96

 

Total assets

 

$

5,144

 

 

$

4,972

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,013

 

 

$

964

 

Current maturities of long-term debt

 

 

22

 

 

 

22

 

Accrued liabilities

 

 

524

 

 

 

503

 

Total current liabilities

 

 

1,559

 

 

 

1,489

 

Long-term debt

 

 

1,174

 

 

 

1,179

 

Obligations payable to Honeywell

 

 

580

 

 

 

629

 

Other liabilities

 

 

239

 

 

 

142

 

COMMITMENTS AND CONTINGENCIES (Note 14)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

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

   123,238 and 122,967 shares issued and 122,686

   and 122,499 shares outstanding as of March 31, 2019

   and December 31, 2018 respectively

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

1,727

 

 

 

1,720

 

Treasury stock, at cost

 

 

(2

)

 

 

-

 

Retained earnings

 

 

50

 

 

 

2

 

Accumulated other comprehensive (loss)

 

 

(183

)

 

 

(189

)

Total equity

 

 

1,592

 

 

 

1,533

 

Total liabilities and equity

 

$

5,144

 

 

$

4,972

 

 

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

 

7


 

RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED AND COMBINED INTERIM STATEMENT OF CASH FLOW

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

48

 

 

$

45

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16

 

 

 

17

 

Stock compensation expense

 

 

7

 

 

 

4

 

Other noncash expense

 

 

3

 

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(17

)

 

 

51

 

Inventories

 

 

(72

)

 

 

(10

)

Other current assets

 

 

(16

)

 

 

5

 

Other assets

 

 

(1

)

 

 

(1

)

Accounts payable

 

 

70

 

 

 

18

 

Accrued liabilities

 

 

(6

)

 

 

(48

)

Obligations payable to Honeywell

 

 

(49

)

 

 

-

 

Other liabilities

 

 

7

 

 

 

37

 

Net cash (used for) provided by operating activities

 

 

(10

)

 

 

126

 

Cash flows used for investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant, equipment and software

 

 

(15

)

 

 

(16

)

Cash paid for acquisitions, net of cash acquired

 

 

(6

)

 

 

-

 

Proceeds received related to amounts due from related parties

 

 

-

 

 

 

7

 

Net cash used for investing activities

 

 

(21

)

 

 

(9

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(6

)

 

 

-

 

Non-operating obligations paid to Honeywell, net

 

 

(15

)

 

 

-

 

Tax payments related to stock vestings

 

 

(2

)

 

 

-

 

Net decrease in invested equity

 

 

-

 

 

 

(91

)

Net cash flow used by cash pooling

 

 

-

 

 

 

(8

)

Net cash used for financing activities

 

 

(23

)

 

 

(99

)

Effect of foreign exchange rate changes on cash and cash

   equivalents

 

 

1

 

 

 

1

 

Net (decrease) increase in cash and cash equivalents

 

 

(53

)

 

 

19

 

Cash and cash equivalents at beginning of period

 

 

265

 

 

 

56

 

Cash and cash equivalents at end of period

 

$

212

 

 

$

75

 

 

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

 

 

8


 

RESIDEO TECHNOLOGIES, INC.

 

CONSOLIDATED AND COMBINED INTERIM STATEMENT OF EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions, shares

in thousands)

 

Common

Shares

 

 

Treasury

Shares

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-

In Capital

 

 

Retained

Earnings

 

 

Invested

Equity

 

 

Accumulated

Other

Comprehensive

(Loss)

 

 

Total

Equity

 

Balance at December 31, 2017

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,703

 

 

$

(100

)

 

$

2,603

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

45

 

Other comprehensive income,

   net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

30

 

 

 

30

 

Change in invested equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(89

)

 

 

-

 

 

 

(89

)

Balance at March 31, 2018

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,659

 

 

$

(70

)

 

$

2,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

122,499

 

 

 

468

 

 

$

-

 

 

$

-

 

 

$

1,720

 

 

$

2

 

 

$

-

 

 

$

(189

)

 

$

1,533

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

48

 

 

 

-

 

 

 

-

 

 

 

48

 

Other comprehensive income,

   net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

6

 

Shares issued for employee

   stock plans

 

 

271

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

Shares withheld for employees' taxes

 

 

(84

)

 

 

84

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

Balance at March 31, 2019

 

 

122,686

 

 

 

552

 

 

$

-

 

 

$

(2

)

 

$

1,727

 

 

$

50

 

 

$

-

 

 

$

(183

)

 

$

1,592

 

 

 

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

 

 

9


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND 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”), 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.

Separation from Honeywell

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”). On October 3, 2018 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 was declared effective by the SEC. On October 29, 2018, Honeywell’s shareholders of record as of October 16, 2018 ( “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.

In connection with the separation, Resideo and Honeywell entered into a Separation and Distribution Agreement, an Employee Matters Agreement, a Tax Matters Agreement, a Transition Services Agreement, a Trademark License Agreement and a Patent Cross-License Agreement. The agreements govern the relationship between Resideo and Honeywell following the separation and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be provided by Honeywell to Resideo and by Resideo to Honeywell.

Basis of Presentation

The unaudited Consolidated Interim Balance Sheet as of March 31, 2019, Consolidated Balance Sheet as of December 31, 2018 and unaudited Consolidated Interim Statement of Operations, Comprehensive Income, Equity, and Cash Flows for the three months ended March 31, 2019 consists of the consolidated balances of Resideo as prepared on a stand-alone basis. The unaudited Combined Interim Statement of Operations, Comprehensive Income, Equity, and Cash Flows for the three months ended March 31, 2018, have been prepared on a “carve-out” basis. Prior to the separation, these unaudited Combined Interim Financial Statements were derived from the unaudited consolidated interim financial statements and accounting records of Honeywell. These unaudited Combined Interim Financial Statements reflect the Company’s consolidated historical financial position, results of operations and cash flows as they have been historically managed 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.

All intracompany transactions have been eliminated for all periods presented. As described in “Note 5. Related Party Transactions with Honeywell” of Notes to unaudited Consolidated and Combined Interim Financial Statements of this Form 10-Q, all significant transactions between the Company and Honeywell occurring prior to the Spin-Off have been included in the unaudited Combined Interim Financial Statements for the period ended March 31, 2018.

10


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

Prior to the Spin-Off, transactions between the Company and Honeywell were reflected in the Combined Balance Sheet as Due from related parties, current or Due to related parties, current. In the unaudited Combined Interim Statement of Cash Flows, the cash flows related to related party notes receivables presented in the Combined Balance Sheet in Due from related parties, current are reflected as investing activities since these balances represent amounts loaned to Honeywell. The cash flows related to related party notes payables presented in the Combined Balance Sheet in Due to related parties, current are reflected as financing activities since these balances represent amounts financed by Honeywell.

While the Company was owned by Honeywell, a centralized approach to cash management and financing was used. Prior to the consummation of the Spin-Off, the majority of the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed. Cash transfers to and from Honeywell’s cash management accounts are reflected in the Combined Balance Sheet as Due to and Due from related parties, current and in the unaudited Combined Interim Statement of Cash Flows as net financing activities.

The unaudited Combined Interim Financial Statements prior to the Spin-Off include certain assets and liabilities that have historically been held at the Honeywell corporate level but were specifically identifiable or otherwise attributable to the Company. The cash and cash equivalents held by Honeywell at the corporate level were not specifically identifiable to the Company and therefore were not attributed 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.

Prior to the Spin-Off, Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The cost of these services has been allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider these allocations to be a reasonable reflection of the benefits received by the Company. However, the financial information presented in these unaudited Consolidated and Combined Interim Financial Statements may not reflect the consolidated and combined financial position, operating results and cash flows of the Company had the Company been a separate stand-alone entity during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both Resideo and Honeywell consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefits received by the Company during the periods presented. After the Spin-Off, a number of the above services have continued under a transition services agreement with Honeywell, which the Company expenses as incurred based on the contractual pricing terms.

 

The Company reports its 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 is the Company’s practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires its businesses to close their books on the last Saturday of the month 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 actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, the Company will provide appropriate disclosures. Actual closing dates for the three months ended March 31, 2019 and 2018 were March 30, 2019 and March 31, 2018, respectively.

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 2018 Annual Report on Form 10-K. Included herein are certain updates to those policies.

11


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

Leases—Effective January 1, 2019, arrangements containing leases are evaluated as an operating or finance lease at lease inception. For operating leases, the Company recognizes an operating right-of-use asset and operating lease liability at lease commencement based on the present value of lease payments over the lease term.

Since an implicit rate of return is not readily determinable for the Company's leases, an incremental borrowing rate is used in determining the present value of lease payments, and is calculated based on information available at the lease commencement date. Most leases include renewal options, however, generally it is not reasonably certain that these options will be exercised at lease commencement. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recognized on the Company’s balance sheet. The Company does not separate lease and non-lease components for its real estate and automobile leases.

ReclassificationFor the three months ended March 31, 2018 we reclassified $1 million of interest from Interest and other charges, net to Other (income) expense, net in the unaudited Combined Interim Statement of Operations to conform with the current period presentation. This reclassification had no impact on Income before taxes and Net income, the unaudited Consolidated and Combined Balance Sheet or unaudited Combined Interim Statement of Cash Flows during the respective periods.

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 consolidated and combined financial position or results of operations.

The Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, and applied the changes prospectively, recognizing a cumulative-effect adjustment to the beginning balance of retained earnings as of the adoption date. As permitted by the new guidance, the Company elected the package of practical expedients, which among other things, allowed historical lease classification to be carried forward.

Upon adoption of the ASU No. 2016-02 the Company recognized an aggregate lease liability of $115 million, calculated based on the present value of the remaining minimum lease payments for qualifying leases as of January 1, 2019, with a corresponding right-of-use asset of $112 million. The cumulative-effect adjustment recognized to opening retained earnings was not material. The adoption of the new guidance did not impact the Company’s unaudited consolidated interim statements of operations or cash flows.

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. The Company adopted the standard on January 1, 2019 and has not reclassified the income tax effects of U.S. Tax Reform from accumulated other comprehensive income to retained earnings. The Company has adopted the aggregate portfolio accounting policy for recognizing the disproportionate income tax effects in accumulated other comprehensive income.

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

12


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

Note 3. Earnings Per Share

On October 29, 2018, the date of consummation of the Spin-Off, 122,498,794 shares of the Company’s Common Stock, par value $0.001 per share, were distributed to Honeywell shareholders of record as of October 16, 2018. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Spin-Off as no common stock was outstanding prior to the date of the Spin-Off. For the 2018 year to date calculation, these shares are treated as issued and outstanding from January 1, 2018 for purposes of calculating historical basic earnings per share. For March 31, 2019 and March 31, 2018, this calculation excludes 551,937 and 467,764 of treasury shares respectively.

The details of the earnings per share calculations for the three months ended March 31, 2019 and 2018 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

Basic:

 

2019

 

 

2018

 

Net income

 

$

48

 

 

$

45

 

Weighted average common shares outstanding (in thousands)

 

 

122,570

 

 

 

122,499

 

Earnings Per Share - Basic

 

$

0.39

 

 

$

0.37

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

Diluted:

 

2019

 

 

2018

 

Net income

 

$

48

 

 

 

45

 

Weighted average common shares outstanding - Basic (in thousands)

 

 

122,570

 

 

 

122,499

 

Dilutive effect of unvested RSUs

 

 

902

 

 

 

-

 

Weighted average common shares outstanding - Diluted (in thousands)

 

 

123,472

 

 

 

122,499

 

Earnings Per Share - Diluted

 

$

0.39

 

 

$

0.37

 

 

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 period from December 31, 2018 to March 31, 2019. As of March 31, 2019, options and other rights to purchase approximately 1.8 million shares of common stock were outstanding, all of which were anti-dilutive during the three months ended March 31, 2019, and therefore excluded from the computation of diluted income per common share. Additionally, approximately 0.3 million shares of performance based unit awards, are excluded from the computation of diluted income per common share as the contingency has not been satisfied at March 31, 2019.

 

Note 4. Acquisitions

On March 28, 2019 the Company acquired Buoy Labs, for $6 million, which is part of the Products & Solutions segment. Buoy Labs provides innovative Wi-Fi enabled solutions that tracks the amount of water used in a home, integrating smart software and hardware that can help consumers identify potential leaks and intervene to prevent them through its subscription-based app services. In connection with the acquisition, the Company recognized preliminary goodwill and intangible assets of $6 million. The Company is still assessing the final allocation of the purchase price to the assets and liabilities of the business.

 

Note 5. Related Party Transactions with Honeywell

Prior to the Spin-Off, the unaudited Combined Interim Financial Statements were derived from the unaudited Consolidated Interim Financial Statements and accounting records of Honeywell.

13


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

Prior to the Spin-Off, Honeywell was a related party that provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The cost of these services were allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider the allocations to be a reasonable reflection of the benefits received by the Company.

During the three months ended March 31, 2018, the Company was allocated $68 million of general corporate expenses incurred by Honeywell and such amounts are included within Selling, general and administrative expenses in the unaudited 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. Sales to Honeywell during the three months ended March 31, 2018 were $7 million. Costs of goods sold to Honeywell during the three months ended March 31, 2018 were $5 million. Purchases from Honeywell during the three months ended March 31, 2018 were $51 million. The total net effect of the settlement of these intercompany transactions is reflected in unaudited Combined Interim Statements of Cash Flows as a financing activity.

 

While the Company was owned by Honeywell, a centralized approach to cash management and financing of operations was used. Prior to consummation of the Spin-Off, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed.

 

Subsequent to the Spin-Off on October 29, 2018, transactions with Honeywell were not considered related party transactions. Accordingly, no related party transactions with Honeywell were recorded for the three months ended March 31, 2019.

 

 

Note 6. Revenue Recognition

Disaggregated Revenue

Revenues by channel are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

U.S. and Canada

 

$

536

 

 

$

510

 

EMEA (1)

 

 

115

 

 

 

117

 

India

 

 

14

 

 

 

15

 

Global Distribution

 

 

665

 

 

 

642

 

Comfort

 

 

272

 

 

 

262

 

Security

 

 

132

 

 

 

110

 

RTS

 

 

147

 

 

 

151

 

Products & Solutions (2)

 

 

551

 

 

 

523

 

Net revenue

 

$

1,216

 

 

$

1,165

 

 

(1)

EMEA represents Europe, the Middle East and Africa.

(2)

Products & Solutions sales channel naming convention changed from what was disclosed in our quarterly report for the quarter ended September 30, 2018. Comfort & Care was broken out into Comfort and Residential Thermal Solutions (“RTS”).

14


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

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. Less than 3% of the Company’s revenue is satisfied over time. As of March 31, 2019, contract assets and liabilities are not material.

 

Note 7. Income Taxes

 

The effective tax rate of 43% did not change for the three months ended March 31, 2019 year-over-year, as compared to the three months ended March 31, 2018.

 

The effective tax rate for the quarter ended March 31, 2019 was higher than the U.S. federal statutory rate of 21% which is primarily attributable to other nondeductible expenses and U.S. taxation of foreign earnings.

 

The effective tax rate for the three months ended March 31, 2018 was higher than the U.S. federal statutory rate of 21% primarily attributable to U.S. taxation of foreign earnings, accrued withholdings taxes on earnings deemed to not be permanently reinvested, and other non-deductible expenses.

 

Note 8. Inventories

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

166

 

 

$

167

 

Work in process

 

 

29

 

 

 

34

 

Finished products

 

 

506

 

 

 

427

 

 

 

$

701

 

 

$

628

 

 

Note 9. Accrued Liabilities

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Obligations payable to Honeywell

 

$

140

 

 

$

140

 

Taxes payable

 

 

105

 

 

 

76

 

Compensation, benefit and other employee related

 

 

44

 

 

 

73

 

Other

 

 

235

 

 

 

214

 

 

 

$

524

 

 

$

503

 

 

Refer to “Note 14. Commitments and Contingencies” of this Form 10-Q for further details on Obligations payable to Honeywell.

 

15


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

Note 10. Long-term Debt and Credit Agreement

 

The Company’s debt at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

6.125% notes due 2026

 

$

400

 

 

$

400

 

Five-year variable rate term loan A due 2023

 

 

345

 

 

 

350

 

Seven-year variable rate term loan B due 2025

 

 

474

 

 

 

475

 

Unamortized debt issuance costs

 

 

(23

)

 

 

(24

)

Total outstanding indebtedness

 

 

1,196

 

 

 

1,201

 

Less: amounts due within one year

 

 

22

 

 

 

22

 

Total long-term debt due after one year

 

$

1,174

 

 

$

1,179

 

 

In October of 2018, the Company issued $400 million in principal amount of its 6.125% senior unsecured notes (the “Senior Notes”), entered into term loan facilities in the form of a seven-year LIBOR plus 2.00% senior secured first-lien term B loan facility in an aggregate principal amount of $475 million and a five-year LIBOR plus 2.00% senior secured first-lien term A loan facility in an aggregate principal amount of $350 million (the “Term Loans”) and established a five-year senior secured first-lien revolving credit facility in an aggregate principal amount of $350 million (the "Revolving Credit Facility"). The Term Loans interest rate for the three months ended March 31, 2019 was 4.63%. At March 31, 2019, there were no borrowings and $18 million of letters of credit issued under the $350 million Revolving Credit Facility. For more information, please refer to “Note 15. Long-term Debt” in our 2018 Annual Report on Form 10-K.

As of March 31, 2019, the Company assessed the amount recorded under the Term Loans, the Senior Notes, and the Revolving Credit Facility and determined the Term Loans and the Revolving Credit Facility approximated fair value, and the Senior Notes’ fair value is approximately $413 million. The fair values of the debt are based on the quoted inactive prices and are therefore classified as Level 2 within the valuation hierarchy.

The net proceeds from the borrowings under the Revolving Credit Facility, Term Loans and the offering of the Senior Notes were used as part of the financing for the Spin-Off. The interest expense for the Revolving Credit Facility, Term Loans and Senior Notes during the three months ended March 31, 2019 was $17 million, which includes the amortization of debt issuance cost and debt discounts.

 

Note 11. Leases

As discussed in Note. 2, the Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019. The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment. Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation, and certain automobile lease agreements include rental payments which fluctuate based on mileage. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease costs were $12 million for the three months ended March 31, 2019, and include costs associated with short-term leases and variable lease costs of $1 million and $3 million, respectively. Operating lease costs of $8 million were recognized as a component of selling, general & administrative expenses, with the remaining $4 million recognized as a component of cost of goods sold. The Company subleases one manufacturing site and three other sites to a third party. The leases have terms of 3 to 5 years and include renewal options. Sublease income for the three months ended March 31, 2019 related to these sites was not material.

The Company recognized the following related to its operating leases:

16


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

 

 

 

Financial Statement Line Item

 

At March 31,

2019

 

Operating right-of-use assets

 

Other assets

 

$

117

 

Operating lease liabilities - current

 

Accrued liabilities

 

$

29

 

Operating lease liabilities - noncurrent

 

Other liabilities

 

$

90

 

Maturities of the Company’s operating lease liabilities were as follows:

 

 

 

At March 31,

2019

 

2019 (1)

 

$

27

 

2020

 

 

31

 

2021

 

 

27

 

2022

 

 

22

 

2023

 

 

16

 

Thereafter

 

 

16

 

Total lease payments

 

 

139

 

Less: imputed interest

 

 

20

 

Present value of operating lease liabilities

 

$

119

 

Weighted-average remaining lease term (years)

 

 

5.24

 

Weighted-average discount rate

 

 

6.34

%

 

(1)

Represents lease payments from April 1, 2019 through December 31, 2019

 

Future minimum lease payments under operating leases having initial or remaining non-cancellable lease terms in excess of one year as of December 31, 2018 were as follows:

 

 

 

At December 31,

2018

 

2019

 

$

39

 

2020

 

 

33

 

2021

 

 

28

 

2022

 

 

22

 

2023

 

 

15

 

Thereafter

 

 

17

 

 

 

$

154

 

 

 

Supplemental cash flow information related to the Company’s operating leases was as follows:

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2019

 

Operating cash flows

 

 

 

$

9

 

Operating right-of-use assets obtained in exchange for operating

   lease liabilities

 

 

 

$

12

 

 

17


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, unless otherwise noted)

 

As of March 31, 2019, the Company has additional operating leases that have not yet commenced. Obligations under these leases are approximately $17 million and the leases are expected to commence during the year ended December 31, 2019 with lease terms of 1 to 10 years.

 

The Company’s obligations relating to finance leases as of March 31, 2019, and associated costs for the three months then ended, were not material.

 

 

Note 12. Accumulated Other Comprehensive (Loss)

The changes in Accumulated other comprehensive (loss) are provided in the tables below.

 

Changes in Accumulated Other Comprehensive (Loss) by Component

 

 

 

Foreign

Exchange

Translation

Adjustment

 

 

Pension

Adjustments

 

 

Changes in

Fair Value of

Effective

Cash Flow

Hedges

 

 

Total

Accumulated

Other

Comprehensive

(Loss)

 

Balance at December 31, 2017

 

$

(100

)

 

$

-

 

 

$

-

 

 

$

(100

)

Other comprehensive income before

   reclassifications

 

 

31

 

 

 

-

 

 

 

-

 

 

 

31

 

Amounts reclassified from accumulated other

   comprehensive income (a)

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(1

)

Net current period other comprehensive income

 

 

31

 

 

 

-

 

 

 

(1

)

 

 

30

 

Balance at March 31, 2018

 

$

(69

)

 

$

-

 

 

$

(1

)

 

$

(70

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

(177

)

 

$

(12

)

 

$

-

 

 

$

(189

)

Other comprehensive income before

reclassifications

 

 

6

 

 

 

-

 

 

 

-

 

 

 

6

 

Net current period other comprehensive income

 

 

6

 

 

 

-

 

 

 

-

 

 

 

6