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Section 1: 10-Q (10-Q)

rezi-10q_20190630.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 June 30, 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)

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

 

Title of each class:

Trading Symbol:

Name of each exchange on which registered:

Common Stock, par value $0.001 per share

REZI

New York Stock Exchange

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

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

The number of shares outstanding of the Registrant’s common stock, par value $0.001 per share as of August 1st, 2019 was 122,779,163 shares.

 

 

 

 


 

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 and Six Months Ended June 30, 2019 and 2018

5

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Comprehensive (Loss) Income (unaudited) – Three and Six Months Ended June 30, 2019 and 2018

6

 

 

 

 

 

 

Consolidated Interim Balance Sheet (unaudited) – June 30, 2019 and December 31, 2018

7

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Cash Flows (unaudited) – Six Months Ended June 30, 2019 and 2018

8

 

 

 

 

 

 

Consolidated and Combined Interim Statement of Equity (unaudited) – Three and Six Months Ended June 30, 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

28

 

 

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

 

 

4.

Controls and Procedures

40

 

 

 

 

Part II.

1.

Legal Proceedings

41

 

 

 

 

 

1A.

Risk Factors

41

 

 

 

 

 

5.

Other Information

41

 

 

 

 

 

6.

Exhibits

42

 

 

 

 

 

 

Signatures

43

 

 

 

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, including the impact of tariffs and the recently negotiated USMCA, which, when legislatively approved by each of the US, Mexico and Canada, will serve to replace NAFTA;

 

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;

3


 

RESIDEO TECHNOLOGIES, INC.

 

 

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;

 

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 June 30, 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

(Dollars in millions except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

1,242

 

 

$

1,196

 

 

$

2,458

 

 

$

2,361

 

Cost of goods sold

 

 

946

 

 

 

850

 

 

 

1,849

 

 

 

1,672

 

Gross profit

 

 

296

 

 

 

346

 

 

 

609

 

 

 

689

 

Selling, general and administrative expenses

 

 

254

 

 

 

217

 

 

 

482

 

 

 

429

 

Operating profit

 

 

42

 

 

 

129

 

 

 

127

 

 

 

260

 

Other expense, net

 

 

35

 

 

 

124

 

 

 

19

 

 

 

176

 

Interest expense

 

 

18

 

 

 

-

 

 

 

35

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before taxes

 

 

(11

)

 

 

5

 

 

 

73

 

 

 

84

 

Tax expense (benefit)

 

 

-

 

 

 

(28

)

 

 

36

 

 

 

6

 

Net (loss) income

 

$

(11

)

 

$

33

 

 

$

37

 

 

$

78

 

Weighted Average Number of Common Shares Outstanding (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

122,700

 

 

 

122,499

 

 

 

122,635

 

 

 

122,499

 

Diluted

 

 

122,700

 

 

 

122,499

 

 

 

123,490

 

 

 

122,499

 

(Loss) Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

0.27

 

 

$

0.30

 

 

$

0.64

 

Diluted

 

$

(0.09

)

 

$

0.27

 

 

$

0.30

 

 

$

0.64

 

 

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 (LOSS) INCOME

(Dollars in millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net (loss) income

 

$

(11

)

 

$

33

 

 

$

37

 

 

$

78

 

   Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

(4

)

 

 

(49

)

 

 

2

 

 

 

(18

)

Changes in fair value of effective cash flow hedges

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Total other comprehensive (loss) income, net of tax

 

 

(4

)

 

 

(49

)

 

 

2

 

 

 

(19

)

Comprehensive (loss) income

 

$

(15

)

 

$

(16

)

 

$

39

 

 

$

59

 

 

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

(Dollars in millions, shares in thousands)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

142

 

 

$

265

 

Accounts receivable

 

 

835

 

 

 

821

 

Inventories

 

 

722

 

 

 

628

 

Other current assets

 

 

147

 

 

 

95

 

Total current assets

 

 

1,846

 

 

 

1,809

 

Property, plant and equipment – net

 

 

304

 

 

 

300

 

Goodwill

 

 

2,650

 

 

 

2,634

 

Other intangible assets – net

 

 

127

 

 

 

133

 

Other assets

 

 

233

 

 

 

96

 

Total assets

 

$

5,160

 

 

$

4,972

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,009

 

 

$

964

 

Current maturities of long-term debt

 

 

22

 

 

 

22

 

Accrued liabilities

 

 

528

 

 

 

503

 

Total current liabilities

 

 

1,559

 

 

 

1,489

 

Long-term debt

 

 

1,169

 

 

 

1,179

 

Obligations payable to Honeywell

 

 

581

 

 

 

629

 

Other liabilities

 

 

258

 

 

 

142

 

COMMITMENTS AND CONTINGENCIES (Note 15)

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

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

   123,268 and 122,967 shares issued and 122,710

   and 122,499 shares outstanding as of June 30, 2019

   and December 31, 2018, respectively

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

1,743

 

 

 

1,720

 

Treasury stock, at cost

 

 

(2

)

 

 

-

 

Retained earnings

 

 

39

 

 

 

2

 

Accumulated other comprehensive loss

 

 

(187

)

 

 

(189

)

Total equity

 

 

1,593

 

 

 

1,533

 

Total liabilities and equity

 

$

5,160

 

 

$

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 FLOWS

(Dollars in millions)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Cash flows (used for) provided by operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

37

 

 

$

78

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

36

 

 

 

33

 

Repositioning charges, net of payments

 

 

14

 

 

 

(1

)

Stock compensation expense

 

 

14

 

 

 

9

 

Other noncash expense (income)

 

 

6

 

 

 

(12

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(7

)

 

 

21

 

Inventories

 

 

(95

)

 

 

(63

)

Other current assets

 

 

(8

)

 

 

(6

)

Other assets

 

 

(8

)

 

 

6

 

Accounts payable

 

 

25

 

 

 

106

 

Accrued liabilities

 

 

(17

)

 

 

(10

)

Obligations payable to Honeywell

 

 

(48

)

 

 

-

 

Other liabilities

 

 

14

 

 

 

97

 

Net cash (used for) provided by operating activities

 

 

(37

)

 

 

258

 

Cash flows used for investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant, equipment and software

 

 

(38

)

 

 

(24

)

Cash paid for acquisitions, net of cash acquired

 

 

(17

)

 

 

-

 

Proceeds received related to amounts due from related parties

 

 

-

 

 

 

7

 

Net cash used for investing activities

 

 

(55

)

 

 

(17

)

Cash flows used for financing activities:

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(11

)

 

 

-

 

Non-operating obligations paid to Honeywell, net

 

 

(18

)

 

 

-

 

Tax payments related to stock vestings

 

 

(2

)

 

 

-

 

Net decrease in invested equity

 

 

-

 

 

 

(193

)

Cashflow used by cash pooling

 

 

-

 

 

 

(8

)

Net cash used for financing activities

 

 

(31

)

 

 

(201

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

-

 

 

 

(3

)

Net (decrease) increase in cash and cash equivalents

 

 

(123

)

 

 

37

 

Cash and cash equivalents at beginning of period

 

 

265

 

 

 

56

 

Cash and cash equivalents at end of period

 

$

142

 

 

$

93

 

 

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

(Dollars in millions, shares in thousands)

(Unaudited)

 

 

 

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

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33

 

 

 

-

 

 

 

33

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(49

)

 

 

(49

)

Change in invested equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(93

)

 

 

-

 

 

 

(93

)

Balance at June 30, 2018

 

 

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,599

 

 

$

(119

)

 

$

2,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

(11

)

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4

)

 

 

(4

)

Shares issued for employee stock plans

 

 

30

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

Shares withheld for employees' taxes

 

 

(6

)

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Adjustments due to Spin-Off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

Balance at June 30, 2019

 

 

122,710

 

 

 

558

 

 

$

-

 

 

$

(2

)

 

$

1,743

 

 

$

39

 

 

$

-

 

 

$

(187

)

 

$

1,593

 

 

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

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

Note 1. Organization, Operations and Basis of Presentation

Business Description

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

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

Prior to the Spin-Off on October 29, 2018, the Company’s historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 29, 2018, these financial statements are presented on a combined basis and for the periods subsequent to October 29, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Interim Financial Statements”). The Consolidated and Combined Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Consolidated and 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 June 30, 2018.

10


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

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

Prior to the Spin-Off, Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Company. The cost of these services has been allocated to the Company on the basis of the proportion of net revenue. The Company and Honeywell consider these allocations to be a reasonable reflection of the benefits received by the Company. However, the financial information presented in these 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 and six months ended June 30, 2019 and 2018 were June 29, 2019 and June 30, 2018, respectively.

11


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

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.

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

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 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 statement 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.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. From November 2018 to April 2019, amendments to Topic 326 were issued to clarify numerous accounting topics. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2018. The Company is currently assessing the impact this pronouncement may have on our trade receivables and notes receivables.

12


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

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.

Note 3. (Loss) 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 June 30, 2019 and June 30, 2018, this calculation excludes 557,585 and 467,764 of treasury shares, respectively.

The details of the (loss) earnings per share calculations for the three and six months ended June 30, 2019 and 2018 are as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

Basic:

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net (loss) income

 

$

(11

)

 

$

33

 

 

$

37

 

 

$

78

 

Weighted average common shares outstanding (in thousands)

 

 

122,700

 

 

 

122,499

 

 

 

122,635

 

 

 

122,499

 

(Loss) earnings per share - Basic

 

$

(0.09

)

 

$

0.27

 

 

$

0.30

 

 

$

0.64

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

Diluted:

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net (loss) income

 

$

(11

)

 

$

33

 

 

$

37

 

 

$

78

 

Weighted average common shares outstanding - Basic (in thousands)

 

 

122,700

 

 

 

122,499

 

 

 

122,635

 

 

 

122,499

 

Dilutive effect of unvested RSUs

 

 

-

 

 

 

-

 

 

 

855

 

 

 

-

 

Weighted average common shares outstanding - Diluted (in thousands)

 

 

122,700

 

 

 

122,499

 

 

 

123,490

 

 

 

122,499

 

(Loss) earnings per share - Diluted

 

$

(0.09

)

 

$

0.27

 

 

$

0.30

 

 

$

0.64

 

 

Diluted (loss) earnings per share is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the three and six months ended June 30, 2019. In periods where the Company has a net loss, no dilutive common shares are included in the calculation for diluted shares as they are considered anti-dilutive. For the six months ended June 30, 2019, average options and other rights to purchase approximately 1.4 million shares of common stock were outstanding, all of which were anti-dilutive during the six months ended June 30, 2019, and therefore excluded from the computation of diluted earnings per common share. Additionally, an average of approximately 0.2 million shares of performance based unit awards are excluded from the computation of diluted earnings per common share for the six months ended June 30, 2019 as the contingency has not been satisfied at June 30, 2019.

 

13


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

Note 4. Acquisitions

On March 28, 2019 the Company acquired all of the capital stock of Buoy Labs, for $6 million, which has been integrated into our 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 allow consumers to act 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 acquisition agreement includes deferred payments for certain individuals that are contingent upon employment as well as financial performance. The Company determined that these deferred payments are accounted for as compensation expense over the requisite service period. The Company is still assessing the final allocation of the purchase price to the assets and liabilities of the business.

 

On May 21, 2019 the Company acquired certain assets relating to innovative energy efficiency from Whisker Labs, for $5 million, which has been integrated into our Products & Solutions segment. The acquired technology creates a thermodynamic model of a home to accurately predict home heating and air conditioning run time and energy use to enable a homeowner to use less energy while maintaining comfort. In connection with the acquisition, the Company recognized preliminary goodwill and intangible assets of $5 million. The Company is still assessing the final allocation of the purchase price to the assets and liabilities of the business.

 

On June 27, 2019 the Company acquired all of the membership interests of LifeWhere for $6 million, which has been integrated into our Products & Solutions segment. LifeWhere uses machine learning and analytics to predict potential failure on critical home appliances, such as water heaters, furnaces and air conditioners. This service provides the detailed analytics required for professional contractors to dispatch technicians with the right skills to quickly repair the appliance before it causes a catastrophic failure. 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.

 

These acquisitions have an immaterial financial statement impact on both an individual basis and when considered in the aggregate.

 

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

During the three and six months ended June 30, 2018, the Company was allocated $69 million and $137 million, respectively, of general corporate expenses incurred by Honeywell and such amounts are included within Selling, general and administrative expenses in the unaudited Combined Interim Statement of Operations for the six months ended June 30, 2018  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.

14


 

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Dollars in millions, unless otherwise noted)

(Unaudited)

 

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 and six months ended June 30, 2018 were $8 million and $15 million, respectively.  Costs of goods sold to Honeywell during the three and six months ended June 30, 2018 were $8