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 April 2, 2022

1, 2023

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.)

 

 

16100 NN. 71st Street,, Suite 550

Scottsdale,, Arizona

85254

(Address of principal executive offices)

(Zip Code)

(480) 573-5340
(Registrant’s telephone number, including area code)

(480) 573-5340

(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“emerging growth company"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 April 29, 202221, 2023 was 147,114,150 shares.

145,400,448
 shares.

TABLE OF CONTENTS
Part I - Financial Information
Item 1.
3
3
4
5
6
7
8
Item 2.
21
Item 3.
29
Item 4.
30
Part II - Other Information
Item 1.
31
Item 1A.
31
Item 6.
32
33


 

Item

 

Page

 

 

 

 

Part I.

 

Item 1. Financial Statements

5

 

 

 

 

 

1.

Financial Statements

5

 

 

 

 

 

 

Consolidated Interim Statements of Operations (unaudited) – Three Months Ended April 2, 2022 and April 3, 2021

5

 

 

 

 

 

 

Consolidated Interim Statements of Comprehensive Income (unaudited) – Three Months Ended April 2, 2022 and April 3, 2021

6

 

 

 

 

 

 

Consolidated Interim Balance Sheets (unaudited) – April 2, 2022 and December 31, 2021

7

 

 

 

 

 

 

Consolidated Interim Statements of Cash Flows (unaudited) – Three Months Ended April 2, 2022 and April 3, 2021

8

 

 

 

 

 

 

Consolidated Interim Statements of Equity (unaudited) – Three Months Ended April 2, 2022 and April 3, 2021

9

 

 

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

10

 

 

 

 

 

2.

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

21

 

 

 

 

 

3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

 

 

4.

Controls and Procedures

30

 

 

 

 

Part II.

1.

Legal Proceedings

31

 

 

 

 

 

1A.

Risk Factors

31

 

 

 

 

 

6.

Exhibits

32

 

 

 

 

 

 

Signatures

33

2

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within

Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements.
Resideo Technologies, Inc.
Consolidated Balance Sheets
(Unaudited)
(in millions)April 1, 2023December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$292 $326 
Accounts receivable, net985 1,002 
Inventories, net1,008 975 
Other current assets210 199 
Total current assets2,495 2,502 
Property, plant and equipment, net379 366 
Goodwill2,736 2,724 
Intangible assets, net471 475 
Other assets318 320 
Total assets$6,399 $6,387 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$894 $894 
Current portion of long-term debt12 12 
Accrued liabilities563 640 
Total current liabilities1,469 1,546 
Long-term debt1,402 1,404 
Obligations payable under Indemnification Agreements584 580 
Other liabilities340 328 
Total liabilities3,795 3,858 
COMMITMENTS AND CONTINGENCIES
Stockholders’ equity
Common stock, $0.001 par value: 700 shares authorized, 150 and 147 shares issued and outstanding at April 1, 2023 and 148 and 146 shares issued and outstanding at December 31, 2022, respectively— — 
Additional paid-in capital2,191 2,176 
Retained earnings657 600 
Accumulated other comprehensive loss, net(200)(212)
Treasury stock at cost(44)(35)
Total stockholders’ equity2,604 2,529 
Total liabilities and stockholders’ equity$6,399 $6,387 
Refer to accompanying Notes to the meaning of the Private Securities Litigation Reform Act of 1995. 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:

Unaudited Consolidated Financial Statements.
•
competition from other companies in our markets and segments, as well as in new markets and emerging markets;
3

•
our abilityResideo Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
(in millions, except per share data)April 1, 2023April 2, 2022
Net revenue$1,549 $1,506 
Cost of goods sold1,129 1,068 
Gross profit420 438 
Research and development expenses27 24 
Selling, general and administrative expenses244 236 
Intangible asset amortization9 6 
Restructuring and impairment expenses2 — 
Income from operations138 172 
Other expenses, net39 40 
Interest expense, net18 11 
Income before taxes81 121 
Provision for income taxes24 34 
Net income$57 $87 
Earnings per share:
Basic$0.39 $0.60 
Diluted$0.38 $0.58 
Weighted average number of shares outstanding:
Basic147145
Diluted149149
Refer to successfully develop new technologies and products and develop and protect the intellectual property relatedaccompanying Notes to the same andUnaudited Consolidated Financial Statements.
4

Resideo Technologies, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
(in millions)April 1, 2023April 2, 2022
Comprehensive income:
Net income$57 $87 
Other comprehensive income, net of tax:
Foreign exchange translation gain (loss)16 (9)
Pension liability adjustments3 — 
Changes in fair value of effective cash flow hedges(7)23 
Total other comprehensive income, net of tax12 14 
Comprehensive income$69 $101 
Refer to defend against IP threats of others;
•
inability to obtain necessary product components, production equipment or replacement parts;
•
the impact of pandemics, epidemics, natural disasters and other public health emergencies, such as COVID-19;
•
failure to achieve and maintain a high level of product and service quality;
•
inability to compete in the market for potential acquisitions;
•
inability to consummate acquisitions on satisfactory terms or to integrate such acquisitions effectively;
•
our ability to retain or expand relationships with significant customers;
•
dependence upon information technology infrastructure having adequate cyber-security functionality;
•
economic, political, regulatory, foreign exchange and other risks of international operations, including the impact of tariffs;
•
changes in prevailing global and regional economic conditions;
•
our failure to execute on key business transformation programs and activities;
•
the failure to increase productivity through sustainable operational improvements;
•
fluctuation in financial results dueaccompanying Notes to the seasonal natureUnaudited Consolidated Financial Statements.
5

Resideo Technologies, Inc.
Consolidated Statements of portions of our business;
Cash Flows
•(Unaudited)
our ability
Three Months Ended
(in millions)April 1, 2023April 2, 2022
Cash Flows From Operating Activities:
Net income$57 $87 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization24 20 
Stock-based compensation expense12 11 
Other, net2 2 
Changes in assets and liabilities, net of acquired companies:
Accounts receivable, net23 (61)
Inventories, net(27)(66)
Other current assets(8)(12)
Accounts payable(12)17 
Accrued liabilities(86)(66)
Other, net11 9 
Net cash used in operating activities(4)(59)
Cash Flows From Investing Activities:
Capital expenditures(20)(19)
Acquisitions, net of cash acquired(6)(633)
Other investing activities, net— (13)
Net cash used in investing activities(26)(665)
Cash Flows From Financing Activities:
Proceeds from issuance of A&R Term B Facility— 200 
Repayments of long-term debt(3)(3)
Payment of debt facility issuance and modification costs— (4)
Other financing activities, net(6)(4)
Net cash (used in) provided by financing activities(9)189 
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash6 — 
Net decrease in cash, cash equivalents and restricted cash(33)(535)
Cash, cash equivalents and restricted cash at beginning of period329 779 
Cash, cash equivalents and restricted cash at end of period$296 $244 
Supplemental Cash Flow Information:
Interest paid$27 $14 
Taxes paid, net of refunds$19 $12 
Capital expenditures in accounts payable$15 $13 
Refer to recruit and retain qualified personnel;
•
labor disputes, work stoppages, other disruptions, or the need to relocate any of our facilities;
•
changes in legislation or government regulations or policies;
•
the significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturers (“OEMs”) customers;
•
the operational constraints and financial distress of third parties;
•
our ability to borrow funds and access capital markets;
•
the amount of our obligations and nature of our contractual restrictions pursuant to, and disputes that have or may hereafter arise under, the Reimbursement Agreement and the other agreements we entered into with Honeywell in connection with the Spin-Off;
•
our reliance on Honeywell for the Honeywell Home trademark;
•
potential material environmental liabilities;
•
our inability to maintain intellectual property agreements necessary to our business;
•
potential material 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; and
•
certain factors discussed elsewhere in this Form 10-Q.

3

These and other factors are more fully discussed in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 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 changesaccompanying Notes to the risk factors described in our 2021 Annual Report on Form 10-K. These risks could cause actual resultsUnaudited Consolidated Financial Statements.

6

Resideo Technologies, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
Common StockAccumulated Other
Comprehensive
Loss		Treasury Stock
(in millions, except shares in thousands)SharesAmountAdditional
Paid-In
Capital		Retained
Earnings		SharesAmountTotal Stockholders’ Equity
Balance at January 1, 2023146,222 $— $2,176 $600 $(212)2,050 $(35)$2,529 
Net income— — — 57 — — — 57 
Other comprehensive loss, net of tax— — — — 12 — — 12 
Common stock issuance, net of shares withheld for taxes862 — 3 — — 497 (9)(6)
Stock-based compensation expense— — 12 — — — — 12 
Balance at April 1, 2023147,084 $— $2,191 $657 $(200)2,547 $(44)$2,604 
Common StockAccumulated Other
Comprehensive
Loss		Treasury Stock
(in millions, except shares in thousands)SharesAmountAdditional
Paid-In
Capital		Retained
Earnings		SharesAmountTotal Stockholders’ Equity
Balance at January 1, 2022144,808 $— $2,121 $317 $(165)1,440 $(21)$2,252 
Net income— — — 87 — — — 87 
Other comprehensive income, net of tax— — — — 14 — — 14 
Common stock issuance, net of shares withheld for taxes564 — 3 — — 256 (6)(3)
Stock-based compensation expense— — 11 — — — — 11 
Balance at April 2, 2022145,372 $— $2,135 $404 $(151)1,696 $(27)$2,361 
Refer to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our resultsaccompanying Notes to the Unaudited Consolidated Financial Statements.
7
Table of operations, financial condition and liquidity and the development of the industries 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.Contents

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 April 2, 2022 should be read in conjunction with the financial statements for the year ended December 31, 2021 contained in our 2021 Annual Report on Form 10-K.

4

Item 1. Financial Statements

RESIDEO TECHNOLOGIES, INC.

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

(In millions except shares in thousands and per share data)

(Unaudited)

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Net revenue

 

$

1,506

 

 

$

1,419

 

Cost of goods sold

 

 

1,072

 

 

 

1,051

 

Gross profit

 

 

434

 

 

 

368

 

Research and development expenses

 

 

24

 

 

 

21

 

Selling, general and administrative expenses

 

 

238

 

 

 

217

 

Operating profit

 

 

172

 

 

 

130

 

Other expense, net

 

 

40

 

 

 

44

 

Interest expense

 

 

11

 

 

 

13

 

Income before taxes

 

 

121

 

 

 

73

 

Tax expense

 

 

34

 

 

 

24

 

Net income

 

$

87

 

 

$

49

 

Weighted Average Number of Common Shares Outstanding (in thousands)

 

 

 

 

 

 

Basic

 

 

145,118

 

 

 

143,382

 

Diluted

 

 

148,760

 

 

 

147,656

 

Earnings Per Share

 

 

 

 

 

 

Basic

 

$

0.60

 

 

$

0.34

 

Diluted

 

$

0.58

 

 

$

0.33

 

The unaudited

Resideo Technologies, Inc.
Notes to Consolidated Interim Financial Statements are an integral part of these statements.
(Unaudited)

5

RESIDEO TECHNOLOGIES, INC.

CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Net income

 

$

87

 

 

$

49

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

Foreign exchange translation adjustment

 

 

(9

)

 

 

(26

)

Changes in unrealized gain on derivatives

 

 

23

 

 

 

2

 

   Total other comprehensive income (loss), net of tax

 

 

14

 

 

 

(24

)

Comprehensive income

 

$

101

 

 

$

25

 

The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.

6

RESIDEO TECHNOLOGIES, INC.

CONSOLIDATED INTERIM BALANCE SHEETS

(In millions, except number of shares which are reflected in thousands and par value)

(Unaudited)

 

 

April 2, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

244

 

 

$

779

 

Accounts receivable – net

 

 

1,008

 

 

 

876

 

Inventories – net

 

 

922

 

 

 

740

 

Other current assets

 

 

165

 

 

 

146

 

Total current assets

 

 

2,339

 

 

 

2,541

 

Property, plant and equipment – net

 

 

350

 

 

 

287

 

Goodwill

 

 

3,125

 

 

 

2,661

 

Other assets

 

 

431

 

 

 

364

 

Total assets

 

$

6,245

 

 

$

5,853

 

LIABILITIES

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

958

 

 

$

883

 

Current maturities of debt

 

 

12

 

 

 

10

 

Accrued liabilities

 

 

576

 

 

 

601

 

Total current liabilities

 

 

1,546

 

 

 

1,494

 

Long-term debt

 

 

1,412

 

 

 

1,220

 

Obligations payable under Indemnification Agreements

 

 

592

 

 

 

585

 

Other liabilities

 

 

334

 

 

 

302

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Common stock, $0.001 par value, 700,000 shares authorized,
147,068 and 145,372 shares issued and outstanding as of April 2, 2022, 146,248 and 144,808 shares issued and outstanding as of December 31, 2021, respectively

 

 

0

 

 

 

0

 

Additional paid-in capital

 

 

2,135

 

 

 

2,121

 

Treasury stock, at cost

 

 

(27

)

 

 

(21

)

Retained earnings

 

 

404

 

 

 

317

 

Accumulated other comprehensive loss

 

 

(151

)

 

 

(165

)

Total equity

 

 

2,361

 

 

 

2,252

 

Total liabilities and equity

 

$

6,245

 

 

$

5,853

 

The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.

7

RESIDEO TECHNOLOGIES, INC.

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

Three Months Ended

 

 

 

April 2, 2022

 

 

April 3, 2021

 

Cash flows (used for) provided by operating activities:

 

 

 

 

 

 

Net income

 

$

87

 

 

$

49

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

20

 

 

 

23

 

Stock compensation expense

 

 

11

 

 

 

9

 

Other

 

 

2

 

 

 

25

 

Changes in assets and liabilities, net of acquired companies:

 

 

 

 

 

 

Accounts receivable

 

 

(61

)

 

 

(17

)

Inventories – net

 

 

(66

)

 

 

(10

)

Other current assets

 

 

(12

)

 

 

16

 

Accounts payable

 

 

17

 

 

 

(15

)

Accrued liabilities

 

 

(66

)

 

 

(66

)

Obligations payable under Indemnification Agreements

 

 

7

 

 

 

(7

)

Other

 

 

2

 

 

 

(2

)

Net cash (used for) provided by operating activities

 

 

(59

)

 

 

5

 

Cash flows used for investing activities:

 

 

 

 

 

 

Expenditures for property, plant, equipment and other intangibles

 

 

(19

)

 

 

(19

)

Cash paid for acquisitions, net of cash acquired

 

 

(633

)

 

 

(5

)

Other

 

 

(13

)

 

 

-

 

Net cash used for investing activities

 

 

(665

)

 

 

(24

)

Cash flows provided by financing activities:

 

 

 

 

 

 

Proceeds from long-term debt

 

 

200

 

 

 

950

 

Payment of debt facility issuance and modification costs

 

 

(4

)

 

 

(21

)

Repayment of long-term debt

 

 

(3

)

 

 

(921

)

Other

 

 

(4

)

 

 

5

 

Net cash provided by financing activities

 

 

189

 

 

 

13

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

0

 

 

 

(3

)

Net decrease in cash and cash equivalents

 

 

(535

)

 

 

(9

)

Cash and cash equivalents at beginning of period

 

 

779

 

 

 

517

 

Cash and cash equivalents at end of period

 

$

244

 

 

$

508

 

The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.

8

RESIDEO TECHNOLOGIES, INC.

CONSOLIDATED INTERIM STATEMENTS OF EQUITY

(In millions, shares in thousands)

(Unaudited)

Three Months Ended April 2, 2022

 

Common
Shares

 

 

Treasury
Shares

 

 

Common
Stock

 

 

Treasury
Stock

 

 

Additional
Paid-
In Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total
Equity

 

Balance at January 1, 2022

 

 

144,808

 

 

 

1,440

 

 

$

0

 

 

$

(21

)

 

$

2,121

 

 

$

317

 

 

$

(165

)

 

$

2,252

 

Net income

 

 

-

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

87

 

 

 

-

 

 

 

87

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

0

 

 

 

-

 

 

 

0

 

 

 

0

 

 

 

14

 

 

 

14

 

Stock issuances, net of shares withheld for taxes

 

 

564

 

 

 

256

 

 

 

0

 

 

 

(6

)

 

 

3

 

 

 

0

 

 

 

0

 

 

 

(3

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

0

 

 

 

-

 

 

 

11

 

 

 

-

 

 

 

-

 

 

 

11

 

Balance at April 2, 2022

 

 

145,372

 

 

 

1,696

 

 

$

0

 

 

$

(27

)

 

$

2,135

 

 

$

404

 

 

$

(151

)

 

$

2,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended April 3, 2021

 

Common
Shares

 

 

Treasury
Shares

 

 

Common
Stock

 

 

Treasury
Stock

 

 

Additional
Paid-
In Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total
Equity

 

Balance at January 1, 2021

 

 

143,059

 

 

 

900

 

 

$

0

 

 

$

(6

)

 

$

2,070

 

 

$

75

 

 

$

(146

)

 

$

1,993

 

Net income

 

 

-

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

49

 

 

 

-

 

 

 

49

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

0

 

 

 

-

 

 

 

-

 

 

 

0

 

 

 

(24

)

 

 

(24

)

Stock issuances, net of shares withheld for taxes

 

 

760

 

 

 

169

 

 

 

0

 

 

 

(4

)

 

 

9

 

 

 

0

 

 

 

0

 

 

 

5

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

0

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

 

9

 

Balance at April 3, 2021

 

 

143,819

 

 

 

1,069

 

 

$

0

 

 

$

(10

)

 

$

2,088

 

 

$

124

 

 

$

(170

)

 

$

2,032

 

The unaudited Notes to Consolidated Interim Financial Statements are an integral part of these statements.

9

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

Note 1. Organization,Nature of Operations and Basis of Presentation

Nature of Operations
Business Description

Resideo Technologies, Inc. (“Resideo”, the “Company”, “we”, “us”, or “the Company”“our”), is a leading manufacturer and developer of technology-driven products that provide critical comfort, energy, smoke and carbon monoxide detection home safety products, and security solutions to homes globally. The Company isWe are also thea leading wholesale distributor of low-voltage security products including access control, fire detection, intrusion,fire suppression, security, and video products, and participatesparticipate significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. The Company has aOur global footprint servingserves both commercial and residential end markets.

The Company was incorporated in Delaware on April 24, 2018. The Company separated from Honeywell International Inc. (“Honeywell”) on October 29, 2018, becoming an independent publicly traded company as a result of a pro rata distribution of the Company’s common stock to shareholders of Honeywell (the “Spin-Off”).

Basis of PresentationConsolidation and Reporting

The Company’s financial statements are presented on a consolidated basis (collectively, the “Interimaccompanying Unaudited Consolidated Financial Statements”) andStatements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles generally accepted in(“GAAP”) for interim financial information and with the United Statesinstructions to Form 10-Q and Article 10 of America (“U.S. GAAP”). All intercompany transactions have been eliminated for all periods presented. The InterimRegulation S-X. Accordingly, the Unaudited Consolidated Financial Statements are unaudited; however, indo not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, theythe Unaudited Consolidated Financial Statements included herein contain all the adjustments, (consistingwhich consist of those of a normal recurring nature) consideredadjustments, necessary to state fairly thepresent our financial position, results of operations and cash flows for the periods presentedindicated. Operating results for the period from January 1, 2023 through April 1, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023.
For additional information, refer to the consolidated financial statements and notes thereto included in conformityour Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”), filed with U.S. GAAP applicable to interim periods.the United States Securities and Exchange Commission (the “SEC”) on February 21, 2023.

Reporting Period

The Company reports

We report financial information on a fiscal quarter basis using a “modified” 4-4-5modified four-four-five week calendar. Our fiscal calendar (modified in that the fiscal year always begins on January 1 and ends on December 31).31. We have elected the first, second and third quarters to end on a Saturday in order to not disrupt business processes. The effects of this practiceelection are generally not significant to reported results for any quarter. In the event that differences in closing dates are material to year-over-year comparisons of quarterly or year-to-date results, the Company will provide appropriate disclosures.

Reclassification

Certain reclassifications have been made to the prior period financial statements to conform to the classification adopted in the current period.

The prior period unaudited consolidated interim statement of operations was reclassified to present researchquarter and development expenses asonly exist within a separate line item within the statement. Research and development expenses were formerly included within Selling, general and administrative expenses.reporting year.


Note 2. Summary of Significant Accounting Policies

Our significant accounting policies are detailed in 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 2021 Annual Report on Form 10-K.10-K for the year ended December 31, 2022. There have been no significant changes to these policies that have had a material impact on the Unaudited Consolidated Financial Statements and accompanying notes for three months ended April 1, 2023.

Recent Accounting Pronouncements
—The Company considers

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 determineddisclose only those that may have a material impact.
8
Table of Contents
Resideo Technologies, Inc.
Notes to be eitherConsolidated Financial Statements
(Unaudited)
Adopted Accounting Pronouncements

In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs (Topic 405): Disclosure of Supplier Finance Program Obligations. This guidance enhances transparency of an entity’s use of supplier finance programs by requiring quarterly and annual disclosures about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts annually, and a description of where in the financial statements outstanding amounts are presented. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Effective January 1, 2023, we completed our assessment and adopted ASU 2022-04 concluding that it is not applicable or are expected to Resideo at this time as we currently have an immaterial impact on the Company’s consolidated financial position or results of operations.no supplier finance programs in place.


Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which isand subsequent amendment to the initial guidance: ASU 2021-01, Reference Rate Reform (Topic 848): Scope (collectively, “Topic 848”). Topic 848 provides optional guidance relatedexpedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform that provides practical expedients for contract modifications andif certain criteria are met. The amendments apply only to contracts, hedging relationships, associated with the transition fromand other transactions that reference rates that areLondon Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. This guidance along with its subsequentdiscontinued because of reference rate reform. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848

10

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

clarifications, is effective. ASU 2022-06 defers the sunset date of Topic 848 from March 12, 2020 through December 31, 2022 to December 31, 2024. This guidance may be applied prospectively to contract modifications made and is applicable for the Company’s A&R Senior Credit Facilities and Swap Agreements, which use LIBOR as a reference rate.hedging relationships entered into or evaluated on or before December 31, 2024. The A&R Senior Credit Facilities include a transition clause to a new reference rate in the event LIBOR is discontinued and the Swap Agreements will be amended to match the new reference rate. We are currently evaluatinghave evaluated the potential impact of adopting this guidance, butstandard and do not expect it to have a material impact on our consolidated financial statements.statements and related disclosures. Refer to Note 12. Long-Term Debt and Note 13. Long-term DebtDerivative Financial Instruments to the Unaudited Consolidated Financial Statements.


Note 3. Acquisitions

Pro forma results of operations for the following acquisitions have not been presented, as the impact on our consolidated financial results was not material.

2023 Acquisitions

BTX Technologies, Inc.—On January 23, 2023, we acquired 100% of the outstanding equity of BTX Technologies, Inc., (“BTX”) a leading distributor of professional audio, video, data communications, and Credit Agreementbroadcast equipment. We report BTX Technologies, Inc.’s results within the ADI Global Distribution segment. We have made a preliminary purchase price allocation that is subject to change as additional information is obtained.

2022 Acquisitions

Teknique Limited—On December 23, 2022, we acquired 100% of the outstanding equity of Teknique Limited, a developer and producer of edge-based, artificial intelligence-enabled video camera solutions. We report Teknique Limited’s results within the Products and Solutions segment. Purchase consideration includes cash and a note payable with the former owner. We have made a preliminary purchase price allocation that is subject to change as additional information is obtained.

Electronic Custom Distributors, Inc.—On July 5, 2022, we acquired 100% of the outstanding equity of Electronic Custom Distributors, Inc., a regional distributor of residential audio, video, automation, security, wire and telecommunication products. We report Electronic Customer Distributors, Inc.’s results within the ADI Global Distribution segment. We completed the accounting for further details on the Company’s Swap Agreementsacquisition during the first quarter of 2023, which did not result in any adjustments.

9
Table of Contents
Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
First Alert—On March 31, 2022, we acquired 100% of the outstanding equity of First Alert, Inc., a leading provider of home safety products. We report First Alert’s results within the Products and A&R Senior Credit Facilities.Solutions segment. We completed the accounting for the acquisition during the first quarter of 2023, which did not result in any adjustments.


Note 3. Revenue Recognition

Disaggregated Revenue

The Company has two operating segments, Products & Solutions and ADI Global Distribution. Disaggregated revenue information for Products & Solutions is presented by product grouping while ADI Global Distribution is presented by region. Beginning January 1, 2022, the Products & Solutions segment further disaggregated the Comfort product grouping into Air and Water. Residential Thermal Solutions is now referenced as Energy.

Revenues by product grouping and region are as follows:

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Air

 

$

214

 

 

$

191

 

Water

 

 

91

 

 

 

88

 

Energy

 

 

159

 

 

 

150

 

Security

 

 

155

 

 

 

177

 

Products & Solutions

 

 

619

 

 

 

606

 

 

 

 

 

 

 

 

U.S. and Canada

 

 

752

 

 

 

667

 

EMEA (1)

 

 

126

 

 

 

134

 

APAC (2)

 

 

9

 

 

 

12

 

ADI Global Distribution

 

 

887

 

 

 

813

 

Net revenue

 

$

1,506

 

 

$

1,419

 

(1) EMEA represents Europe, the Middle East and Africa.

(2) APAC represents Asia and Pacific countries.

The Company recognizes the majority of its revenue from performance obligations outlined in contracts with its customers that are satisfied at a point in time. Less than 3% of the Company’s revenue is satisfied over time. As of April 2, 2022 and April 3, 2021, contract assets and liabilities were not material.

Note 4. Segment Financial Data

The Company monitors its

We monitor our business operations through 2our two operating segments,segments: Products &and Solutions and ADI Global DistributionDistribution.

These operating segments follow the same accounting policies used for the financial statements. We evaluate a segment’s performance on a GAAP basis, primarily operating income before corporate expenses.

Corporate expenses include expenses related to the corporate office as well as supporting the operating segments, but do not relate directly to revenue-generating activities primarily including unallocated stock-based compensation expenses, unallocated pension expense, restructuring expenses, acquisition-related costs, and reports Corporate separately from the two operating segments.

Products & Solutions—The Products & Solutions business is a leading global provider of products, software solutions and technologies that help homeowners stay connected and in control of their comfort, security, and energy use.

ADI Global Distribution—The ADI Global Distribution business is the leading distributor of low-voltage security products including access control, fire detection, intrusion, and video products and participates significantly

11

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

in the broaderother expenses related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable.

Corporate—Corporate includesto executive, legal, finance, information technology,tax, treasury, human resources, IT, strategy, communications, and communications activities not allocated directlycorporate travel expenses. Additional unallocated amounts primarily include non-operating items such as Reimbursement Agreement expense, interest income, interest expense, and other income (expense). The Reimbursement Agreement is further described in Note 16. Commitments and Contingencies to either business units.the Unaudited Consolidated Financial Statements.


Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions, and assesses operating performance.


The following table represents summary financial data attributable to the segments:

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Revenue

 

 

 

 

 

 

Total Products & Solutions revenue

 

$

714

 

 

$

700

 

Less: Intersegment revenue

 

 

95

 

 

 

94

 

External Products & Solutions revenue

 

 

619

 

 

 

606

 

External ADI Global Distribution revenue

 

 

887

 

 

 

813

 

Total revenue

 

$

1,506

 

 

$

1,419

 

Three Months Ended
(in millions)April 1, 2023April 2, 2022
Net revenue
Products and Solutions$658 $619 
ADI Global Distribution891 887 
Total net revenue$1,549 $1,506 

Three Months Ended
(in millions)April 1, 2023April 2, 2022
Income from operations
Products and Solutions$117 $153 
ADI Global Distribution72 80 
Corporate(51)(61)
Total income from operations$138 $172 

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Operating profit

 

 

 

 

 

 

Products & Solutions

 

$

153

 

 

$

130

 

ADI Global Distribution

 

 

80

 

 

 

59

 

Corporate

 

 

(61

)

 

 

(59

)

Total

 

$

172

 

 

$

130

 

The Company’s Chief Executive Officer, its Chief Operating Decision Maker, does not use segment assets information to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.reported.

Note 5. Stock-Based CompensationRevenue Recognition

We have two operating segments, Products and Solutions and ADI Global Distribution. Disaggregated revenue information for Products and Solutions is presented by product grouping, while ADI Global Distribution is presented by region.

10
Table of Contents
Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The following table presents revenue by business line and geographic location, as we believe this presentation best depicts how the nature, amount, timing, and uncertainty of net revenue and cash flows are affected by economic factors:

Three Months Ended
(in millions)April 1, 2023April 2, 2022
Products and Solutions
Air$211 $214 
Safety and Security228 155 
Energy136 159 
Water83 91 
Total Products and Solutions658 619 
ADI Global Distribution
U.S. and Canada768 752 
EMEA (1)
123 126 
APAC (2)
— 9 
Total ADI Global Distribution891 887 
Total net revenue$1,549 $1,506 
(1)EMEA represents Europe, the Middle East and Africa.
(2)APAC represents Asia and Pacific countries.

Note 6. Restructuring

During 2022, we executed certain restructuring programs to lower costs, increase gross and operating margins and position us for growth (“2022 Plan”). We expect to fully execute our restructuring initiatives and programs over the next 12-24 months, and we may incur future additional restructuring expenses associated with these plans. We are unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, associated with future phases of the plans or the total costs we may incur in connection with these plans. Refer to Note 6. Restructuring Expenses in our 2022 Annual Report on Form 10-K for further discussion of our restructuring programs.

The following table summarizes the status of our restructuring expenses included within accrued liabilities on the Unaudited Consolidated Balance Sheets.

(in millions)April 1, 2023December 31, 2022
Beginning of period$27 $9 
Charges2 26 
Usage (1)
(4)(5)
Other(2)(3)
End of period$23 $27 
(1) Usage primarily relates to cash payments associated with employee termination costs.

Note 7. Pension Plans

Restricted Stock Units (“RSUs”) and Performance Stock Unit (“PSUs”)

During the three months ended April 2, 2022, as part1, 2023, we recognized a pension settlement loss of $3 million related to our U.S qualified defined benefit pension plan. The non-cash pension settlement loss resulted from a voluntary lump sum window offering and the purchase of a group annuity contract that transferred a portion of the Company’s annual long-term compensation underassets and liabilities to an insurance company. The corresponding remeasurement resulted in a decrease in both the 2018 Stock Incentive PlanU.S. qualified defined benefit pension plan assets and liabilities of Resideo Technologies, Inc. and its Affiliates and the 2018 Stock Incentive Plan for Non-Employee Directors of Resideo Technologies, Inc. as may be amended from time to time (together, the “Stock Incentive Plan”), it granted 672,453 market-based PSUs and 808,919 service-based RSUs to eligible employees. The weighted average grant date fair value per share for market-based PSUs and service-based RSUs was $36.11 and $24.87, respectively.

Note 6. Leases

The Company is party to operating leases for the majority of its manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment.Certain of the Company’s real estate leases include variable rental payments which adjust periodically based on inflation. Generally, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

12

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

The Company’s operating lease costs for the three months ended April 2, 2022 and April 3, 2021 consisted of the following:

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Cost of goods sold

 

$

3

 

 

$

4

 

Selling, general and administrative

 

 

12

 

 

 

12

 

Total operating lease costs

 

$

15

 

 

$

16

 

Total operating lease costs include variable lease costs of $4 million for the three months ended April 2, 2022 and April 3, 2021. Total operating lease costs also include offsetting sublease income which is immaterial for the three months ended April 2, 2022 and April 3, 2021.

The Company recognized the following related to its operating leases:

 

 

Financial
Statement
Line Item

 

At April 2,
2022

 

 

At December 31,
2021

 

Operating right-of-use assets

 

Other assets

 

$

164

 

 

$

141

 

Operating lease liabilities - current

 

Accrued liabilities

 

$

36

 

 

$

32

 

Operating lease liabilities - noncurrent

 

Other liabilities

 

$

140

 

 

$

120

 

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

 

 

At April 2,
2022

 

2022

 

$

33

 

2023

 

 

40

 

2024

 

 

31

 

2025

 

 

25

 

2026

 

 

21

 

Thereafter

 

 

55

 

Total lease payments

 

 

205

 

Less: imputed interest

 

 

29

 

Present value of operating lease liabilities

 

$

176

 

Weighted-average remaining lease term (years)

 

 

6.10

 

Weighted-average incremental borrowing rate

 

 

5.08

%

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

 

 

 

 

Three Months Ended

 

 

 

 

 

April 2, 2022

 

 

April 3, 2021

 

Operating cash outflows

 

 

 

$

8

 

 

$

8

 

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

 

 

 

$

32

 

 

$

10

 

Note 7. Income Taxes

The Company recorded tax expense of $34 million and $24 million for the three months ended April 2, 2022 and April 3, 2021 respectively.

13

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by the Company’s forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where the Company expects to report losses for which the Company does not expect to receive tax benefits, the Company applies separate forecasted effective tax rates to those jurisdictions rather than including them in the consolidated forecasted effective tax rate.

For the three months ended April 2, 2022 the net tax expense of $34 million consists primarily of interim period tax expense of $35 million based on year-to-date pretax income multiplied by the Company’s forecasted effective tax rate, partially offset by a tax benefit specific to the period of approximately $1 million consisting primarily of excess deductions for share-based compensation and the release of a previously unrecognized tax benefit. In addition to items specific to the period, the Company’s income tax rate is impacted by the mix of earnings across the jurisdictions in which the Company operates, non-deductible expenses, and U.S. taxation of foreign earnings.

$60 million.

Note 8. Earnings Per ShareStock-Based Compensation Plans
11
Table of Contents

Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

The following table sets forthStock Incentive Plan, which consists of the computationAmended and Restated 2018 Stock Incentive Plan of basicResideo Technologies, Inc. and diluted earnings per share (in millions, except shares in thousandsits Affiliates and per share data):

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Numerator:

 

 

 

 

 

 

Net income

 

$

87

 

 

$

49

 

Denominator - Weighted average common shares outstanding (in thousands):

 

 

 

 

 

 

Basic

 

 

145,118

 

 

 

143,382

 

Add: dilutive effect of common stock equivalents

 

 

3,642

 

 

 

4,274

 

Diluted

 

 

148,760

 

 

 

147,656

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.60

 

 

$

0.34

 

Diluted

 

$

0.58

 

 

$

0.33

 

Diluted earnings per share is computed based upon the weighted average number2018 Stock Incentive Plan for Non-Employee Directors of common shares outstandingResideo Technologies, Inc., provides for the period plusgrant of stock options, stock appreciation rights, restricted stock units, restricted stock, and other stock-based awards.


A summary of awards granted as part of our annual long-term compensation follows:
Three Months Ended April 1, 2023Three Months Ended April 2, 2022
Number of Stock Units GrantedWeighted average grant date fair value per shareNumber of Stock Units GrantedWeighted average grant date fair value per share
Performance Stock Units (“PSUs”)553,071$29.89 672,453$36.11 
Restricted Stock Units (“RSUs”)1,466,307$19.03 808,919$24.87 

Annual awards to our key employees generally have a three-year service or performance period. Awards to our non-employee directors have a one-year service period. The fair value is determined at the dilutive effectgrant date. PSUs granted in 2023 were issued with the shares awarded per unit being based on the difference in performance between the total stockholders’ return of our common stock equivalents using the treasury stock method and the average market priceagainst that of the Company’sS&P 600 Industrials Index. PSUs granted prior to 2023 were issued with the shares awarded per unit being based on the difference in performance between the total stockholders’ return of our common stock against that of the S&P 400 Industrials Index. Time-based RSUs issued in 2023 are subject to straight-line vesting over the service period, while those issued prior to 2023 are subject to graded vesting over the service period.

Stock-based compensation expense, net of tax was $12 million and $11 million for the three months ended April 1, 2023 and April 2, 2022, respectively.

Note 9. Inventories, net

The following table summarizes the details of our inventories, net:

(in millions)April 1, 2023December 31, 2022
Raw materials$271 $251 
Work in process24 25 
Finished products713 699 
Total inventories, net$1,008 $975 


Note 10. Goodwill and April 3, 2021.Intangible Assets, net

Our goodwill balance and changes in carrying value by segment are as follows:

(in millions)Products and SolutionsADI Global DistributionTotal
Balance at December 31, 2022$2,072 $652 $2,724 
Acquisitions— 4 4 
Impact of foreign currency translation6 2 8 
Balance at April 1, 2023$2,078 $658 $2,736 
12
ForTable of Contents
Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the net carrying amount of intangible assets:

(in millions)April 1, 2023December 31, 2022
Intangible assets subject to amortization$291 $295 
Indefinite-lived intangible assets180 180 
Total intangible assets$471 $475 

Intangible assets subject to amortization consisted of the following:

April 1, 2023December 31, 2022
(in millions)Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Patents and technology$65 $(29)$36 $65 $(28)$37 
Customer relationships315 (123)192 313 (117)196 
Trademarks14 (9)5 14 (8)6 
Software180 (122)58 175 (119)56 
Total intangible assets$574 $(283)$291 $567 $(272)$295 

Intangible assets amortization expense was $9 million and $6 million for three months ended April 1, 2023 and April 2, 2022, average optionsrespectively.

Note 11. Leases

Total operating lease costs are as follows:

Three Months Ended
(in millions)April 1, 2023April 2, 2022
Operating lease cost:
Cost of goods sold$5 $3 
Selling, general and administrative expenses14 12 
Total operating lease costs$19 $15 

Total operating lease costs include variable lease costs of $6 million and other rights to purchase approximately 0.5$4 million shares of common stock were outstanding and anti-dilutive, and therefore excluded from the computation of diluted earnings per common share. In addition, an average of 0.9 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three months ended April 1, 2023 and April 2, 2022, as the contingency had not been satisfied. For the three months ended April 3, 2021, average options and other rights to purchase approximately 0.1 million shares of common stock were outstanding and anti-dilutive, and therefore excluded from the computation of diluted income per common share. An average of approximately 0.7 million shares of performance-based unit awards are excluded from the computation of diluted earnings per common share for the three months ended April 3, 2021, as the contingency had not been satisfied.

respectively.

Note 9. Inventories—Net

 

 

April 2, 2022

 

 

December 31, 2021

 

Raw materials

 

$

273

 

 

$

174

 

Work in process

 

 

25

 

 

 

17

 

Finished products

 

 

624

 

 

 

549

 

 

 

$

922

 

 

$

740

 

Note 10. Acquisitions

14

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

On February 6, 2022, the Company entered into an agreement to acquire 100% of the issued and outstanding capital stock of First Alert, Inc. (“First Alert”), a leading provider of home safety products. The acquisition closed on March 31, 2022 for an aggregate cash purchase price of $620 million, subject to post-closing adjustment. First Alert is expected to expand and leverage the Company's footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products. The business is included within the Products & Solutions segment.

The Company has not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations. The consideration paid by the Company to complete the acquisition has been allocated preliminarily to the assets acquired and liabilities assumed based upon the net book values. The purchase price in excess of the net book value was recorded as goodwill, as of the date of the acquisition, as a temporary measure pending the completion of the valuation analysis. The Company included net assets and Goodwill of $156 million and $464 million, respectively, in the Consolidated Interim Balance Sheets as of April 2, 2022. Accordingly, the purchase price allocations are preliminary and are subject to future adjustments during the maximum one-year allocation period. In addition to goodwill, the final purchase price allocation is expected to include adjustments to the net assets recognized at book value and significant allocations from Goodwill to intangible assets, such as customer relationships, trade name, developed technology, and leasehold interests.

The following table summarizes the preliminary allocationcarrying amounts of our operating lease assets and liabilities:


(in millions)Financial Statement Line ItemApril 1, 2023December 31, 2022
Operating lease assetsOther assets$192 $191 
Operating lease liabilities - currentAccrued liabilities$38 $37 
Operating lease liabilities - non-currentOther liabilities$166 $166 
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Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Supplemental cash flow information related to operating leases follows:

Three Months Ended
(in millions)April 1, 2023April 2, 2022
Cash paid for operating lease liabilities$9 $8 
Non-cash activities: operating lease assets obtained in exchange for new operating lease liabilities$7 $32 

Note 12. Long-Term Debt

Long-term debt is comprised of the purchase pricefollowing:

(in millions)April 1, 2023December 31, 2022
4.000% Senior Notes due 2029$300 $300 
Variable rate A&R Term B Facility1,128 1,131 
Gross debt1,428 1,431 
Less: current portion of long-term debt(12)(12)
Less: unamortized deferred financing costs(14)(15)
Total long-term debt$1,402 $1,404 

A&R Senior Credit Facilities

On February 12, 2021, we entered into an Amendment and Restatement Agreement with JP Morgan Chase Bank N.A. as administrative agent (“the A&R Credit Agreement”). The A&R Credit Agreement provides for an (i) initial seven-year senior secured Term B loan facility in an aggregate principal amount of $950 million, which was later amended to add $200 million in additional term loans (the “A&R Term B Facility”) and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the A&R Term B Facility, the “A&R Senior Credit Facilities”).

At April 1, 2023 and December 31, 2022, the weighted average interest rate for the A&R Term B Facility was 7.13% and 6.78%, respectively, and there were no borrowings and no letters of credit issued under the A&R Revolving Credit Facility. As of April 1, 2023, we were in compliance with all covenants related to the A&R Senior Credit Facilities and Senior Notes due 2029.

Senior Notes due 2029

On August 26, 2021, we issued $300 million in principal amount of 4.00% Senior Notes due 2029 (the “Senior Notes due 2029”). The Senior Notes due 2029 are senior unsecured obligations guaranteed by the Company’s existing and future domestic subsidiaries and rank equally with all senior unsecured debt and senior to all subordinated debt.

We entered into certain interest rate swap agreements in 2021 and 2023 to effectively convert a portion of our variable-rate debt to fixed rate debt. Refer to Note 13.Derivative Financial Instruments for further discussion.

Refer to Note 11. Long-Term Debt in our 2022 Annual Report on Form 10-K for further discussion.

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Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 13. Derivative Financial Instruments

In March 2021, we entered into eight interest rate swap agreements (“Swap Agreements”) with several financial institutions for a combined notional value of $560 million. The Swap Agreements were entered into to reduce the consolidated interest rate risk associated with variable rate, long-term debt. Under the Swap Agreements, we convert a portion of our variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over the remaining terms. We designated the Swap Agreements as cash flow hedges of the variability in expected cash outflows for interest payments.

The Swap Agreements are adjusted to fair value on a quarterly basis. The fair value of the swap is presented within the Unaudited Consolidated Balance Sheets, and we recognize any changes in the fair value as an adjustment of accumulated other comprehensive loss within equity to the extent the swap is effective. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive loss related to the Swap Agreements are reclassified into income resulting in a net interest expense on the hedged amount of the underlying debt obligation equal to the effective yield of the fixed rate of the swap.

On March 31, 2023, we modified one of the eight Swap Agreements, with a notional value of $70 million that matures in May 2024 as follows:(i) the original swap was cancelled for no termination payment and (ii) we simultaneously entered into a new pay-fixed interest rate swap with a notional amount of $70 million, effectively blending the asset position of the original interest rate swap into a new swap and extending the term of our hedged position to February 2027. In connection with this transaction, no cash was exchanged between us and the counterparty. The new pay-fixed interest rate swap qualifies as a hybrid instrument in accordance with Accounting Standards Codification 815, Derivatives and Hedging, consisting of a financing component and an embedded at-market derivative that was designated as a cash flow hedge. As a result, the gain position remaining in accumulated other comprehensive loss for the modified Swap Agreements as of April 1, 2023 of $4 million is being amortized as a reduction to interest expense over the effective period of the original swap agreement. The financing component is accounted for at amortized cost over the life of the swap while the embedded at-market derivative is accounted for at fair value.

The following table summarizes the fair value and presentation of derivative instruments in the Unaudited Consolidated Balance Sheets as well as the changes in fair value recorded in accumulated other comprehensive loss:

Fair Value of Derivative Assets
(in millions)Financial Statement Line ItemApril 1, 2023December 31, 2022
Derivatives designated as hedging instruments:
Interest rate swapsOther current assets$21 $23 
Interest rate swapsOther assets17 22 
Total derivative assets designated as hedging instruments$38 $45 
Unrealized gainAccumulated other comprehensive loss$35 $42 

The following table summarizes the effect of derivative instruments designated as cash flow hedges in other comprehensive income and the Unaudited Consolidated Statements of Operations:

(in millions)Financial Statement Line ItemApril 1, 2023April 2, 2022
Gains recorded in accumulated other comprehensive loss, beginning of period:$42 $6 
Current period (loss) gain recognized in other comprehensive income(7)23 
Gains recorded in accumulated other comprehensive loss, end of period$35 $29 

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Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 14. Fair Value

The estimated fair value of our financial instruments held, and when applicable, issued to finance our operations, is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that we would realize upon disposition nor do they indicate our intent or ability to dispose of the financial instrument. Assets and liabilities that are carried at fair value are required to be classified and disclosed in one of the following three categories:

Level 1—quoted market prices in active markets for identical assets and liabilities
Level 2—observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3—unobservable inputs that are not corroborated by market data

Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value of assets acquired and liabilities assumedmeasurement. There were no changes in the methodologies used in our valuation practices as of April 1, 2023.

The fair values of long-term debt instruments were determined using quoted market prices in inactive markets or discounted cash flows based upon current observable market interest rates and therefore were classified as Level 2 measurements in the datefair value hierarchy.

The following table provides a summary of the acquisition:carrying amount and fair value of outstanding debt:

April 1, 2023December 31, 2022
(in millions)Carrying ValueFair ValueCarrying ValueFair Value
Debt:
4.000% Senior Notes due 2029$300 $253 $300 $242 
Variable rate A&R Term B Facility1,128 1,124 1,131 1,125 
Total debt$1,428 $1,377 $1,431 $1,367 

Accounts receivable – net

 

$

72

 

Inventories – net

 

 

113

 

Cash and other current assets

 

 

5

 

Property, plant and equipment – net

 

 

64

 

Goodwill (includes unallocated identified intangible assets)

 

 

464

 

Other assets (non-current)

 

 

30

 

Total assets

 

$

748

 

Accounts payable

 

 

57

 

Accrued liabilities

 

 

43

 

Other liabilities

 

 

28

 

Net assets acquired

 

$

620

 

The Company expensed approximately $Refer to 10Note 12. Long-Term Debt million of costs related to the acquisition of First Alert during the three months ended April 2, 2022. These costs, which consist primarily of advisory, insurance,Unaudited Consolidated Financial Statements.


Interest Rate Risk—We have exposure to movements in interest rates associated with cash and legal fees, are included in Selling, generalborrowings. We may have and administrative expensesmay in the accompanying Consolidated Interim Statementsfuture enter into various interest rate protection agreements in order to limit the impact of Operations.

On February 14, 2022,movements in interest rates. The fair values of interest rate swaps have been determined based on market value equivalents at the Company acquired balance sheet date, taking into account the current interest rate environment and therefore, were classified as Level 2 measurements in the fair value hierarchy.

100
%
The following table provides a summary of the outstanding equitycarrying amount and fair value of Arrow Wireour interest rate swaps:

April 1, 2023December 31, 2022
(in millions)Carrying ValueFair ValueCarrying ValueFair Value
Assets:
Interest rate swaps$38 $38 $45 $45 

Refer to Note 13. Derivative Financial Instruments to the Unaudited Consolidated Financial Statements.

There are no Level 1 or Level 3 assets or liabilities for the periods presented. The carrying amounts of cash and Cable Inc. (“Arrow”), a leading regional distributor of data communications, connectivitycash equivalents, accounts receivable, other current assets, accounts payable, accrued and security products, for an aggregate cash purchase price of $15 million. The business is included within the ADI Global Distribution segment and is expected to strengthen the Company’s global distribution portfolio in the data communications category with an assortment of copper and fiber cabling and connectivity, connectors, racking solutions and network equipment. The Company is still assessing the final allocationother liabilities approximate fair value because of the purchase price to the assets and liabilitiesshort-term maturity of the business.these amounts.

15

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

Note 15. Accrued Liabilities

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Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Accrued liabilities consist of the following:

(in millions)April 1, 2023December 31, 2022
Obligations payable under Indemnification Agreements$140 $140 
Compensation, benefit and other employee-related79 108 
Customer rebate reserve75 98 
Product warranties24 40 
Current operating lease liability38 37 
Taxes payable46 38 
Other (1)
161 179 
Total accrued liabilities$563 $640 
(1) Other includes accruals for advertising, legal and professional reserves, freight, royalties, interest, and other miscellaneous items.

The Indemnification Agreements are further described in Note 11. Accrued Liabilities

 

 

April 2, 2022

 

 

December 31, 2021

 

Obligations payable under Indemnification Agreements

 

$

140

 

 

$

140

 

Taxes payable

 

 

79

 

 

 

54

 

Compensation, benefit and other employee-related

 

 

75

 

 

 

114

 

Customer rebate reserve

 

 

66

 

 

 

94

 

Other

 

 

216

 

 

 

199

 

 

 

$

576

 

 

$

601

 

Refer to Note 12.16. Commitments and Contingencies for further details on Obligations payable under Indemnification Agreements.

to the Unaudited Consolidated Financial Statements.


Note 12.16. Commitments and Contingencies

Environmental Matters

The Company is

We are subject to various federal, state, local, and foreign government requirements relating to the protection of the environment and accruesaccrue costs related to environmental matters when it is probable that it haswe have incurred a liability related to a contaminated site and the amount can be reasonably estimated. Environmental-relatedWe 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 claims associated with environmental and safety matters, including products containing hazardous substances. Additional claims and costs involving environmental matters are likely to continue to arise in the future.

Environment-related expenses for sites owned and operated by Resideous are presented within Costcost of goods sold for operating sites. For the three months ended April 2, 20221, 2023 and April 3, 2021,2, 2022, environmental expenses related to these operating sites were not material. Liabilities for environmental costs were $22$22 million as ofat April 2, 20221, 2023 and December 31, 2021.2022.


Obligations Payable Under Indemnification Agreements

The indemnification and reimbursement agreement (the “Reimbursement Agreement”)Reimbursement Agreement and the tax matters agreement (the “TaxTax Matters Agreement”)Agreement (collectively, the “Indemnification Agreements”) are further described below.

Reimbursement Agreement

We separated from Honeywell on October 29, 2018, becoming an independent publicly traded company as a result of a pro rata distribution of our common stock to shareholders of Honeywell (the “Spin-off”). In connection with the Spin-Off, the Companywe entered into the Reimbursement Agreement, with Honeywell pursuant to which the Company haswe have an obligation to make cash payments to Honeywell in amounts equal to 90%90% of payments for certain Honeywell environmental-liability payments, which include amounts billed (“payments”)(payments), less 90%90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90%90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the “recoveries”)recoveries). TheWhile the amount payable by the Companyus in respect of such liabilities arising in respect of any given year is subject to a cap of $$140 million under the Reimbursement Agreement, the estimated liability for resolution of pending and future environmental-related liabilities recorded on our balance sheet are calculated as if we were responsible for 100% of the environmental-liability payments associated with certain sites. Refer to 140 million. See Note 17.15. Commitments and Contingencies in the Company’s 2021our 2022 Annual Report on Form 10-K for further discussion.

The following table summarizes information concerning the Company’s Reimbursement Agreement liabilities:

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Beginning balance

 

$

597

 

 

$

591

 

Accruals for indemnification liabilities deemed probable and reasonably estimable

 

 

41

 

 

 

36

 

Indemnification payment

 

 

(35

)

 

 

(35

)

Ending balance (1)

 

$

603

 

 

$

592

 

(1)
Reimbursement Agreement liabilities deemed probable and reasonably estimable, however, it is possible the Company could pay $140 million per year (exclusive of any late payment fees up to 5% per annum) until the earlier of (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.
17

16Table of Contents

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

For the three months ended April 2, 2022 and April 3, 2021 net expenses related

Resideo Technologies, Inc.
Notes to the Reimbursement Agreement were $41 million and $36 million, respectively and are recorded in Other expense, net.

Consolidated Financial Statements

Reimbursement Agreement liabilities are included in the following balance sheet accounts:

 

 

April 2, 2022

 

 

December 31, 2021

 

Accrued liabilities

 

$

140

 

 

$

140

 

Obligations payable under Indemnification Agreements

 

 

463

 

 

 

457

 

 

 

$

603

 

 

$

597

 

(Unaudited)

The Company does not currently possess sufficient information to reasonably estimate the amounts of indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with such indemnification liability payments can be determined although they could be material to the Company’s unaudited consolidated results of operations and operating cash flows in the periods recognized or paid.

Tax Matters Agreement

In connection with the Spin-Off, the Companywe entered into the Tax Matters Agreement with Honeywell, pursuant to which it iswe are responsible and will indemnify Honeywell for certain taxes, including certain income taxes, sales taxes, VAT and payroll taxes, relating to the business for all periods, including periods prior to the consummation of the Spin-Off. In addition, the Tax Matters Agreement addresses the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the Spin-Off. As

We are required to indemnify Honeywell for any taxes resulting from the failure of the Spin-Off and related internal transactions to qualify for their intended tax treatment under U.S. federal, state and local income tax law, as well as foreign tax law, where such taxes result from our action or omission not permitted by the Separation and Distribution Agreement between Honeywell and Resideo dated as of October 19, 2018 or the Tax Matters Agreement.

The following table summarizes information concerning the Reimbursement and Tax Matter Agreements’ liabilities:

(in millions)Reimbursement AgreementTax Matters AgreementTotal
Balance as of December 31, 2022$614 $106 $720 
Accruals for liabilities deemed probable and reasonably estimable (1)
41 (2)39 
Payments to Honeywell(35)— (35)
Balance as of April 1, 2023$620 $104 $724 
(1) Reimbursement Agreement liabilities deemed probable and reasonably estimable; however, it is possible we could pay $140 million per year (exclusive of any late payment fees up to 5% per annum) until the earlier of (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million.

The liabilities related to the Reimbursement and Tax Matters Agreements are included in the following balance sheet accounts:

(in millions)April 1, 2023December 31, 2022
Accrued liabilities$140 $140 
Obligations payable under Indemnification Agreements584 580 
Total indemnification liabilities$724 $720 

For the three months ended April 1, 2023 and April 2, 2022, and December 31, 2021, the Company has recorded a liability in respectnet expenses related to the Tax MattersReimbursement Agreement were $41 million and are recorded in other expense, net.

We do not currently possess sufficient information to reasonably estimate the amounts of $indemnification liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with such indemnification liability payments can be determined although they could be material to our consolidated results of operations and operating cash flows in the periods recognized or paid.

128 million,
Independent of our payments under the Reimbursement Agreement, we will have ongoing liability for certain environmental claims, which is included in Obligations payable under Indemnification Agreements.are part of our ongoing business.

Trademark Agreement

In connection with the Spin-Off, the Company and Honeywell

We entered into a 40-year40-year Trademark License Agreement (the “Trademark Agreement”)with Honeywell that authorizes the Company’sour use of certain licensed trademarks in the operation of Resideo’sour business for the advertising, sale and distribution of certain licensed products. In exchange, the Company payswe will pay to Honeywell a royalty fee which is generally equal to 1.5%of 1.5% on net revenue to Honeywell related to such licensed products, which is recorded in Selling,selling, general and administrative expensesexpense on the unauditedUnaudited Consolidated Interim Statements of Operations. For the three months ended April 2, 20221, 2023 and April 3, 2021,2, 2022, royalty fees were $6$4 million and $5$6 million, respectively.

18
Table of Contents
Resideo Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Other Matters

The Company isWe are subject to lawsuits, investigations and disputes arising out of the conduct of itsour business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee matters, intellectual property, and environmental, health, and safety matters. The Company recognizesWe recognize a liability for any contingency that is probable of occurrence and reasonably estimable. The CompanyWe continually assessesassess the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. No such matters are material to the Company's unauditedour financial statements.

The Company, the Company’s former CEO Michael Nefkens, the Company’s former CFO Joseph Ragan, and the Company’s former CIO Niccolo de Masi were named defendants in a class action securities suit that was filed in the U.S. District Court for the District of Minnesota styled In re Resideo Technologies, Inc. Securities Litigation, (the “Securities Litigation”). The amended complaint asserted claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, broadly alleging, among other things, that the defendants (or some of them) made false and misleading statements regarding, among other things, Resideo’s business, performance, the efficiency of its supply chain, operational and administrative issues resulting from the spin-off from Honeywell, certain business initiatives, and financial guidance in 2019.

17

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

On August 18, 2021, the Company and plaintiffs’ representative executed a definitive Stipulation and Agreement of Settlement providing for, among other things, a total settlement payment of $ Refer to 55 million (the “Settlement”). Insurance recoveries of approximately $39 million were received related to the Settlement. On March 25, 2022, the court entered a final judgement approving the Settlement, which was amended to provide a dismissal of the Securities Litigation with prejudice on April, 14, 2022.

Certain current or former directors and officers of the Company were defendants in a consolidated derivative action in the District Court for the District of Delaware under the caption In re Resideo Technologies, Inc. Derivative Litigation, (the “Federal Derivative Action”). On September 23, 2021 the Federal Derivative Action was transferred to the District of Minnesota, where Securities Litigation was pending. On September 1, 2021, an additional shareholder derivative complaint was filed by Riviera Beach, part of the leadership group in the Federal Derivative Action, and City of Hialeah Employees Retirement System against certain current or former directors and officers of the Company in the District of Minnesota, alleging substantially that the same facts and making substantially the same claims against the same defendants as in the Federal Derivative Action, and additionally referencing board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8 (the “Riviera Beach Action”). On December 1, 2021, the Federal Derivative Action and the Riviera Beach Action were consolidated into a single action under the caption: In re Resideo Technologies, Inc. Derivative Litigation, (the “Consolidated Federal Derivative Action”) and was stayed pending entry of final judgement in the Securities Litigation. On April 19, 2022, after entry of the final judgement in the Securities Litigation, the court entered the parties' stipulation suspending all deadlines in the case for sixty days to facilitate settlement discussions.

On June 25, 2021, the Bud & Sue Frashier Family Trust U/A DTD 05/05/98, filed a shareholder derivative complaint against certain current or former directors and officers of the Company in the Court of Chancery of the State of Delaware, captioned Bud & Sue Frashier Trust U/A DTD 05/05/98 v. Fradin, (“Delaware Chancery Derivative Action”). The Delaware Chancery Derivative Action alleges substantially the same facts and makes substantially the same claims as the Federal Derivative Action, and additionally references board materials obtained through a demand made pursuant to Section 220 of the Delaware Code Title 8. The Delaware Chancery Derivative Action remains stayed by agreement of the parties.

While the Company is engaged in discussions concerning potential settlement of the Federal Derivative Action and the Delaware Chancery Derivative Action, there can be no guarantees that a settlement will be reached or approved. In the event that no settlement is reached, the Company intends to defend these actions vigorously, but there can be no assurance that the defense will be successful.

See Note 17.15. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in the Company’s 2021our 2022 Annual Report on Form 10-K for further discussion of these matters.


Certain current or former directors and officers were defendants in a consolidated derivative action, In re Resideo Technologies, Inc. Derivative Litigation (the “Consolidated Federal Derivative Action”), which was stayed pending entry of final judgment in the related securities litigation and Delaware Chancery derivative action. An additional suit was filed in the Court of Chancery of the State of Delaware in 2021 and not consolidated with the Consolidated Federal Derivative Action. On November 17, 2022, the parties executed a Confidential Term Sheet summarizing the agreed terms of a global settlement to resolve all of the pending lawsuits and derivative claims. Under the terms of the settlement, we agreed to implement or codify certain corporate governance reforms and reimburse the plaintiffs’ attorneys’ fees of up to $1.6 million. On February 3, 2023, the parties executed a definitive stipulation of settlement. The United States District Court for the District of Minnesota preliminarily approved the settlement and a fairness hearing will be held on June 7, 2023. The final settlement remains subject to, among other things, court approval. The settlement liability is included in the other accrued liabilities in the Unaudited Consolidated Balance Sheets, and the expected insurance recovery of approximately $0.6 million is included in accounts receivable, net.

On September 16, 2022, Salvatore Badalamenti (“Plaintiff”) filed a putative class action lawsuit (the “Badalamenti Lawsuit”) in the U.S. District Court for the District of New Jersey against Honeywell International Inc. and the Company. Plaintiff alleges, among other things, that the Company violated certain consumer protection laws by falsely advertising the Company’s combination-listed single data-bus burglar and fire alarms system control units (the “Products”) as conforming to Underwriters Laboratories, Inc. (the “UL”) or the National Fire Protection Association (“NFPA”) standards and/or failing to disclose such nonconformance. Plaintiff further alleges that the Products are defective because they do not conform to the UL and NFPA industry standards. Plaintiff does not allege that he, or anyone else, has experienced any adverse event due to the alleged product defect or that the Products did not work. Plaintiff alleges causes of action for violation of the New Jersey Consumer Fraud Act, fraud, negligent misrepresentation, breach of express and implied warranties, violation of the Magnuson-Moss Warranty Act, unjust enrichment, and violation of the Truth-in-Consumer Contract, Warranty, and Notice Act.

Plaintiff seeks to represent a putative class of other persons in the U.S. who purchased the Products. Plaintiff, on behalf of himself and the putative class, seeks damages in an unknown amount, which he describes as the cost to repair and/or replace the Products and/or the diminution in value of the Products.

We believe we have strong defenses against the allegations and claims asserted in the Badalamenti Lawsuit and our motion to dismiss Plaintiff's complaint was fully briefed on March 3, 2023. We continue to defend the matter vigorously; however, there can be no assurance that we will be successful in such defense. In light of the early stage of the Badalamenti Lawsuit, we are unable to estimate the total costs to defend the matter or the potential liability to us in the event that we are not successful in our defense.

Warranties and Guarantees

In the normal course of business, the Company issueswe issue product warranties and product performance guarantees. It accruesWe accrue for the estimated cost of product warranties and product performance guarantees based on contract terms and historical experience at the time of sale. Adjustments to initial obligations for warranties and guarantees are made as changes to the obligations become reasonably estimable. Product warranties and product performance guarantees are included in Accruedother accrued liabilities.

18

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

The following table summarizes information concerning recorded obligations for product warranties and product performance guarantees:

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Beginning of period

 

$

23

 

 

$

22

 

Accruals for warranties/guarantees issued during the year

 

 

6

 

 

 

4

 

Additions from acquisitions

 

 

8

 

 

 

-

 

Adjustment of pre-existing warranties/guarantees

 

 

(2

)

 

 

(1

)

Settlement of warranty/guarantee claims

 

 

(5

)

 

 

(5

)

End of period

 

$

30

 

 

$

20

 

19

Note 13. Long-term Debt and Credit Agreement

The Company’s debt asTable of April 2, 2022 and December 31, 2021 consisted of the following:Contents

 

 

April 2, 2022

 

 

December 31, 2021

 

4.000% notes due 2029

 

$

300

 

 

$

300

 

Seven-year variable rate term loan B due 2028

 

 

1,140

 

 

 

943

 

Revolving Credit Facility

 

 

0

 

 

 

-

 

Unamortized deferred financing costs

 

 

(16

)

 

 

(13

)

Total outstanding indebtedness

 

 

1,424

 

 

 

1,230

 

Less: Amounts expected to be paid within one year

 

 

12

 

 

 

10

 

Total long-term debt due after one year

 

$

1,412

 

 

$

1,220

 

At April 2, 2022 and April 3, 2021, the interest rate for the A&R Term B Facility (defined below) was 2.76% and 2.75%, respectively, and there were 0 borrowings and 0 letters of credit issued under the A&R Revolving Credit Facility (as defined below). During the three months ended April 3, 2021, the Company incurred debt extinguishment costs of $23 million related to the execution of the A&R Credit Agreement (as defined below) and a partial redemption of previously outstanding senior notes. As of April 2, 2022, the Company was in compliance with all covenants related to the A&R Credit Agreement and the Senior Notes due 2029 (as defined below).

The Company assessed the amounts recorded under the A&R Term B Facility, the Senior Notes due 2029, and the A&R Revolving Credit Facility. The Company determined that the A&R Revolving Credit Facility approximated fair value. The A&R Term B Facility and the Senior Notes due 2029 had approximate fair values of $1,126 million and $272 million, respectively. The fair values of the debt are based on the quoted inactive prices and are therefore classified as Level 2 within the valuation hierarchy.

Senior Notes due 2029

On August 26, 2021, the Company issued $300 million in principal amount of 4% senior unsecured notes due in 2029 (the “Senior Notes due 2029”). The Senior Notes due 2029 are senior unsecured obligations of Resideo guaranteed by Resideo’s existing and future domestic subsidiaries and rank equally with all of Resideo’s senior unsecured debt and senior to all of Resideo’s subordinated debt.

Credit Agreement

On February 12, 2021, the Company entered into an Amendment and Restatement Agreement with JP Morgan Chase Bank N.A. as administrative agent (the “A&R Credit Agreement”). This agreement effectively replaced the Company’s previous senior secured credit facilities.

The A&R Credit Agreement provides for a (i) seven-year senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii) a five-year senior secured revolving credit

19

RESIDEO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In millions, unless otherwise noted)

(Unaudited)

facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the A&R Term B Facility, the “A&R Senior Credit Facilities”).

On March 28, 2022, the A&R Credit Agreement was further amended to include an additional aggregate principal amount of $200 million in the loans.

Refer to Note 18. Long-Term Debt and Credit Agreement in the Company’s 2021 Annual Report on Form 10-K for further discussion regarding the Company’s long-term debt and credit agreement.

Note 14. Derivative Instruments

The Company uses interest rate swap agreements to manage exposure to interest rate risks. The Company does not use interest rate swap agreements for speculative or trading purposes. The gain or loss on the interest rate swaps that qualify as derivatives is recorded in Accumulated other comprehensive loss and is subsequently recognized as Interest expense in the Interim Consolidated Statements of Operations when the hedged exposure affects earnings. If the related debt or the interest rate swap is terminated prior to maturity, the fair value of the interest rate swap recorded in Accumulated other comprehensive loss may be recognized in the Consolidated Interim Statements of Operations based on an assessment of the agreements at the time of termination.

In March 2021, the Company entered into 8 interest rate swap agreements (the “Swap Agreements”) with several financial institutions for a combined notional value of $560 million. The effect of the Swap Agreements is to convert a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over terms ranging from two to four years. The Swap Agreements are adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs primarily including the forward LIBOR curve available to swap dealers. Contract gains or losses recognized in other comprehensive income (loss) totaled $23 million for the three months ended April 2, 2022. Amounts reclassified from Accumulated other comprehensive loss into earnings were not material for any of the periods presented. The fair value of the Swap Agreements as of April 2, 2022 was $28 million. Amounts expected to be reclassified into earnings in the next 12 months were not material as of April 2, 2022.

Note 15. Pension

The Company sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of its U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit plans. It also sponsors defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in certain jurisdictions, principally Germany, Austria, Belgium, France, India, Switzerland, and the Netherlands.The pension obligations as of April 2, 2022 and December 31, 2021 were $115 million and $114 million, respectively, and are included in Other liabilities in the unaudited Consolidated Interim Balance Sheets. Net periodic benefit cost recognized in Comprehensive income (loss) is $2 million for the three months ended April 2, 2022 and April 3, 2021.

The components of net periodic benefit costs other than the service cost are included in Other expense, net in the unaudited Consolidated Interim Statements of Operations for the three months ended April 2, 2022 and April 3, 2021.

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(In millions, except per share amounts)

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand the results of operations and financial condition of Resideo Technologies, Inc. and its consolidated subsidiaries (“Resideo” or “the Company”, “we”, “us” or “our”) for the three months ended April 2, 2022 and should be read in conjunction with the unaudited Consolidated Interim Financial Statements and the notes thereto contained elsewhere in this Form 10-Q. The financial information as of April 2, 2022 should be read in conjunction with the consolidated and combined financial statements for the year ended December 31, 2021 contained in our 2021 Annual Report on Form 10-K (the “2021 Annual Report on Form 10-K”).

Overview and Business Trends

We are a leading global manufacturer and distributor of technology-driven products and solutions that help homeowners and businesses 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, including smoke and carbon monoxide detection home safety products, and security markets. We have a global footprint serving commercial and residential end-markets. We manage our business operations through two operating segments, Products & Solutions and ADI Global Distribution. Our Products & Solutions segment offerings include temperature and humidity control, energy products and solutions, water and air solutions, as well as smoke and carbon monoxide detection home safety products, security panels, sensors, peripherals, wire and cable, communications devices, video cameras, awareness solutions, cloud infrastructure, installation and maintenance tools, and related software. Our ADI Global Distribution business is the leading wholesale distributor of low-voltage security products including access control, fire detection, intrusion, and video products and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. The Products & Solutions segment, consistent with our industry, has a higher gross and operating profit margin profile in comparison to the ADI Global Distribution segment.

Our financial performance is influenced by several macro factors such as repair and remodeling activity, residential and non-residential construction, employment rates, and overall macro environment. We are experiencing global shortages in key materials and components in certain instances impacting our ability to supply certain products as well as labor shortages, materials price inflation, and increased freight costs.

Current Quarter Developments

In March 2022, we completed the acquisition of First Alert, Inc. (“First Alert”), a leading provider of home safety products. This acquisition was integrated into the Products & Solutions portfolio and expands our footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products.

In March 2022, the A&R Credit Agreement was further amended to increase the aggregate principal amount of the A&R Term B Facility by $200 million. A portion of the proceeds of this increased borrowing under the A&R Term B Facility was used to finance the First Alert acquisition.

First Quarter Highlights

Net revenue increased $87 million, or 6%, in the first quarter of 2022 compared to the same quarter of 2021, driven by price increases. During the first quarter of 2022, gross profit was favorably impacted due to timing impacts of selling through lower cost inventory in the quarter. Gross profit as a percent of net revenues increased to 29% in the first quarter of 2022 from 26% in the first quarter of 2021. The primary items driving the 300 basis point (“bps”) increase in gross profit percentage were a 300 bps benefit from price increases and sales mix.

Research and development expense for the three months ended April 2, 2022 was $24 million, an increase of $3 million from $21 million for the three months ended April 3, 2021. The increase was primarily due to planned investment to support new product launches.

21

Selling, general and administrative expense for the three months ended April 2, 2022 was $238 million, an increase of $21 million from $217 million for the three months ended April 3, 2021. The increase was driven by transaction costs associated with the First Alert acquisition, increased commercial investment, and labor inflation and other items totaling $27 million. The increases were partially offset by foreign currency translation, and other cost reductions totaling $6 million.

First quarter net income was $87 million for the three months ended April 2, 2022 compared to net income of $49 million for the three months ended April 3, 2021.

We ended the first quarter with $244 million in cash and cash equivalents. Net cash used for operating activities was $59 million for the three months ended April 2, 2022. At April 2, 2022, accounts receivable were $1,008 million, inventories were $922 million, accounts payable were $958 million, and there were no borrowings under our revolving credit facility.

COVID-19 and Recent Macroeconomic Environment

Our visibility toward future performance is more limited than is typical due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and its variants, and the overall prevailing macroeconomic environment, including due to COVID-19. For example, recent business conditions have been impacted by shortages in key materials and components which have impacted our ability to supply certain products. We have also experienced increased labor rates, labor shortages, materials price inflation, and increased freight costs. In response to these challenges, we have, among other measures, aggressively managed supplier relationships to mitigate some of these shortages, developed contingency plans for future supply, aligned our production schedules with demand in a proactive manner; and pursued further improvements in the productivity and effectiveness of our manufacturing, selling, and administrative activities.

Basis of Presentation

Our financial statements are presented on a consolidated basis (collectively, the “Interim Financial Statements”). The Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Reclassification

The prior period unaudited consolidated interim statement of operations was reclassified to present Research and development expenses as a separate line item within the statement. Research and development expenses were formerly included within Selling, general and administrative expenses.

Components of Operating Results

Net Revenue

We manage our global business operations through two operating segments, Products & Solutions and ADI Global Distribution:

Products & Solutions: We generate the majority of our Products & Solutions net revenue primarily from residential end-markets. Our Products & Solutions segment includes traditional products, as well as connected products, which we define as any device with the capability to be monitored or controlled from a remote location by an end-user or service provider. Our products are sold primarily through a network of HVAC, plumbing, security, and electrical distributors including our ADI Global Distribution business, OEMs, and service providers such as HVAC contractors, security dealers, and plumbers, and additionally through retail and online channels for specific markets.

ADI Global Distribution: We generate revenue through the distribution of low-voltage electronic and security products, as well as audio, communications, data communications, fire, networking, smart home, power, ProAV, and wire and cable that are delivered through a comprehensive network of professional contractors, distributors and OEMs, as well as major retailers and online merchants. In addition to our own security products, ADI Global Distribution distributes products from industry-leading manufacturers and carries a line of private label products. We sell these

22

products to contractors that service non-residential and residential end-users. 14% of ADI Global Distribution’s net revenue is supplied by our Products & Solutions segment. Management estimates that in 2022 and 2021 approximately two-thirds of ADI Global Distribution’s net revenue was attributed to commercial end markets and one-third to residential end markets.

Cost of Goods Sold

Products & Solutions:Cost of goods sold includes costs associated with raw materials, assembly, shipping and handling of those products; costs of personnel-related expenses, equipment associated with manufacturing support, logistics and quality assurance, non-research and development engineering costs, and costs of certain intangible assets.

ADI GlobalDistribution: Cost of goods sold consists primarily of inventory-related costs and includes labor and personnel-related expenses.

Research and Development Expenses

Research and development expenses include expenses related to development of new products as well as enhancements and improvements to existing products that substantially change the product. These expenses are primarily related to employee compensation and consulting fees.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include trademark royalty expenses, sales incentives and commissions, professional fees, legal fees, promotional and advertising expenses, and personnel-related expenses, including stock compensation expense and pension benefits.

Other Expense, Net

Other expense, net consists primarily of Reimbursement Agreement expenses. For further information see Note 12. Commitments and Contingencies of

Notes to InterimConsolidated Financial Statements of this Form 10-Q. Other expense, net also includes debt extinguishment costs incurred as a result of the redemption of our previously outstanding senior notes due 2026 and the execution of the A&R Credit Agreement as well as foreign exchange gains and losses and other non-operating related expenses or income.
(Unaudited)

Three Months Ended
(in millions)April 1, 2023April 2, 2022
Beginning balance$48 $23 
Accruals for warranties/guarantees issued during the year5 6 
Adjustment of pre-existing warranties/guarantees— (2)
Settlement of warranty/guarantee claims(20)(5)
Reserve of acquired company at date of acquisition— 8 
Ending balance$33 $30 
Interest Expense
Note 17. Income Taxes

Interest expense consists of interest on our short and long-term obligations, including our senior notes, term credit facilities, revolving credit facilities, and any realized gains or losses from our interest rate swaps. Interest expense on our obligations includes contractual interest, amortization of the debt discount, and amortization of deferred financing costs.

Tax Expense

Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory tax rates, adjusted for U.S. taxation of foreign earnings, non-deductible expenses, and other permanent differences.

Results of Operations

The following table sets forth our selected unaudited consolidated interim statements of operations for the periods presented:

23

Unaudited Consolidated Interim Statements of Operations

(In millions except shares in thousands and per share data)

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Net revenue

 

$

1,506

 

 

$

1,419

 

Cost of goods sold

 

 

1,072

 

 

 

1,051

 

Gross profit

 

 

434

 

 

 

368

 

Research and development expenses

 

 

24

 

 

 

21

 

Selling, general and administrative expenses

 

 

238

 

 

 

217

 

Operating profit

 

 

172

 

 

 

130

 

Other expense, net

 

 

40

 

 

 

44

 

Interest expense

 

 

11

 

 

 

13

 

Income before taxes

 

 

121

 

 

 

73

 

Tax expense

 

 

34

 

 

 

24

 

Net income

 

$

87

 

 

$

49

 

Weighted Average Number of Common Shares Outstanding (in thousands)

 

 

 

 

 

 

Basic

 

 

145,118

 

 

 

143,382

 

Diluted

 

 

148,760

 

 

 

147,656

 

Earnings Per Share

 

 

 

 

 

 

Basic

 

$

0.60

 

 

$

0.34

 

Diluted

 

$

0.58

 

 

$

0.33

 

Results of Operations for the Three Months Ended April 2, 2022 and April 3, 2021

Net Revenue

 

 

Three Months Ended

 

 

 

April 2,
2022

 

 

April 3,
2021

 

Net revenue

 

$

1,506

 

 

$

1,419

 

% change compared with prior period

 

 

6

%

 

 

 

Net revenue for the three months ended April 2, 2022 was $1,506 million, an increase of $87 million, or 6%, from $1,419 for the three months ended April 3, 2021. The increase in net revenue was driven by price increases.

A discussion of net revenue by segment can be found in the Review of Business Segments section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cost of Goods Sold

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

Cost of goods sold

 

$

1,072

 

 

$

1,051

 

% change compared with prior period

 

 

2

%

 

 

 

Gross profit percentage

 

 

28.8

%

 

 

25.9

%

Cost of goods sold for the three months ended April 2, 2022 was $1,072 million, an increase of $21 million, or 2%, from $1,051 million for the three months ended April 3, 2021.

This increase in cost of goods sold was driven by increased material costs, costs related to acquisitions, increased freight costs, and labor inflation totaling $69 million. These increased costs were partially offset by the,

24

foreign currency translation, favorable changes in sales mix, sourcing productivity, and other cost savings totaling $48 million.

Gross profit percentage was 29% for the three months ended April 2, 2022, compared to 26% for the three months ended April 3, 2021. The primary items driving the increase in gross profit percentage were a 300 bps impact from price increases and favorable sales mix.

Research and Development Expenses

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

Research and development expenses

 

$

24

 

 

$

21

 

% of revenue

 

 

2

%

 

 

1

%

Research and development expense for the three months ended April 2, 2022 was $24 million, an increase of $3 million from $21 million for the three months ended April 3, 2021. The increase was driven by planned investment to support new product launches.

Selling, General and Administrative Expenses

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

Selling, general and administrative

 

$

238

 

 

$

217

 

% of revenue

 

 

16

%

 

 

15

%

Selling, general and administrative expense for the three months ended April 2, 2022 was $238 million, an increase of $21 million from $217 million for the three months ended April 3, 2021. The increase was driven by transaction costs associated with the First Alert acquisition, increased investment, and labor inflation and other items totaling $27 million. These increases were partially offset by foreign currency translation, and other cost reductions totaling $6 million.

Other Expense, Net

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

Other expense, net

 

$

40

 

 

$

44

 

Other expense, net for the three months ended April 2, 2022 was $40 million, a decrease of $4 million from $44 million for the three months ended April 3, 2021. Other expense, net for the three months ended April 2, 2022 included $41 million in expenses related to the Honeywell Reimbursement Agreement partially offset by $1 million of other non-operating expenses. Other expense, net for the three months ended April 3, 2021, included $36 million in expenses related to the Honeywell Reimbursement Agreement and $23 million of debt extinguishment costs, partially offset by a $9 million reduction in accruals related to the Tax Matters Agreement, and $6 million of other non-operating income.

Tax Expense

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

Tax expense

 

$

34

 

 

$

24

 

Effective tax rate

 

 

29

%

 

 

32

%

25

Tax expense for the three months ended April 2, 2022 was $34 million.

For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by ourthe forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where we expect to report losses for whichand where we do not expect to receive tax benefits, we are required to apply separate forecastedforecast effective tax rates to those jurisdictions rather than including them in the consolidated forecastedforecast effective tax rate.

For the three months ended April 1, 2023 and April 2, 2022, the net tax expense ofwas $24 million and $34 million, respectively, and consists primarily of interim period tax expense of $35 million based on year-to-date pretax income multiplied by our forecasted effective tax rate partially offset by a tax benefit specific to the period of approximately $1 million consisting primarily of excess deductions for share-based compensation and the release of a previously unrecognized tax benefit.rate. In addition to items specific to the period, our income tax rate is impacted by the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.

Note 18. Earnings Per Share

Review

The reconciliation of Business Segmentsthe numerator and denominator used for the computation of basic and diluted earnings per share follows:
Three Months Ended
(in millions, except per share data)April 1, 2023April 2, 2022
Numerator for Basic and Diluted Earnings Per Share:
Net income$57 $87 
Denominator for Basic and Diluted Earnings Per Share:
Weighted average basic number of common shares outstanding147 145 
Plus: dilutive effect of common stock equivalents2 4 
Weighted average diluted number of common shares outstanding149 149 
Earnings per share:
Basic$0.39 $0.60 
Diluted$0.38 $0.58 

Products & Solutions

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

 

 

 

2022

 

 

2021

 

 

% Change

 

Total revenue

 

$

714

 

 

$

700

 

 

 

 

Less: Intersegment revenue

 

 

95

 

 

 

94

 

 

 

 

External revenue

 

$

619

 

 

$

606

 

 

 

2

%

Operating profit

 

$

153

 

 

$

130

 

 

 

18

%

Operating profit percentage

 

 

25

%

 

 

21

%

 

 

 

On March 31,

Diluted earnings per share is computed based upon the weighted average number of shares of common stock 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. For the three months ended April 1, 2023 and April 2, 2022, we completedaverage options and other rights to purchase approximately 1.4 million and 0.5 million shares of our common stock, respectively, were outstanding and anti-dilutive, and therefore, are excluded from the acquisitioncomputation of First Alert, a leading providerdiluted earnings per share. In addition, an average of home safety products. This acquisition was integrated into0.8 million and 0.9 million shares of PSUs are excluded from the Products & Solutions portfolio and expands our footprint in the home with complementary smoke and carbon monoxide detection home safety products and fire suppression products. The impactcomputation of this acquisition was not materialdiluted earnings per common share for the three months ended April 2, 2022

Products & Solutions revenue increased 2%, mainly due to price increases. Operating profit increased from $130 million to $153 million, or 18%. Operating profit was positively impacted by price increases1, 2023 and cost reductions totaling $69 million. These impacts were partially offset by lower volume, unfavorable changes in sales mix, increased investment, increased freight costs, and labor inflation totaling $46 million.

ADI Global Distribution

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

 

 

 

2022

 

 

2021

 

 

% Change

 

External revenue

 

$

887

 

 

$

813

 

 

 

9

%

Operating profit

 

$

80

 

 

$

59

 

 

 

36

%

Operating profit percentage

 

 

9

%

 

 

7

%

 

 

 

In February 2022, we completed the acquisition of Arrow Wire and Cable, Inc. a leading regional distributor of data communications, connectivity, and security products. This acquisition was integrated into and builds upon the ADI Global Distribution product portfolio and expands its presence in the data communications category with an assortment of copper and fiber cabling and connectivity, connectors, racking solutions, and network equipment. The impact of this acquisition was not material for the three months ended April 2, 2022.

ADI Global Distribution revenue increased 9% highlighted by strong growth in the U.S. and Canada driven by price increases, increased volume, and the impact of acquisitions. Operating profit increased from $59 million to $80 million, or 36%. Operating profit was favorably impacted primarily by changes in sales mix, price increases, impact of acquisitions, higher revenue, and other expense productivity totaling $29 million. These positive impacts were partially offset by commercial investments, increased freight costs, as well as labor inflation totaling $8 million.

26

Corporate

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

 

 

 

2022

 

 

2021

 

 

% Change

 

Corporate costs

 

$

61

 

 

$

59

 

 

 

3

%

Corporate costs for the three months ended April 2, 2022, were $61 million, an increase from $59 million forrespectively, as the three months ended April 3, 2021, or 3%. The increase was due primarily to transaction costs associated with the First Alert acquisition of $10 million partially offset by lower consulting spend, foreign currency translation, and other cost reductions totaling $8 million.

Capital Resources and Liquidity

Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations, supplemented by external sources of capital as needed. Additional liquidity may also be provided through access to the financial capital markets and a committed global credit facility. The following is a summary of our liquidity position:

contingency has not been satisfied.
•
Cash flows used for operating activities was $59 million for the three months ended April 2, 2022 compared to cash flows provided by operating activities of $5 million for the three months ended April 3, 2021.
20
•
As of April 2, 2022, total cash and cash equivalents were $244 million.
•
At April 2, 2022, there were no borrowings and no letters of credit issued under our $500 million revolving credit facility.

Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies, and the expansion of our sales and marketing activities. While we may elect to seek additional funding at any time, we believe our existing cash, cash equivalents, and availability under our credit facilities are sufficient to meet our capital requirements through at least the next 12 months and the longer term. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.

Reimbursement Agreement

In connection with the Spin-Off, we entered into the Reimbursement Agreement, pursuant to which we have an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable by us in respect of such liabilities arising in any given year is subject to a cap of $140 million.

The amount paid during the three months ended April 2, 2022 was $35 million. See Note 12. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of the Form 10-Q and Note 17. Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements in our 2021 Annual Report on Form 10-K for further discussion.

27

Cash Flow Summary for the three months ended April 2, 2022 and April 3, 2021

Our cash flows from operating, investing and financing activities for the three months ended April 2, 2022 and April 3, 2021, as reflected in the unaudited Interim Financial Statements, are summarized as follows:

 

 

Three Months Ended

 

 

 

April 2,

 

 

April 3,

 

 

 

2022

 

 

2021

 

Cash (used for) provided by:

 

 

 

 

 

 

Operating activities

 

$

(59

)

 

$

5

 

Investing activities

 

 

(665

)

 

 

(24

)

Financing activities

 

 

189

 

 

 

13

 

Effect of exchange rate changes on cash and cash equivalents

 

 

-

 

 

 

(3

)

Net decrease in cash and cash equivalents

 

$

(535

)

 

$

(9

)

Cash used for operating activities for the three months ended April 2, 2022 increased by $64 million, primarily due to increased working capital of $68 million to support higher revenue and higher inventory levels to support the business.

Cash used for investing activities increased by $641 million, primarily due to $628 million of additional cash paid for acquisitions in the three months ended April 2, 2022.

Net cash provided by financing activities increased by $176 million. The increase was primarily due to $196 million of net proceeds from the March 2022 Amended A&R Credit Agreement, as compared to $8 million of net proceeds resulting from the 2021 execution of the A&R Credit Agreement, redemption of the $140 million in principal amount of our previously outstanding senior notes, and debt issuance and modification costs, and a $3 million repayment of long-term debt. In addition, cash used for other financing activities increased by $9 million.

Capital Expenditures

We believe our capital spending has been sufficient to support the requirements of the business. We expect to continue investing to expand and modernize our existing facilities and to create capacity for new product development.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, net revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

28

Critical Accounting Policies

The preparation of our unaudited Interim Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed in our 2021 Annual Report on Form 10-K to be critical to the understanding of our unaudited Interim Financial Statements included in this Form 10-Q. There have been no changes in our critical accounting policies as compared to what was disclosed in the 2021 Annual Report on Form 10-K. Actual results could differ from our estimates and assumptions, and any such differences could be material to our unaudited Interim Financial Statements.

Other Matters

Litigation, Environmental Matters and Reimbursement Agreement

See Note 12. Commitments and Contingencies of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of environmental and other litigation matters.

Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Interim Financial Statements of this Form 10-Q for a discussion of recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.

Interest Rate Risk

As of April 2, 2022, $1,140 million of our total debt, excluding unamortized deferred financing costs, carried variable interest rates. In March 2021, eight interest rate swap agreements were entered into with various financial institutions for a combined notional amount of $560 million (the “Swap Agreements”). The Swap Agreements effectively converted a portion of the Company’s variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289% over a term of two to four years. For more information on the Swap Agreements, see Note 14. Derivative Instruments of Notes to Consolidated Interim Financial Statements of this Form 10-Q. The fair market values of our fixed-rate financial instruments and Swap Agreements are sensitive to changes in interest rates. At April 2, 2022, an increase in interest rate by 100 basis points would have an approximate $6 million impact on our annual interest expense, while a decrease in interest rate is not possible due to the interest rate floor on our variable rate debt.

Foreign Currency Exchange Rate Risk

We are exposed to market risks from changes in currency exchange rates. While we primarily transact with customers in the U.S. Dollar, we also transact in foreign currencies, primarily including the Euro, Canadian Dollar, Indian Rupee, British Pound, and Mexican Peso. These exposures may impact total assets, liabilities, future earnings and/or operating cash flows. Our exposure to market risk for changes in foreign currency exchange rates arises from transactions arising from international trade, foreign currency denominated monetary assets and liabilities, and international financing activities between subsidiaries. We rely primarily on natural offsets to address our exposures and may supplement this approach from time to time by entering into forward and option hedging contracts. As of April 2, 2022 and December 31, 2021, we have no outstanding foreign currency hedging arrangements.

Commodity Price Risk

While we are exposed to commodity price risk, we attempt to pass through significant changes in component and raw material costs to our customers based on the contractual terms of our arrangements. In limited situations, we may not be fully compensated for such changes in costs.

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Item 4. Controls2. Management’s Discussion and Procedures

EvaluationAnalysis of Disclosure ControlsFinancial Condition and Procedures

We maintain a systemResults of disclosure controls and procedures designed to give reasonable assurance thatOperations.

The following information required toshould be disclosedread in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.

Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.

Our Chief Executive Officer and Chief Financial Officer,conjunction with the assistanceUnaudited Consolidated Financial Statements included herein under “Item 1. Unaudited Consolidated Financial Statements” and the Audited Consolidated Financial Statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of other membersFinancial Condition and Results of Operations” (“MD&A”) included in our management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this2022 Annual Report on Form 10-K.


FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q. Based10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. This Quarterly Report includes industry and market data that we obtained from various third-party sources, including forecasts based upon such evaluation,data; 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 Chief Executive Officerforward-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 are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and Chief Financial Officercould cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

•competition from other companies in our markets and segments, as well as in new markets and emerging markets;
•our ability to identify consumer preferences and industry standards, develop and protect intellectual property related thereto, and successfully market new technologies, products, and services to consumers;
•our reliance on certain suppliers;
•the impact of disruptions in our supply chain from third-party suppliers and manufacturers, including our inability to obtain necessary product components, production equipment or replacement parts;
•inability to consummate acquisitions on satisfactory terms or to integrate such acquisitions effectively;
•the impact of earthquakes, hurricanes, fires, power outages, floods, pandemics, epidemics, natural disasters and other catastrophic events. or other public health emergencies, such as COVID-19;
•the impact of potentially volatile global market and economic conditions and industry and end market cyclicality, including factors such as interest rates, inflation, availability of financing, consumer spending habits and preferences, housing market changes, and employment rates;
•failure to achieve and maintain a high level of product and service quality, including the impact of warranty claims, product recalls, and product liability actions that may be brought against us;
•our ability to retain or expand relationships with significant customers;
•the significant failure or inability to comply with specifications and manufacturing requirements or delays or other problems with existing or new products or inability to meet price requirements;
•inability to successfully execute transformation programs or to effectively manage our workforce;
•the failure to increase productivity through sustainable operational improvements;
•economic, political, regulatory, foreign exchange and other risks of international operations;
•the potential adverse impacts of enhanced tariff, import/export restrictions, or other trade barriers on global economic conditions, financial markets and our business;
•our dependence upon IT infrastructure and network operations having adequate cyber-security functionality;
•risks associated with the Reimbursement Agreement, the other agreements we entered into with Honeywell in connection with the Spin-Off, and our relationships with Honeywell, including our reliance on Honeywell for the Honeywell Home trademark and potential material environmental liabilities;
•regulations and societal actions to respond to global climate change;
•failure to comply with the broad range of current and future standards, laws and regulations in the jurisdictions in which we operate;
•the impact of potential material litigation matters, government proceedings, and other contingencies and uncertainties;
•our ability to borrow funds and access capital markets in light of the terms of our debt documents or otherwise;
•our ability to recruit and retain qualified personnel;
•currency exchange rate fluctuations; and
•other risks detailed under the caption “Risk Factors” in this Quarterly Report, in Part I, Item 1A in our 2022 Annual Report on Form 10-K, and other filings we make with the SEC.
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There have concluded thatbeen no material changes to the risk factors described in our disclosure controls2022 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Quarterly Report. Even if our results of operations, financial condition and proceduresliquidity and the development of the industries in which we operate are effective at a reasonable assurance levelconsistent with the forward-looking statements contained in this Quarterly Report, 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 speak only as of the enddate 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.
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Overview and Business Trends
We are a leading global manufacturer and distributor of technology-driven products and solutions that help homeowners and businesses 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 markets, smoke and carbon monoxide detection home safety and fire suppression products, and security markets. We have a global footprint serving commercial and residential end-markets. We manage our business operations through two operating segments, Products and Solutions and ADI Global Distribution. The Products and Solutions operating segment, consistent with our industry, has a higher gross and operating profit profile in comparison to the ADI Global Distribution operating segment.
Our Products and Solutions operating segment offerings include temperature and humidity control, energy products and solutions, water and air solutions, smoke and carbon monoxide detection home safety products, security panels, sensors, peripherals, wire and cable, communications devices, video cameras, other home-related lifestyle convenience solutions, cloud infrastructure, installation and maintenance tools, and related software.
Our ADI Global Distribution business is a leading wholesale distributor of low-voltage security products including access control, fire detection, security, and video products and participates significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. Our ADI Global Distribution strategy is focused on growth in our omni-channel presence, expansion into adjacent markets, and continued enhancements to our value-add services to support our professional installers’ efficiency and profitability.
Our financial performance is influenced by macroeconomic factors such as repair and remodeling activity, residential and non-residential construction, employment rates, interest rates, lingering impacts of the COVID-19 pandemic, including to our supply chain, and the overall macroeconomic environment. Our visibility toward future performance is more limited due to uncertainty surrounding the prevailing macroeconomic environment. While we believe supply chain and logistics will continue to normalize over 2023, with end demand moderating as inventories rebalance over the period, covereduncertainties remain, including the potential for changes in inflation and interest rates, banking liquidity and consolidation, increased labor costs, unfavorable foreign currency impacts from a stronger U.S. Dollar and potential market and other disruption from the ongoing conflict in Ukraine.
Current Period Highlights
•Net revenue of $1.55 billion, up 3% from $1.51 billion in the first quarter 2022
•Income from operations of $138 million, or 8.9% of revenue, compared to $172 million, or 11.4% of revenue in the first quarter 2022
•Fully diluted earnings per share of $0.38, compared to $0.58 per share in the first quarter 2022
•Cash Flow From Operations was a use of cash of $4 million in the first quarter of 2023 as compared to $59 million in the first quarter of 2022
Recent Developments
On January 23, 2023, we acquired 100% of the outstanding equity of BTX, a leading distributor of professional audio, video, data communications and broadcast equipment. This acquisition will allow Resideo to further expand our Pro AV and private brand offerings across North America in the ADI business segment.

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Results of Operations
The following table represents results of operations on a consolidated basis for the periods indicated:
Three Months Ended
(in millions, except per share data and percentages)April 1, 2023April 2, 2022$ change% change
Net revenue$1,549 $1,506 $43 2.9 %
Cost of goods sold1,129 1,068 61 5.7 %
Gross profit420 438 (18)(4.1)%
Gross profit %27.1 %29.1 %(200) bps
Research and development expenses27 24 3 12.5 %
Selling, general and administrative expenses244 236 8 3.4 %
Intangible asset amortization9 6 3 50.0 %
Restructuring and impairment expenses2 — 2 N/A
Income from operations138 172 (34)(19.8)%
Other expenses, net39 40 (1)(2.5)%
Interest expense, net18 11 7 63.6 %
Income before taxes81 121 (40)(33.1)%
Provision for income taxes24 34 (10)(29.4)%
Net income$57 $87 $(30)(34.5)%
Earnings per share:
Basic$0.39 $0.60 $(0.21)(35.3)%
Diluted$0.38 $0.58 $(0.20)(34.6)%

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Net Revenue
Net revenue for the three months ended April 1, 2023 was $1,549 million, an increase of $43 million, or 2.9%, from the same period in the prior year, driven primarily by this Quarterly Report on Form 10-Q.

Changes$121 million from acquisitions and higher selling prices of $54 million across both segments. Partially offsetting these increases were lower sales volume of $105 million and unfavorable foreign currency fluctuations of approximately $27 million. Volume declines were driven by customer destocking, declines in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarterretail sales channel, and softened demand for security and energy products.

Gross Profit
The chart below presents the drivers of the gross profit variance from the three months ended April 2, 2022 to the three months ended April 1, 2023.
1073

Gross profit dollars decreased $18 million in the three months ended April 1, 2023 compared to the three months ended April 2, 2022 and gross margin decreased 200 basis points (“bps”) to 27.1% compared to 29.1% in the same period in the prior year. The decrease in gross margin was driven by 220 bps from higher manufacturing costs and 70 bps from lower volume leverage in both ADI and the Products and Solutions segment. These impacts were partially offset by 70 bps of positive gross margin impact from acquisitions and 20 bps from price increases and sales mix.
Research and Development Expenses
Research and development expenses for the three months ended April 1, 2023 were $27 million, an increase of $3 million, or 12.5%, from $24 million for the three months ended April 2, 2022. The increase was driven by $3 million of additional expense from First Alert.
Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended April 1, 2023, were $244 million, an increase of $8 million, or 3.4% primarily from the inclusion of First Alert and other acquisitions of $18 million offset by $10 million of transaction costs incurred in the first quarter of 2022.

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Restructuring and Impairment Expenses
In the fourth quarter of 2022, we executed multiple restructuring programs to lower costs, increase margins and position us for growth. For the three months ended April 1, 2023, our Products and Solutions segment incurred additional restructuring expenses of $2 million primarily related to employee termination cost.
Intangible Asset Amortization
Intangible asset amortization increased $3 million for the three months ended April 1, 2023, as compared to the same period in 2022 due to the increased amortization costs primarily due intangibles obtained through acquisition activities.
Other Expenses, Net
Other expenses, net consists primarily of Reimbursement Agreement expenses in the amount of $41 million.
Interest Expense, Net
Interest expense, net increased $7 million for the three months ended April 1, 2023 as compared to the same period in 2022 due to higher interest rates in 2023 compared to 2022 and additional borrowings of $200 million associated with our A&R Credit Agreement.
Tax Expense
Income tax expense decreased by $10 million for the three months ended April 1, 2023 compared to the same period in 2022, primarily driven by a decrease in income before income taxes. The income tax rate increased 150 basis points for the three months ended April 1, 2023 compared to the same period in 2022, primarily due to the mix of earnings across the jurisdictions in which we operate, non-deductible expenses, and U.S. taxation of foreign earnings.

Segment Results of Operations

Products and Solutions
The chart below presents net revenue and income from operations for the three months ended April 1, 2023 and April 2, 2022.
4685
Products and Solutions net revenue increased $39 million, or 6%, mainly due to revenue from the First Alert acquisition of $98 million and price increases of $28 million, partially offset by lower sales volume of $74 million and unfavorable foreign exchange fluctuations of $13 million. Income from operations decreased $36 million, or 24%, from prior year, primiarly due to higher manufacturing and input costs of $22 million and lower sales volume of $18 million, due to customer destocking.

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ADI Global Distribution
The chart below presents net revenue and income from operations for the three months ended April 1, 2023 and April 2, 2022.
5355
ADI Global Distribution net revenue increased $4 million, or 0.5%, driven by price increases of $25 million and the impact of acquisitions of $23 million, partially offset by lower sales volume of $30 million primarily, sales in residential security and AV categories, and unfavorable foreign exchange fluctuations of $14 million. Income from operations decreased $8 million, or 10%, due to lower sales volume of $6 million, additional investment in marketing and sales of $2 million, and foreign exchange fluctuations of $1 million, partially offset by positive sales mix and price increases, net of inflation of $2 million.
Corporate
Corporate costs for the three months ended April 1, 2023, were $51 million, a decrease of $10 million, or 16%, from $61 million in the same period of 2022. The decrease was due primarily to 2022 transaction costs associated with the First Alert acquisition of $10 million and a tax matter accrual release of $2 million. These positive impacts were partially offset by higher third-party spend of $3 million.

Capital Resources and Liquidity
As of April 1, 2023, total cash and cash equivalents were $292 million. Our liquidity is primarily dependent on our ability to continue to generate positive cash flows from operations, supplemented by external sources of capital, as needed. Additional liquidity may also be provided through access to the capital markets and our $500 million A&R Revolving Credit Facility.
Liquidity
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We may enter into acquisitions or strategic arrangements in the future, which also could require us to seek additional equity or debt financing. While we may elect to seek additional funding at any time, we believe our existing cash, cash equivalents and availability under our credit facilities are sufficient to meet our capital requirements through at least the next 12 months and the longer term.
We may from time to time take steps to reduce our debt or otherwise improve our financial position. These actions could include prepayments, open market debt repurchases, negotiated repurchases, other redemptions or retirements of outstanding debt, opportunistic refinancing of debt, raising additional capital or divesting certain non-core assets. The amount of prepayments or the amount of debt that has materially affected,may be refinanced, repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.
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Credit Agreement
As of April 1, 2023, we had $1,414 million of long-term debt outstanding under our A&R Credit Agreement and Senior Notes due 2029, of which $12 million is reasonably likelydue in the next 12 months. Refer to materially affect, our internal control over financial reporting.

30Note

PART II12

. Long-Term Debt to the Unaudited Consolidated Financial Statements. We plan to transition the reference rate under the A&R Senior Credit Facilities from LIBOR to Secured Overnight Financing Rate (“SOFR”) during the second quarter of 2023.
Cash Flow Summary for the Three Months Ended April 1, 2023 and April 2, 2022
Our cash flows from operating, investing and financing activities for the three months ended April 1, 2023 and April 2, 2022, as reflected in the Unaudited Consolidated Financial Statements are summarized as follows:
Three Months Ended
(in millions)April 1, 2023April 2, 2022$ change
Cash provided by (used for) operating activities:
Operating activities$(4)$(59)$55 
Investing activities(26)(665)639 
Financing activities(9)189 (198)
Effect of exchange rate changes on cash6 — 6 
Net decrease in cash, cash equivalents and restricted cash$(33)$(535)$502 
Net cash used for operating activities for the three months ended April 1, 2023 was $4 million. Compared to the three months ended April 2, 2022, net cash used for operating activities was $55 million higher due to improved working capital management in the Products and Solutions segment.

Net cash used for investing activities for the three months ended April 1, 2023 was $26 million, a decrease of $639 million compared to the three months ended April 2, 2022, as a result of the 2022 acquisitions in the Products and Solutions and ADI Global Distribution segments to support growth opportunities.

Net cash used for financing activities was $9 million during the three months ended April 1, 2023, as compared to cash provided by financing activities of $189 million for the three months ended April 2, 2022. The decrease of $198 million was primarily due to $200 million of proceeds received in March 2022 from the Amended A&R Credit Agreement.
Contractual Obligations and Probable Liability Payments
In addition to our long-term debt discussed above, our material cash requirements include the following contractual obligations.

Reimbursement Agreement Payments

In connection with the Spin-Off, we entered into the Reimbursement Agreement with Honeywell. As of April 1, 2023, a liability of $620 million was deemed probable and reasonably estimable; however, it is possible we could pay $140 million per year (exclusive of any late payment fees up to 5% per annum) until the earlier of: (1) December 31, 2043; or (2) December 31 of the third consecutive year during which the annual reimbursement obligation (including in respect of deferred payment amounts) has been less than $25 million. During the three months ended April 1, 2023, we paid Honeywell $35 million under the Reimbursement Agreement.For further discussion on the Reimbursement Agreement, refer to Note 16. Commitments and Contingencies to the Unaudited Consolidated Financial Statements.
Environmental Liability Payments
We make environmental liability payments for sites which we own and are directly responsible. As of April 1, 2023, a payment of $22 million was deemed probable and reasonably estimable.
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Operating Leases
We have operating lease arrangements for the majority of our manufacturing sites, offices, engineering and lab sites, stocking locations, warehouses, automobiles, and certain equipment. As of April 1, 2023, we had operating lease payment obligations of $204 million, with $38 million payable within 12 months.
Capital Expenditures
We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. We expect to continue investing to expand and modernize our existing facilities and to create capacity for new product development.
Other Matters
Litigation, Environmental Matters and the Reimbursement Agreement
Refer to Note 16. Commitments and Contingencies to the Unaudited Consolidated Financial Statements.
Recent Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies to the Unaudited Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from foreign currency exchange rates, commodity price risk and interest rates, which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.
Interest Rate Risk
As of April 1, 2023, $568 million of our $1,128 million A&R Term B Facility debt outstanding, excluding unamortized deferred financing costs, carried variable interest rates. In March 2021, we entered into eight interest rate Swap Agreements with various financial institutions for a combined notional amount of $560 million. The Swap Agreements effectively converted a portion of our variable interest rate obligations based on three-month LIBOR with a minimum rate of 0.50% per annum to a base fixed weighted average rate of 0.9289%. For more information on the Swap Agreements, refer to Note 13. Derivative Financial Instruments to the Unaudited Consolidated Financial Statements. The fair market value of our fixed-rate financial instruments and the Swap Agreements are sensitive to changes in interest rates. As of April 1, 2023, an increase in interest rate by 100 basis points would have an approximate $6 million impact on our annual interest expense.

In March and April 2023, we modified two of the eight Swap Agreements, each with a notional values of $70 million that mature in May 2024 as follows: (i) the original swap agreements were cancelled for no termination payment and (ii) we simultaneously entered into new pay-fixed interest rate swaps with a notional amount of $70 million, effectively blending the asset positions of the original interest rate swap agreements into new swap agreements and extending the term of our hedged position to February 2027. We plan to amend the remaining six Swap Agreements to transition from a LIBOR-based reference rate to Secured Overnight Financing Rate (“SOFR”) during the second quarter of 2023.
Foreign Currency Exchange Rate Risk

We are exposed to market risks from changes in currency exchange rates. While we primarily transact with customers and suppliers in the U.S. Dollar, we also transact in foreign currencies, primarily including the Mexican Peso, Euro, British Pound, Indian Rupee, Canadian Dollar, and Czech Koruna. These exposures may impact total assets, liabilities, future earnings and/or operating cash flows. Our exposure to market risk for changes in foreign currency exchange rates arises from transactions arising from international trade, foreign currency denominated monetary assets and liabilities, and international financing activities between subsidiaries. We rely primarily on natural offsets to address our exposures and may supplement this approach from time to time by entering into forward and option hedging contracts. As of April 1, 2023, we have no outstanding hedging arrangements.
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Commodity Price Risk
While we are exposed to commodity price risk, we attempt to pass through significant changes in component and raw material costs to our customers based on the contractual terms of our arrangements. In limited situations, we may not be fully compensated for such changes in costs.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended April 1, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information

Item 1. Legal Proceedings

Refer to

See Note 12.16. Commitments and Contingencies — Other Matters of Notes to Unaudited Consolidated Interim Financial Statements of this Form 10-QQuarterly Report for a discussion on legal proceedings.


Item 1A. Risk Factors

We face a variety of risks that are inherent in our business and our industry, including operational, legal, and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations, and historical trends. There have been no material changes to the risk factors described in our 20212022 Annual Report on Form 10-K.

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31

Item 6.    Exhibits

The Exhibits listed below on the Exhibit Index are filed or incorporated by reference as part of this Form 10-Q.Quarterly Report.

EXHIBIT INDEX

Exhibit


Number

Exhibit Description

2.1

3.2

4.1

10.1

First Amendment dated as of March 28,2022 to Amended and Restated Credit Agreement, dated as of February 12, 2021, among Resideo Funding Inc., Resideo Technologies Inc., Resideo Holding Inc., Resideo Intermediate Holding Inc., the other subsidiaries of Resideo Technologies, Inc., party thereto JPMorgan Chase Bank N.A., as administrative agent, and the lending institutions party thereto (incorporated by reference to Exhibit 10.1 to Resideo’s Form 8-K filed March 28, 2022, File No. 001-38635)

31.1

31.2

32.1

32.2

101.INS

Inline XBRL Instance Document (filed herewith)

101.SCH

Inline XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

†

Schedules omitted pursuant to item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon its request.


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Resideo Technologies, Inc.

Resideo Technologies, Inc.

Date: May 3, 2022

2023

By:

/s/ Anthony L. Trunzo

Anthony L. Trunzo


Executive Vice President and Chief Financial Officer


(on behalf of the Registrant and as the


Registrant’s Principal Financial Officer)

Date: May 3, 2023By:/s/ Tina Beskid
Tina Beskid
Vice President, Controller, and Chief Accounting Officer
(Principal Accounting Officer)

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