RESIDEO TECHNOLOGIES, INC. - Quarter Report: 2023 July (Form 10-Q)
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 July 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 N. 71st Street, Suite 550 Scottsdale, Arizona | 85254 | |||||||
| (Address of principal executive offices) | (Zip 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 growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of July 21, 2023 was 147,652,724 shares.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements.
Resideo Technologies, Inc.
Consolidated Balance Sheets
(Unaudited)
| (in millions, except par value) | July 1, 2023 | December 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 381 | $ | 326 | |||||||
| Accounts receivable, net | 1,043 | 1,002 | |||||||||
| Inventories, net | 1,001 | 975 | |||||||||
| Other current assets | 197 | 199 | |||||||||
| Total current assets | 2,622 | 2,502 | |||||||||
| Property, plant and equipment, net | 388 | 366 | |||||||||
| Goodwill | 2,737 | 2,724 | |||||||||
| Intangible assets, net | 467 | 475 | |||||||||
| Other assets | 322 | 320 | |||||||||
| Total assets | $ | 6,536 | $ | 6,387 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 948 | $ | 894 | |||||||
| Current portion of long-term debt | 12 | 12 | |||||||||
| Accrued liabilities | 564 | 640 | |||||||||
| Total current liabilities | 1,524 | 1,546 | |||||||||
| Long-term debt | 1,400 | 1,404 | |||||||||
| Obligations payable under Indemnification Agreements | 591 | 580 | |||||||||
| Other liabilities | 344 | 328 | |||||||||
| Total liabilities | 3,859 | 3,858 | |||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||
| Stockholders’ equity | |||||||||||
Common stock, $0.001 par value: 700 shares authorized, 151 and 148 shares issued and outstanding at July 1, 2023, and 148 and 146 shares issued and outstanding at December 31, 2022, respectively | — | — | |||||||||
| Additional paid-in capital | 2,204 | 2,176 | |||||||||
| Retained earnings | 707 | 600 | |||||||||
| Accumulated other comprehensive loss, net | (184) | (212) | |||||||||
| Treasury stock at cost | (50) | (35) | |||||||||
| Total stockholders’ equity | 2,677 | 2,529 | |||||||||
| Total liabilities and stockholders’ equity | $ | 6,536 | $ | 6,387 | |||||||
Refer to accompanying Notes to the Unaudited Consolidated Financial Statements.
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Resideo Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in millions, except per share data) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net revenue | $ | 1,602 | $ | 1,686 | $ | 3,151 | $ | 3,192 | |||||||||||||||
| Cost of goods sold | 1,166 | 1,219 | 2,295 | 2,287 | |||||||||||||||||||
| Gross profit | 436 | 467 | 856 | 905 | |||||||||||||||||||
| Research and development expenses | 29 | 28 | 56 | 52 | |||||||||||||||||||
| Selling, general and administrative expenses | 242 | 244 | 486 | 479 | |||||||||||||||||||
| Intangible asset amortization | 10 | 9 | 19 | 16 | |||||||||||||||||||
| Restructuring and impairment expenses | 2 | — | 4 | — | |||||||||||||||||||
| Income from operations | 153 | 186 | 291 | 358 | |||||||||||||||||||
| Other expenses, net | 42 | 42 | 82 | 82 | |||||||||||||||||||
| Interest expense, net | 17 | 13 | 34 | 24 | |||||||||||||||||||
| Income before taxes | 94 | 131 | 175 | 252 | |||||||||||||||||||
| Provision for income taxes | 44 | 37 | 68 | 71 | |||||||||||||||||||
| Net income | $ | 50 | $ | 94 | $ | 107 | $ | 181 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.34 | $ | 0.65 | $ | 0.73 | $ | 1.25 | |||||||||||||||
| Diluted | $ | 0.34 | $ | 0.63 | $ | 0.72 | $ | 1.22 | |||||||||||||||
| Weighted average number of shares outstanding: | |||||||||||||||||||||||
| Basic | 147 | 145 | 147 | 145 | |||||||||||||||||||
| Diluted | 149 | 149 | 149 | 149 | |||||||||||||||||||
Refer to accompanying Notes to the Unaudited Consolidated Financial Statements.
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Resideo Technologies, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | 50 | $ | 94 | $ | 107 | $ | 181 | |||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign exchange translation gain (loss) | 10 | (70) | 26 | (79) | |||||||||||||||||||
| Pension liability adjustments | 1 | — | 4 | — | |||||||||||||||||||
| Changes in fair value of effective cash flow hedges | 5 | 1 | (2) | 24 | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 16 | (69) | 28 | (55) | |||||||||||||||||||
| Comprehensive income | $ | 66 | $ | 25 | $ | 135 | $ | 126 | |||||||||||||||
Refer to accompanying Notes to the Unaudited Consolidated Financial Statements.
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Resideo Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | |||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | |||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net income | $ | 107 | $ | 181 | |||||||
| Adjustments to reconcile net income to net cash in operating activities: | |||||||||||
| Depreciation and amortization | 49 | 45 | |||||||||
| Restructuring and impairment expenses | 4 | — | |||||||||
| Stock-based compensation expense | 25 | 22 | |||||||||
| Other, net | 2 | (5) | |||||||||
| Changes in assets and liabilities, net of acquired companies: | |||||||||||
| Accounts receivable, net | (35) | (145) | |||||||||
| Inventories, net | (15) | (127) | |||||||||
| Other current assets | 3 | (21) | |||||||||
| Accounts payable | 44 | 54 | |||||||||
| Accrued liabilities | (94) | (47) | |||||||||
| Other, net | 27 | 19 | |||||||||
| Net cash provided by (used in) operating activities | 117 | (24) | |||||||||
| Cash Flows From Investing Activities: | |||||||||||
| Capital expenditures | (49) | (24) | |||||||||
| Acquisitions, net of cash acquired | (6) | (633) | |||||||||
| Other investing activities, net | — | (13) | |||||||||
| Net cash used in investing activities | (55) | (670) | |||||||||
| Cash Flows From Financing Activities: | |||||||||||
| Proceeds from issuance of A&R Term B Facility | — | 200 | |||||||||
| Repayments of long-term debt | (6) | (6) | |||||||||
| Other financing activities, net | (12) | (11) | |||||||||
| Net cash (used in) provided by financing activities | (18) | 183 | |||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | 10 | (13) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 54 | (524) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 329 | 779 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 383 | $ | 255 | |||||||
| Supplemental Cash Flow Information: | |||||||||||
| Interest paid | $ | 46 | $ | 21 | |||||||
| Taxes paid, net of refunds | $ | 67 | $ | 79 | |||||||
| Capital expenditures in accounts payable | $ | 20 | $ | 22 | |||||||
Refer to accompanying Notes to the Unaudited Consolidated Financial Statements.
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Resideo Technologies, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Fiscal Quarters | Common Stock | Accumulated Other Comprehensive Loss | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except shares in thousands) | Shares | Amount | Additional Paid-In Capital | Retained Earnings | Shares | Amount | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at April 2, 2022 | 147,084 | $ | — | $ | 2,191 | $ | 657 | $ | (200) | 2,547 | $ | (44) | $ | 2,604 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | 50 | — | — | — | 50 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 16 | — | — | 16 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuance, net of shares withheld for taxes | 565 | — | — | — | — | 355 | (6) | (6) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 13 | — | — | — | — | 13 | |||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | 147,649 | $ | — | $ | 2,204 | $ | 707 | $ | (184) | 2,902 | $ | (50) | $ | 2,677 | |||||||||||||||||||||||||||||||||
| Balance at April 3, 2022 | 145,372 | $ | — | $ | 2,135 | $ | 404 | $ | (151) | 1,696 | $ | (27) | $ | 2,361 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | 94 | — | — | — | 94 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (69) | — | — | (69) | |||||||||||||||||||||||||||||||||||||||
| Common stock issuance, net of shares withheld for taxes | 312 | — | 1 | — | — | 148 | (4) | (3) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 11 | — | — | — | — | 11 | |||||||||||||||||||||||||||||||||||||||
| Balance at July 2, 2022 | 145,684 | $ | — | $ | 2,147 | $ | 498 | $ | (220) | 1,844 | $ | (31) | $ | 2,394 | |||||||||||||||||||||||||||||||||
| Fiscal Year to Date Periods | Common Stock | Accumulated Other Comprehensive Loss | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except shares in thousands) | Shares | Amount | Additional Paid-In Capital | Retained Earnings | Shares | Amount | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | 146,222 | $ | — | $ | 2,176 | $ | 600 | $ | (212) | 2,050 | $ | (35) | $ | 2,529 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | 107 | — | — | — | 107 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 28 | — | — | 28 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuance, net of shares withheld for taxes | 1,427 | — | 3 | — | — | 852 | (15) | (12) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 25 | — | — | — | — | 25 | |||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | 147,649 | $ | — | $ | 2,204 | $ | 707 | $ | (184) | 2,902 | $ | (50) | $ | 2,677 | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 144,808 | $ | — | $ | 2,121 | $ | 317 | $ | (165) | 1,440 | $ | (21) | $ | 2,252 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | 181 | — | — | — | 181 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (55) | — | — | (55) | |||||||||||||||||||||||||||||||||||||||
| Common stock issuance, net of shares withheld for taxes | 876 | — | 4 | — | — | 404 | (10) | (6) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 22 | — | — | — | — | 22 | |||||||||||||||||||||||||||||||||||||||
| Balance at July 2, 2022 | 145,684 | $ | — | $ | 2,147 | $ | 498 | $ | (220) | 1,844 | $ | (31) | $ | 2,394 | |||||||||||||||||||||||||||||||||
Refer to accompanying Notes to the Unaudited Consolidated Financial Statements.
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Note 1. Nature of Operations and Basis of Presentation
Nature of Operations
Resideo Technologies, Inc. (“Resideo”, the “Company”, “we”, “us”, or “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. We are also a leading wholesale distributor of low-voltage security products including access control, fire detection, fire suppression, security, and video products, and participate significantly in the broader related markets of audio, communications, data communications, networking, power, ProAV, smart home, and wire and cable. Our global footprint serves both commercial and residential end markets.
Basis of Consolidation and Reporting
The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Unaudited Consolidated Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the Unaudited Consolidated Financial Statements included herein contain all adjustments, which consist of normal recurring adjustments, necessary to fairly present our financial position, results of operations and cash flows for the periods indicated. Operating results for the period from January 1, 2023 through July 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”), filed with the United States Securities and Exchange Commission (the “SEC”) on February 21, 2023.
Reporting Period
We report financial information on a fiscal quarter basis using a modified four-four-five week calendar. Our fiscal calendar begins on January 1 and ends on December 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 election are generally not significant to reported results for any quarter and only exist within a reporting year.
Reclassification
For the purpose of comparability, certain prior period amounts have been reclassified to conform to current period classification.
Note 2. Summary of Significant Accounting Policies
Our significant accounting policies are detailed in Note 2. Summary of Significant Accounting Policies of the Annual Report on Form 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 the three and six months ended July 1, 2023.
We consider the applicability and impact of all recent accounting standards updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) and disclose only those that may have a material impact.
8
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 to Resideo at this time as we currently have no supplier finance programs in place.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and subsequent amendment to the initial guidance: ASU 2021-01, Reference Rate Reform (Topic 848): Scope (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued 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. ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. This guidance may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2024. The impact of the adoption of this standard on our financial statements and related disclosures, including accounting policies, processes, and systems, was not material. Refer to Note 12. Long-Term Debt and Note 13. Derivative Financial Instruments to the Unaudited Consolidated Financial Statements for further discussion.
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 broadcast equipment. We report BTX’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 included 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 the acquisition during the first quarter of 2023, which did not result in any adjustments.
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 Solutions segment. We completed the accounting for the acquisition during the first quarter of 2023, which did not result in any adjustments.
9
Note 4. Segment Financial Data
We monitor our business operations through our two operating segments: Products and Solutions and ADI Global Distribution.
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 relate to functions within the corporate office that support the operating segments such as acquisition-related costs, legal, tax, treasury, human resources, IT, strategy, accounting, communications, innovation, business development, facilities management, corporate travel expenses and other executive costs. Additionally, included within Corporate are unallocated non-operating items such as pension expense, Reimbursement Agreement expense, interest income, interest expense, and other income (expense).
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 | Six Months Ended | ||||||||||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net revenue | |||||||||||||||||||||||
| Products and Solutions | $ | 677 | $ | 764 | $ | 1,335 | $ | 1,383 | |||||||||||||||
| ADI Global Distribution | 925 | 922 | 1,816 | 1,809 | |||||||||||||||||||
| Total net revenue | $ | 1,602 | $ | 1,686 | $ | 3,151 | $ | 3,192 | |||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Products and Solutions | $ | 128 | $ | 154 | $ | 245 | $ | 307 | |||||||||||||||
| ADI Global Distribution | 79 | 86 | 151 | 166 | |||||||||||||||||||
| Corporate | (54) | (54) | (105) | (115) | |||||||||||||||||||
| Total income from operations | $ | 153 | $ | 186 | $ | 291 | $ | 358 | |||||||||||||||
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 reported.
Note 5. Revenue 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
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 | Six Months Ended | ||||||||||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Products and Solutions | |||||||||||||||||||||||
| Air | $ | 218 | $ | 262 | $ | 429 | $ | 476 | |||||||||||||||
| Safety and Security | 248 | 267 | 476 | 422 | |||||||||||||||||||
| Energy | 132 | 154 | 268 | 313 | |||||||||||||||||||
| Water | 79 | 81 | 162 | 172 | |||||||||||||||||||
| Total Products and Solutions | 677 | 764 | 1,335 | 1,383 | |||||||||||||||||||
| ADI Global Distribution | |||||||||||||||||||||||
| U.S. and Canada | 806 | 791 | 1,574 | 1,543 | |||||||||||||||||||
EMEA (1) | 119 | 123 | 242 | 249 | |||||||||||||||||||
APAC (2) | — | 8 | — | 17 | |||||||||||||||||||
| Total ADI Global Distribution | 925 | 922 | 1,816 | 1,809 | |||||||||||||||||||
| Total net revenue | $ | 1,602 | $ | 1,686 | $ | 3,151 | $ | 3,192 | |||||||||||||||
(1)EMEA represents Europe, the Middle East and Africa.
(2)APAC represents Asia and Pacific countries.
Note 6. Restructuring
In 2022 we initiated 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) | July 1, 2023 | December 31, 2022 | |||||||||
| Beginning of period | $ | 27 | $ | 9 | |||||||
| Charges | 4 | 26 | |||||||||
Usage (1) | (13) | (5) | |||||||||
| Other | — | (3) | |||||||||
| End of period | $ | 18 | $ | 27 | |||||||
(1) Usage primarily relates to cash payments associated with employee termination costs.
In the third quarter, we initiated another restructuring program with estimated costs of $25 million.
Note 7. Pension Plans
During the first quarter of 2023, we recognized pension settlement losses 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 assets and liabilities to an insurance company. The corresponding remeasurement of our U.S. qualified defined benefit pension plan during the first quarter of 2023 resulted in
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a decrease in both plan assets and liabilities of $60 million. No significant activity occurred during the second quarter of 2023.
Note 8. Stock-Based Compensation Plans
The Stock Incentive Plans, which consists of the Amended and Restated 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates and the 2018 Stock Incentive Plan for Non-Employee Directors of Resideo Technologies, Inc., provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, and other stock-based awards.
During the second quarter of 2023, the Amended and Restated 2018 Stock Incentive Plan of Resideo Technologies, Inc. and its Affiliates was further amended to increase the number of shares of our common stock available for issuance by 3.5 million shares for an aggregate of 19.5 million shares with no more than 7.5 million shares being available for grant in the form of stock options.
A summary of awards granted as part of our annual long-term compensation follows:
| Six Months Ended July 1, 2023 | Six Months Ended July 2, 2022 | ||||||||||||||||||||||
| Number of Stock Units Granted | Weighted average grant date fair value per share | Number of Stock Units Granted | Weighted average grant date fair value per share | ||||||||||||||||||||
Performance Stock Units (“PSUs”) | 553,071 | $ | 29.89 | 672,453 | $ | 36.04 | |||||||||||||||||
Restricted Stock Units (“RSUs”) | 1,481,793 | $ | 19.01 | 1,035,043 | $ | 24.54 | |||||||||||||||||
Annual RSU awards to our key employees generally have a three-year service or performance period. RSU awards to our non-employee directors have a one-year service period. The fair value is determined at the grant 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 against that of the S&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.
Stock-based compensation expense, net of tax was $12 million and $24 million for the three and six months ended July 1, 2023, respectively. For the three and six months ended July 2, 2022, stock-based compensation expense, net of tax was $10 million and $21 million, respectively.
Note 9. Inventories, net
The following table summarizes the details of our inventories, net:
| (in millions) | July 1, 2023 | December 31, 2022 | ||||||||||||
| Raw materials | $ | 248 | $ | 251 | ||||||||||
| Work in process | 26 | 25 | ||||||||||||
| Finished products | 727 | 699 | ||||||||||||
| Total inventories, net | $ | 1,001 | $ | 975 | ||||||||||
Note 10. Goodwill and Intangible Assets, net
Our goodwill balance and changes in carrying value by segment are as follows:
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| (in millions) | Products and Solutions | ADI Global Distribution | Total | ||||||||||||||
Balance at December 31, 2022 | $ | 2,072 | $ | 652 | $ | 2,724 | |||||||||||
| Acquisitions | — | 4 | 4 | ||||||||||||||
| Adjustments | (2) | (1) | (3) | ||||||||||||||
| Impact of foreign currency translation | 8 | 4 | 12 | ||||||||||||||
| Balance at July 1, 2023 | $ | 2,078 | $ | 659 | $ | 2,737 | |||||||||||
The following table summarizes the net carrying amount of intangible assets:
| (in millions) | July 1, 2023 | December 31, 2022 | |||||||||
| Intangible assets subject to amortization | $ | 287 | $ | 295 | |||||||
| Indefinite-lived intangible assets | 180 | 180 | |||||||||
| Total intangible assets | $ | 467 | $ | 475 | |||||||
Intangible assets subject to amortization consisted of the following:
| July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| Patents and technology | $ | 65 | $ | (30) | $ | 35 | $ | 65 | $ | (28) | $ | 37 | |||||||||||||||||||||||
| Customer relationships | 318 | (129) | 189 | 313 | (117) | 196 | |||||||||||||||||||||||||||||
| Trademarks | 14 | (10) | 4 | 14 | (8) | 6 | |||||||||||||||||||||||||||||
| Software | 184 | (125) | 59 | 175 | (119) | 56 | |||||||||||||||||||||||||||||
| Intangible assets subject to amortization | $ | 581 | $ | (294) | $ | 287 | $ | 567 | $ | (272) | $ | 295 | |||||||||||||||||||||||
Intangible assets amortization expense was $10 million and $19 million for the three and six months ended July 1, 2023, respectively. For the three and six months ended July 2, 2022, intangible assets amortization expense was $9 million and $16 million, respectively.
Note 11. Leases
Total operating lease costs are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Operating lease cost: | |||||||||||||||||||||||
| Cost of goods sold | $ | 5 | $ | 7 | $ | 10 | $ | 10 | |||||||||||||||
| Selling, general and administrative expenses | 15 | 13 | 29 | 25 | |||||||||||||||||||
| Total operating lease costs | $ | 20 | $ | 20 | $ | 39 | $ | 35 | |||||||||||||||
Total operating lease costs include variable lease costs of $6 million and $12 million for the three and six months ended July 1, 2023, respectively. For the three and six months ended July 2, 2022, total operating lease costs include variable lease costs of $5 million and $9 million, respectively.
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The following table summarizes the carrying amounts of our operating lease assets and liabilities:
| (in millions) | Financial Statement Line Item | July 1, 2023 | December 31, 2022 | ||||||||||||||
| Operating lease assets | $ | 192 | $ | 191 | |||||||||||||
| Operating lease liabilities - current | $ | 38 | $ | 37 | |||||||||||||
| Operating lease liabilities - non-current | $ | 166 | $ | 166 | |||||||||||||
Supplemental cash flow information related to operating leases was as follows:
| Six Months Ended | |||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | |||||||||
| Cash paid for operating lease liabilities | $ | 18 | $ | 16 | |||||||
| Non-cash activities: operating lease assets obtained in exchange for new operating lease liabilities | $ | 15 | $ | 56 | |||||||
Note 12. Long-Term Debt
Long-term debt is comprised of the following:
| (in millions) | July 1, 2023 | December 31, 2022 | |||||||||
4.000% Senior Notes due 2029 | $ | 300 | $ | 300 | |||||||
| Variable rate A&R Term B Facility | 1,126 | 1,131 | |||||||||
| Gross debt | 1,426 | 1,431 | |||||||||
| Less: current portion of long-term debt | (12) | (12) | |||||||||
| Less: unamortized deferred financing costs | (14) | (15) | |||||||||
| Total long-term debt | $ | 1,400 | $ | 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 (i) an 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”).
The A&R Senior Credit Facilities contain customary LIBOR replacement language, including, but not limited to, the use of rates based on secured overnight financing rate (“SOFR”), which is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement market and is administered by the Federal Reserve Bank of New York. On June 30, 2023, we modified the calculation of interest under the A&R Senior Credit Facilities from being calculated based on LIBOR to being calculated based on SOFR. Therefore, the A&R Senior Credit Facilities bears interest at a rate per annum of Term SOFR plus a credit spread adjustment of 10 basis points for the A&R Revolving Credit Facility and varying credit spread adjustments for the A&R Term B Facility, based on the tenor of each individual borrowing. No other material terms of the A&R Senior Credit Facilities were amended.
At July 1, 2023 and December 31, 2022, the weighted average interest rate for the A&R Term B Facility, excluding the effect of the interest rate swaps, was 7.57% and 6.78%, respectively, and there were no borrowings and no letters of credit issued under the A&R Revolving Credit Facility. As of July 1, 2023, we were in compliance with all covenants related to the A&R Senior Credit Facilities.
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We entered into certain interest rate swap agreements in March 2021, which were amended in June 2023 to transition from a hedge of LIBOR-based cash flows to a hedge of SOFR-based cash flows. These interest rate swap agreements 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.
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.
In March and April 2023, we modified two of the eight Swap Agreements, each with a notional value of $70 million that matures in May 2024 as follows: (i) the original interest rate swap agreements were cancelled for no termination payment and (ii) we simultaneously entered into new pay-fixed interest rate swap agreements with a notional amount of $70 million each, effectively blending the asset positions of the original interest rate swap agreements into new interest swap agreements and extending the term of our hedged positions to February 2027. In connection with these transactions, no cash was exchanged between us and the counterparty. The new pay-fixed interest rate swap agreements qualify as a hybrid instrument in accordance with Accounting Standards Codification 815, Derivatives and Hedging, consisting of financing components and embedded at-market derivatives that were designated as cash flow hedges. The amounts remaining in accumulated other comprehensive loss for the modified interest rate swap agreements as of July 1, 2023 were approximately $5 million in aggregate and are being amortized as a reduction to interest expense over the effective period of the original interest rate swap agreements, or May 2024. The financing components are accounted for at amortized cost over the life of the swap while the embedded at-market derivatives are accounted for at fair value.
On June 23, 2023, we amended the Swap Agreements to transition from a hedge of LIBOR-based cash flows to a hedge of SOFR-based cash flows. Under the amended Swap Agreements, we convert a portion of our variable interest rate obligations based on Term SOFR with a minimum rate of 0.39% per annum to a base fixed weighted average rate of 1.13% 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 each 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.
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 Item | July 1, 2023 | December 31, 2022 | ||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||
| Interest rate swaps | $ | 23 | $ | 23 | |||||||||||||
| Interest rate swaps | 20 | 22 | |||||||||||||||
| Total derivative assets designated as hedging instruments | $ | 43 | $ | 45 | |||||||||||||
| Unrealized gain | Accumulated other comprehensive loss | $ | 40 | $ | 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:
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| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Gains recorded in accumulated other comprehensive loss, beginning of period: | $ | 35 | $ | 29 | $ | 42 | $ | 6 | ||||||||||||||||||
| Current period (loss) gain recognized in/reclassified from other comprehensive income | 5 | 1 | (2) | 24 | ||||||||||||||||||||||
| Gains recorded in accumulated other comprehensive loss, end of period | $ | 40 | $ | 30 | $ | 40 | $ | 30 | ||||||||||||||||||
Unrealized gains expected to be reclassified from accumulated other comprehensive loss in the next 12 months are estimated to be $29 million as of July 1, 2023.
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 measurement. There were no changes in the methodologies used in our valuation practices as of July 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 fair value hierarchy.
The following table provides a summary of the carrying amount and fair value of outstanding debt:
| July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Debt: | |||||||||||||||||||||||
4.000% Senior Notes due 2029 | $ | 300 | $ | 249 | $ | 300 | $ | 242 | |||||||||||||||
| Variable rate A&R Term B Facility | 1,126 | 1,124 | 1,131 | 1,125 | |||||||||||||||||||
| Total debt | $ | 1,426 | $ | 1,373 | $ | 1,431 | $ | 1,367 | |||||||||||||||
Refer to Note 12. Long-Term Debt to the Unaudited Consolidated Financial Statements for further discussion.
Interest Rate Risk—We have exposure to movements in interest rates associated with cash and borrowings. We have entered, and in the future may enter into various interest rate protection agreements in order to limit the impact of movements in interest rates. The fair values of interest rate swaps have been determined based on market value equivalents at the balance sheet date, taking into account the current interest rate environment and therefore, were classified as Level 2 measurements in the fair value hierarchy.
The following table provides a summary of the carrying amount and fair value of our interest rate swaps:
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| July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Interest rate swaps | $ | 43 | $ | 43 | $ | 45 | $ | 45 | |||||||||||||||
Refer to Note 13. Derivative Financial Instruments to the Unaudited Consolidated Financial Statements for further discussion.
There are no Level 1 or Level 3 assets or liabilities for the periods presented. The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued and other liabilities approximate fair value because of the short-term maturity of these amounts.
Note 15. Accrued Liabilities
Accrued liabilities consist of the following:
| (in millions) | July 1, 2023 | December 31, 2022 | |||||||||
| Obligations payable under Indemnification Agreements | $ | 140 | $ | 140 | |||||||
| Compensation, benefit and other employee-related | 86 | 108 | |||||||||
| Customer rebate reserve | 82 | 98 | |||||||||
| Product warranties | 21 | 40 | |||||||||
| Current operating lease liability | 38 | 37 | |||||||||
| Taxes payable | 37 | 38 | |||||||||
Other (1) | 160 | 179 | |||||||||
| Total accrued liabilities | $ | 564 | $ | 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 16. Commitments and Contingencies to the Unaudited Consolidated Financial Statements.
Note 16. Commitments and Contingencies
Environmental Matters
We are subject to various federal, state, local, and foreign government requirements relating to the protection of the environment and accrue costs related to environmental matters when it is probable that we have incurred a liability related to a contaminated site and the amount can be reasonably estimated. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that our handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. We have incurred remedial response and voluntary cleanup costs for site contamination and are a party to 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 us are presented within for operating sites. For the three and six months ended July 1, 2023 and July 2, 2022, environmental expenses related to these operating sites were not material. Liabilities for environmental costs were $22 million at July 1, 2023 and December 31, 2022.
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Obligations Payable Under Indemnification Agreements
The Reimbursement Agreement and the Tax Matters 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, 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 (payments), less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales (the recoveries). While the amount payable by us in respect of such liabilities arising in 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 Note 15. Commitments and Contingencies in our 2022 Annual Report on Form 10-K for further discussion.
Tax Matters Agreement
In connection with the Spin-Off, we entered into the Tax Matters Agreement with Honeywell, pursuant to which we 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.
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 Agreement | Tax Matters Agreement | Total | ||||||||||||||
| Balance as of December 31, 2022 | $ | 614 | $ | 106 | $ | 720 | |||||||||||
Accruals for liabilities deemed probable and reasonably estimable (1) | 85 | (4) | 81 | ||||||||||||||
| Payments to Honeywell | (70) | — | (70) | ||||||||||||||
| Balance as of July 1, 2023 | $ | 629 | $ | 102 | $ | 731 | |||||||||||
(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) | July 1, 2023 | December 31, 2022 | |||||||||
| Accrued liabilities | $ | 140 | $ | 140 | |||||||
| Obligations payable under Indemnification Agreements | 591 | 580 | |||||||||
| Total indemnification liabilities | $ | 731 | $ | 720 | |||||||
For the three and six months ended July 1, 2023, net expenses related to the Reimbursement Agreement were $44 million and $85 million, respectively, and for the three and six months ended July 2, 2022, net expenses related to the Reimbursement Agreement were $45 million and $86 million, respectively, and are recorded in other expense, net.
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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.
Independent of our payments under the Reimbursement Agreement, we will have ongoing liability for certain environmental claims, which are part of our ongoing business.
Trademark Agreement
We entered into a 40-year Trademark Agreement with Honeywell that authorizes our use of the Honeywell Home trademark in the operation of our business for the advertising, sale and distribution of certain licensed products. In exchange, we pay Honeywell a royalty fee based on net revenue related to such licensed products, which is recorded in selling, general and administrative expense in the Unaudited Consolidated Statements of Operations. For the three and six months ended July 1, 2023, royalty fees were $5 million and $9 million, respectively. For the three and six months ended July 2, 2022, royalty fees were $5 million and $11 million, respectively.
Other Matters
We are subject to lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, acquisitions and divestitures, employee matters, intellectual property, and environmental, health, and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses, 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 our financial statements. Refer to Note 15. Commitments and Contingencies in our 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 U.S. District Court for the District of Minnesota preliminarily approved the settlement and a fairness hearing was held on June 22, 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.
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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.
On June 28, 2023, Lisset Tredo, a Company employee, filed a putative class action complaint in the San Diego County Superior Court on behalf of all non-exempt employees in California, in which she alleges violations by the Company of the California Labor Code related to sick leave pay, accurate wage statements, recordkeeping, and pay timing (“the Tredo Lawsuit”). In the Tredo Lawsuit, Tredo seeks alleged unpaid wages, restitution, interest, statutory penalties, attorneys’ fees and costs in an unknown amount.
We are investigating the allegations and defenses. We intend 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 Tredo 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, we issue product warranties and product performance guarantees. We 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 accrued and other liabilities. The following table summarizes information concerning recorded obligations for product warranties and product performance guarantees:
| (in millions) | July 1, 2023 | December 31, 2022 | |||||||||
| Beginning balance | $ | 48 | $ | 23 | |||||||
| Accruals for warranties/guarantees issued during the year | 12 | 30 | |||||||||
| Adjustment of pre-existing warranties/guarantees | (1) | (2) | |||||||||
| Settlement of warranty/guarantee claims | (28) | (17) | |||||||||
| Reserve of acquired company at date of acquisition | — | 14 | |||||||||
| Ending balance | $ | 31 | $ | 48 | |||||||
Note 17. Income Taxes
For interim periods, income tax is equal to the total of (1) year-to-date pretax income multiplied by the forecasted effective tax rate plus (2) tax expense items specific to the period. In situations where we expect to report losses and where we do not expect to receive tax benefits, we apply separate forecast effective tax rates to those jurisdictions rather than including them in the consolidated forecast effective tax rate.
For the three and six months ended July 1, 2023, the net tax expense was $44 million and $68 million, respectively, and for the three and six months ended July 2, 2022, net tax expense was $37 million and $71 million, respectively, and consists primarily of interim period tax expense based on year-to-date pretax income multiplied by our forecasted effective tax 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.
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Note 18. Earnings Per Share
The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per share follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in millions, except per share data) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Numerator for Basic and Diluted Earnings Per Share: | |||||||||||||||||||||||
| Net income | $ | 50 | $ | 94 | $ | 107 | $ | 181 | |||||||||||||||
| Denominator for Basic and Diluted Earnings Per Share: | |||||||||||||||||||||||
| Weighted average basic number of common shares outstanding | 147 | 145 | 147 | 145 | |||||||||||||||||||
| Plus: dilutive effect of common stock equivalents | 2 | 4 | 2 | 4 | |||||||||||||||||||
| Weighted average diluted number of common shares outstanding | 149 | 149 | 149 | 149 | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.34 | $ | 0.65 | $ | 0.73 | $ | 1.25 | |||||||||||||||
| Diluted | $ | 0.34 | $ | 0.63 | $ | 0.72 | $ | 1.22 | |||||||||||||||
Diluted earnings per share is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the period. For the three and six months ended July 1, 2023, average options and other rights to purchase approximately 2.1 million and 1.7 million shares of common stock, respectively, were outstanding and anti-dilutive, and therefore excluded from the computation of diluted earnings per share. In addition, an average of 0.9 million and 0.8 million shares of PSU awards are excluded from the computation of diluted earnings per share for the three and six months ended July 1, 2023, respectively, as the contingency had not been satisfied. For the three and six months ended July 2, 2022, average options and other rights to purchase approximately 0.9 million shares of common stock were outstanding and anti-dilutive, and therefore excluded from the computation of diluted income per share. In addition, an average of 1.0 million and 0.9 million shares of PSU awards are excluded from the computation of diluted earnings per share for the three and six months ended July 2, 2022, respectively, as the contingency had not been satisfied.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the Unaudited 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 Financial Condition and Results of Operations” (“MD&A”) included in our 2022 Annual Report on Form 10-K.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-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 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 forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Quarterly Report 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:
•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 been no material changes to the risk factors described in our 2022 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 liquidity and the development of the industries in which we operate are consistent 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 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.
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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 (“ADI”) is a leading wholesale distributor of low-voltage 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 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 and bank lending standards, supply chain dynamics, 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, uncertainties remain, including the potential for changes in inflation and interest rates, 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 $1.60 billion, down 5% from $1.69 billion in the second quarter of 2022
•Income from operations of $153 million, or 9.6% of revenue, compared to $186 million, or 11.0% of revenue in the second quarter of 2022
•Fully diluted earnings per share of $0.34, compared to $0.63 per share in the second quarter of 2022
•Cash Flow From Operations was a source of cash of $121 million in the second quarter of 2023 as compared to $35 million source of cash in the second quarter of 2022
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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 | Six Months Ended | ||||||||||||||||||||||
| (in millions, except per share data and percentages) | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||||||||||||
| Net revenue | $ | 1,602 | $ | 1,686 | $ | 3,151 | $ | 3,192 | |||||||||||||||
| Cost of goods sold | 1,166 | 1,219 | 2,295 | 2,287 | |||||||||||||||||||
| Gross profit | 436 | 467 | 856 | 905 | |||||||||||||||||||
| Gross profit % | 27.2 | % | 27.7 | % | 27.2 | % | 28.4 | % | |||||||||||||||
| Research and development expenses | 29 | 28 | 56 | 52 | |||||||||||||||||||
| Selling, general and administrative expenses | 242 | 244 | 486 | 479 | |||||||||||||||||||
| Intangible asset amortization | 10 | 9 | 19 | 16 | |||||||||||||||||||
| Restructuring and impairment expenses | 2 | — | 4 | — | |||||||||||||||||||
| Income from operations | 153 | 186 | 291 | 358 | |||||||||||||||||||
| Other expenses, net | 42 | 42 | 82 | 82 | |||||||||||||||||||
| Interest expense, net | 17 | 13 | 34 | 24 | |||||||||||||||||||
| Income before taxes | 94 | 131 | 175 | 252 | |||||||||||||||||||
| Provision for income taxes | 44 | 37 | 68 | 71 | |||||||||||||||||||
| Net income | $ | 50 | $ | 94 | $ | 107 | $ | 181 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 0.34 | $ | 0.65 | $ | 0.73 | $ | 1.25 | |||||||||||||||
| Diluted | $ | 0.34 | $ | 0.63 | $ | 0.72 | $ | 1.22 | |||||||||||||||
Net Revenue
Three months ended
Net revenue for the three months ended July 1, 2023 was $1,602 million, a decrease of $84 million, or 5.0%, from the same period in the prior year driven primarily by lower sales volume of $144 million and unfavorable foreign currency fluctuations of $5 million, partially offset by higher selling prices of $45 million and $19 million from acquisitions across both segments. Volume declines were driven by customer destocking, declines in the retail sales channel, and softened demand for security and energy products.
Six months ended
Net revenue for the six months ended July 1, 2023 was $3,151 million, a decrease of $41 million, or 1.3% from the same period in the prior year, driven primarily by lower sales volume of $224 million and unfavorable foreign currency fluctuations of $32 million offset by $140 million in revenue from acquisitions and $73 million from higher selling prices.
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Gross Profit
Three months ended
The chart below presents the drivers of the gross profit variance from the three months ended July 2, 2022 to the three months ended July 1, 2023.
Gross profit dollars decreased $31 million in the three months ended July 1, 2023 compared to the three months ended July 2, 2022 and gross margin decreased 50 basis points (“bps”) to 27.2% compared to 27.7% in the same period in the prior year. The decrease in gross margin was driven by lower demand from customers as they continue to normalize inventory levels of 220 bps, unfavorable product mix shift of 160 bps partially offset by 330 bps of favorable material, freight and other costs as the inflationary environment has begun to stabilize.
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Six months ended
The chart below presents the drivers of the gross profit variance from the six months ended July 2, 2022 to the six months ended July 1, 2023.
Gross profit dollars decreased $49 million in the six months ended July 1, 2023 compared to the six months ended July 2, 2022 and gross margin decreased 120 bps to 27.2% compared to 28.4% in the same period of the prior year. The decrease in gross margin was driven by lower demand from customers as they continue to normalize inventory levels of 110 bps, unfavorable product mix shift of 110 bps partially offset by 90 bps of favorable material and freight costs as the inflationary environment has begun to stabilize and 10 bps of favorable foreign currency fluctuations.
Research and Development Expenses
Three months ended
Research and development expenses for the three months ended July 1, 2023 were $29 million, an increase of $1 million, or 3.6%, as compared to the same period in 2022 due to additional spend.
Six months ended
Research and development expenses for the six months ended July 1, 2023 were $56 million, an increase of $4 million, or 7.7%, as compared to the same period in 2022. The increase was primarily driven by additional research and development costs from the acquisition of First Alert in first quarter of 2022.
Selling, General and Administrative Expenses
Three months ended
Selling, general and administrative expenses for the three months ended July 1, 2023 were $242 million, a decrease of $2 million, or 0.8%, as compared to the same period in 2022.
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Six months ended
Selling, general and administrative expenses for the six months ended July 1, 2023 were $486 million, an increase of $7 million, or 1.5%, as compared to the same period in 2022, primarily from $18 million in costs related to the inclusion of First Alert and other acquisitions partially offset by $10 million of transaction costs incurred in the first quarter of 2022.
Restructuring and Impairment Expenses
In the fourth quarter of 2022, we executed multiple restructuring programs to lower costs, increase margins and position us for long-term growth. For the three and six months ended July 1, 2023, our Products and Solutions segment incurred additional restructuring expenses of $2 million and $4 million, respectively, primarily related to employee termination costs.
Intangible Asset Amortization
Three months ended
Intangible asset amortization increased $1 million for the three months ended July 1, 2023 as compared to the same period in 2022 due to the increased amortization costs primarily due to intangibles obtained through acquisition activities.
Six months ended
Intangible asset amortization increased $3 million for the six months ended July 1, 2023 as compared to the same period in 2022 due to the increased amortization costs primarily due to intangibles obtained through acquisition activities.
Other Expenses, Net
Three months ended
Other expenses, net consists primarily of Reimbursement Agreement expenses in the amount of $44 million for the three months ended July 1, 2023, slightly offset by favorable foreign currency fluctuations.
Six months ended
Other expenses, net consists primarily of Reimbursement Agreement expenses in the amount of $85 million for the six months ended July 1, 2023, slightly offset by favorable foreign currency fluctuations.
Interest Expense, Net
Three months ended
Interest expense, net increased $4 million for the three months ended July 1, 2023 as compared to the same period in 2022 due to higher interest rates.
Six months ended
Interest expense, net increased $10 million for the six months ended July 1, 2023 as compared to the same period in 2022 due to higher interest rates and additional borrowings of $200 million in March 2022 associated with our A&R Credit Agreement.
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Tax Expense
Three months ended
Income tax expense increased by $7 million for the three months ended July 1, 2023 compared to the same period in 2022, primarily driven by an increase in non-deductible expenses and tax cost related to the true up of estimates from our prior year non-US return provision. The income tax rate increased 1,780 basis points for the three months ended July 1, 2023 compared to the same period in 2022, primarily due to non-deductible expenses being forecasted to be a larger portion of earnings and a true up of prior year non-US return to provision amounts.
Six months ended
Income tax expense decreased by $3 million for the six months ended July 1, 2023 compared to the same period in 2022, primarily driven by a decrease in income before income taxes. The income tax rate increased 1,100 basis points compared to the same period in 2022, primarily due to non-deductible expenses being forecasted to be a larger portion of earnings and a true up of prior year non-US return to provision amounts.
Segment Results of Operations
Products and Solutions
Three months ended
The chart below presents net revenue and income from operations for the three months ended July 1, 2023 and July 2, 2022.
Products and Solutions net revenue decreased $87 million, or 11%, mainly due to lower sales volume of $118 million partially offset by price increases of $32 million. Income from operations decreased $26 million, or 17%, from prior year, primarily due to lower sales volume of $66 million and unfavorable price/mix of $7 million from mix shifts to lower priced products. Partially offsetting the unfavorable impacts to income from operations was $44 million of lower manufacturing input costs, primarily material and freight, due to inflationary environment stabilizing.
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Six months ended
The chart below presents net revenue and income from operations for the six months ended July 1, 2023 and July 2, 2022.
Products and Solutions net revenue decreased $48 million, or 3.5%, mainly due to lower sales volume of $193 million and unfavorable foreign currency fluctuations of $15 million. Partially offsetting these unfavorable impacts was revenue from the First Alert acquisition of $98 million and price increases of $60 million. Income from operations decreased $62 million, or 20.2%, from prior year, primarily due to lower sales volume of $104 million and unfavorable price/mix of $9 million from mix shifts to lower priced products. Partially offsetting the unfavorable impacts to income from operations was $26 million of lower manufacturing input costs, primarily material and freight, due to inflationary environment stabilizing and $20 million from First Alert acquisition.
ADI Global Distribution
Three months ended
The chart below presents net revenue and income from operations for the three months ended July 1, 2023 and July 2, 2022.
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ADI Global Distribution net revenue was slightly up primarily due to price as compared to the same quarter last year. Income from operations decreased $7 million, or 8%, due to sales mix and carry over inflation impacts of $7 million and lower volumes of $3 million partially offset by lower freight and other supply chain costs of $3 million.
Six months ended
The chart below presents net revenue and income from operations for the six months ended July 1, 2023 and July 2, 2022.
ADI Global Distribution net revenue increased $7 million, or 0.4%, driven by the impact of acquisitions of $42 million, price increases of $13 million, partially offset by lower sales volume of $31 million, primarily in sales in residential security and AV categories, and unfavorable foreign exchange fluctuations of $17 million. Income from operations
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decreased $15 million, or 9%, due to $7 million of higher manufacturing input costs, primarily material, and other, $5 million of lower sales volume, and $3 million related to a mix shift towards lower margin products.
Corporate
Three months ended
Corporate costs for the three months ended July 1, 2023, were $54 million, and is flat to the same period of 2022.
Six months ended
Corporate costs for the six months ended July 1, 2023 were $105 million, a decrease of $10 million, or 8.7%, from $115 million in the same period of 2022. The decrease was primarily due to reduction in selling, general and administrative expenses.
Capital Resources and Liquidity
As of July 1, 2023, total cash and cash equivalents were $381 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 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 July 1, 2023, we had $1,412 million of long-term debt outstanding under our A&R Credit Agreement and Senior Notes due 2029, of which $12 million is due in the next 12 months. We entered into certain interest rate swap agreements to effectively convert a portion of our variable-rate debt to fixed rate debt. During the second quarter of 2023, we transitioned the reference rate under the A&R Senior Credit Facilities and the Swap Agreements from LIBOR to SOFR. Refer to Note 12. Long-Term Debt and Note 13. Derivative Financial Instruments to the Unaudited Consolidated Financial Statements for a description of our debt obligations and the timing of future principal and interest payments, including impacts from our Swap Agreements.
Cash Flow Summary for the Six Months Ended July 1, 2023 and July 2, 2022
Our cash flows from operating, investing and financing activities for the six months ended July 1, 2023 and July 2, 2022, as reflected in the Unaudited Consolidated Financial Statements, are summarized as follows:
| Six Months Ended | ||||||||||||||
| (in millions) | July 1, 2023 | July 2, 2022 | $ change | |||||||||||
| Cash provided by (used for) operating activities: | ||||||||||||||
| Operating activities | $ | 117 | $ | (24) | $ | 141 | ||||||||
| Investing activities | (55) | (670) | 615 | |||||||||||
| Financing activities | (18) | 183 | (201) | |||||||||||
| Effect of exchange rate changes on cash | 10 | (13) | 23 | |||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 54 | $ | (524) | $ | 578 | ||||||||
Net cash provided by operating activities for the six months ended July 1, 2023 was $117 million. Compared to the six months ended July 2, 2022, net cash provided by operating activities was $141 million higher primarily due to a decrease in accounts receivable and inventory totaling $222 million offset by a decrease in net income of $74 million.
Net cash used for investing activities for the six months ended July 1, 2023 was $55 million, a decrease of $615 million compared to the six months ended July 2, 2022, primarily due to a decrease in acquisitions of $627 million resulting from the First Alert acquisition occurring in the prior year.
Net cash used for financing activities was $18 million during the six months ended July 1, 2023, as compared to cash provided by financing activities of $183 million for the six months ended July 2, 2022. The decrease of $201 million was primarily due to $200 million of proceeds received in March 2022 from the 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 July 1, 2023, a liability of $629 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 six months ended July 1, 2023, we paid Honeywell $70 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 July 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 July 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.
Other Matters
Litigation, Environmental Matters and the Reimbursement Agreement
Refer to Note 16. Commitments and Contingencies to the Unaudited Consolidated Financial Statements for further discussion.
Recent Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies to the Unaudited Consolidated Financial Statements for further discussion.
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 July 1, 2023, our Swap Agreements with a notional value of $560 million effectively convert a portion of our $1,126 million variable rate A&R Term B Facility to fixed rate debt. In June 2023, we modified our A&R Term B Facility to implement a forward-looking rate based on SOFR. In conjunction, we amended the Swap Agreements to transition from a hedge of LIBOR-based cash flows to a hedge of SOFR-based cash flows. The Swap Agreements effectively convert a portion of our variable interest rate obligations based Term SOFR with a minimum rate of 0.39% per annum to a base fixed weighted average rate of 1.13% over the remaining terms.
As of July 1, 2023, an increase in interest rates by 100 basis points would have an approximately $6 million impact on our annual interest expense.
For more information on the Swap Agreements, refer to Note 13. Derivative Financial Instruments and Note 14. Fair Value to the Unaudited Consolidated Financial Statements.
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, British Pound, Indian Rupee, Euro, Canadian Dollar, Polish Zloty, 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 results from transactions arising out of 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 July 1, 2023, we have no outstanding 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. 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 July 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 Note 16. Commitments and Contingencies to Unaudited Consolidated Financial Statements of this Quarterly 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 2022 Annual Report on Form 10-K.
Item 5. Other Information
During the three months ended July 1, 2023, no director or officer of the Company adopted, modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.
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Item 6. Exhibits
The Exhibits listed below on the Exhibit Index are filed or incorporated by reference as part of this Quarterly Report.
EXHIBIT INDEX
| Exhibit Number | Exhibit Description | ||||||||||
| 10.1 | |||||||||||
| 10.2 | |||||||||||
| 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) | ||||||||||
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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. | ||||||||
Date: August 3, 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: August 3, 2023 | By: | /s/ Tina Beskid | ||||||
| Tina Beskid | ||||||||
| Vice President, Controller, and Chief Accounting Officer (Principal Accounting Officer) | ||||||||
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