Resideo(REZI) - 2022 Q4 - Annual Report

PART I. This part covers the company's business operations, risk factors, properties, legal proceedings, and mine safety disclosures Business Resideo Technologies, Inc. is a global manufacturer and distributor of home comfort, safety, and security products, operating through two segments and focusing on professional channels - Resideo Technologies, Inc. (REZI) separated from Honeywell International Inc. in a pro rata distribution of common stock, becoming an independent publicly traded company on October 29, 2018[10] - The company operates through two primary business segments: Products and Solutions, and ADI Global Distribution, which contributed 43.7% and 56.3% of net revenue, respectively, for the year ended December 31, 2022[11] - Resideo serves approximately 100,000 professionals through its global operations, emphasizing its trusted partner status, global scale, product breadth, innovation, and differentiated service and support[12] Backlog as of December 31, 2022 | Segment | Backlog (in millions) | | :---------------------- | :-------------------- | | Products and Solutions | $240 | | ADI Global Distribution | $185 | - As of December 31, 2022, Resideo employed approximately 15,200 employees in 30 countries, with 3,700 in the U.S. and 6,900 in Mexico[25] - The company holds approximately 2,400 worldwide active patents and pending patent applications to protect its research and development investments[39] Risk Factors The company faces diverse risks including intense competition, supply chain disruptions, macroeconomic volatility, regulatory compliance, and financial obligations from Honeywell agreements - The company operates in highly competitive markets across both Products and Solutions and ADI Global Distribution segments, facing global, national, regional, and local providers, including new entrants with disruptive technologies[46][47] - Resideo relies on certain single or limited source suppliers for materials and components, making it vulnerable to supply disruptions, material inflation, and increased costs, as experienced with the global semiconductor shortage in 2022[57][58] - The Reimbursement Agreement with Honeywell requires Resideo to make substantial cash payments for certain environmental liabilities, potentially exceeding $140 million annually, which can materially affect liquidity and cash flows[85][185] - International operations, representing approximately 25% of 2022 net revenue, expose the company to risks such as exchange control regulations, trade restrictions, tariffs, and geopolitical instability[73][120] - The efficient operation of the business depends on a dependable IT infrastructure and network operations with adequate cybersecurity functionality, as failures or cyber threats could lead to financial loss, reputational damage, and operational disruptions[81][84] Unresolved Staff Comments No unresolved staff comments from the Securities and Exchange Commission - No unresolved staff comments[128] Properties Resideo's global properties, including its Scottsdale headquarters, are deemed adequate for current business operations - The corporate headquarters is located in Scottsdale, Arizona[129] Regional Distribution of Sites (Owned or Leased) | Region | Sites | | :------- | :---- | | Asia | 163 | | Pacific | 11 | | Americas | 81 | | EMEA | 11 | - The company believes its properties are adequate and suitable for its business as presently conducted and are adequately maintained[131] Legal Proceedings The company is involved in various legal proceedings, including commercial, product liability, and environmental matters, with a derivative lawsuit settlement and a class action pending - The company is subject to various lawsuits, investigations, and disputes arising out of the conduct of its business, including matters relating to commercial transactions, product liability, intellectual property, and environmental, health and safety[132] - A definitive stipulation of settlement was executed on February 3, 2023, to resolve all pending derivative lawsuits, agreeing to corporate governance reforms and $1.6 million in plaintiffs' attorneys' fees, subject to court approval[96][403] - A putative class action lawsuit (Badalamenti Lawsuit) was filed on September 16, 2022, alleging violations of consumer protection laws and product defects related to fire alarm systems; the company believes it has strong defenses and is unable to estimate potential liability at this early stage[404][406] Mine Safety Disclosures This item is not applicable to the company - Not applicable[134] PART II. This part details market information for common equity, financial condition, results of operations, market risks, and financial statements Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Resideo's common stock trades on the NYSE, with 147 million shares outstanding, and the company currently retains earnings rather than paying cash dividends - Resideo's common stock is traded on the New York Stock Exchange under the symbol "REZI"[136] Common Stock Information (as of February 15, 2023) | Metric | Value | | :--------------------- | :----------- | | Holders of record | 35,719 | | Shares outstanding | 147 million | | Closing price per share| $18.96 | - The company has never declared or paid any cash dividends on its common stock and currently does not intend to, expecting to retain future earnings to fund operations, expansion, and debt obligations[137] Reserved This item is reserved and contains no information - This item is reserved[139] Management's Discussion and Analysis of Financial Condition and Results of Operations Resideo's 2022 financial performance saw increased revenue and EPS driven by acquisitions and price adjustments, despite operational challenges, with liquidity maintained through credit facilities and strategic debt management - Resideo's financial performance is influenced by macroeconomic factors such as repair and remodeling activity, residential and non-residential construction, employment rates, interest rates, and the overall macroeconomic environment[144] 2022 Current Period Highlights | Metric | 2022 Value | Change from 2021 | | :------------------------- | :-------------- | :--------------- | | Net revenue | $6,370 million | +9.0% | | Gross profit margin | 27.7% | +0.6 percentage points | | Income from operations | $611 million | +9.3% | | Fully diluted EPS | $1.90 | +16.6% | - In late 2022 and early 2023, Resideo completed several acquisitions, including BTX Technologies, Teknique Limited, Electronic Custom Distributors, and Arrow Wire and Cable, to expand its Pro AV, AI-enabled video camera, and data communications offerings[148][149][150][153] - The acquisition of First Alert on March 31, 2022, significantly expanded Resideo's footprint in home safety products, contributing $341 million in net revenue for the year[151][280] - The company executed multiple restructuring programs in the fourth quarter of 2022, incurring $35 million in expenses, aimed at lowering costs, increasing margins, and positioning for growth[149][163] Overview and Business Trends This section provides an overview of Resideo's business segments and the macroeconomic factors influencing its financial performance and strategic responses - Resideo is a global manufacturer and distributor of technology-driven products and solutions for home comfort, security, and energy use, managing operations through Products and Solutions and ADI Global Distribution segments[141] - Financial performance in 2022 was impacted by supply chain disruptions, global shortages in key materials, inflationary pressures (labor rates, materials, freight), and unfavorable foreign currency impacts from a stronger U.S. dollar[144] - In response to challenges, the company raised prices, aggressively managed supplier relationships, developed contingency plans, aligned production schedules with demand, and pursued productivity improvements[144] Current Period Highlights This section summarizes Resideo's key financial performance metrics for the current period, including revenue, profit margins, and earnings per share 2022 Financial Highlights | Metric | 2022 Value | 2021 Value | Change (%) | | :------------------------- | :-------------- | :-------------- | :--------- | | Net revenue | $6,370 million | $5,846 million | 9.0% | | Gross profit margin | 27.7% | 27.1% | +0.6 pp | | Income from operations | $611 million | $559 million | 9.3% | | Fully diluted EPS | $1.90 | $1.63 | 16.6% | Recent Developments This section outlines recent strategic acquisitions and restructuring initiatives undertaken by the company to expand offerings and improve operational efficiency - Acquired BTX Technologies, Inc. (Jan 2023) to expand Pro AV and private brand offerings in North America[148] - Acquired Teknique Limited (Dec 2022), a producer of edge-based, AI-enabled video camera development and solutions[149] - Acquired First Alert (March 2022), a leading provider of home safety products, expanding the company's footprint with complementary smoke and carbon monoxide detection and fire suppression products[151] - Executed multiple restructuring programs in Q4 2022, resulting in $35 million in restructuring and impairment expenses, with full execution expected over the next 12-24 months[149] Basis of Presentation and Reclassifications This section details reclassifications made in the financial statements for comparability, with no impact on key income metrics - The company reclassified intangible asset amortization and restructuring and impairment expenses on the Consolidated Statements of Operations for comparability, with no impact on income from operations, income before taxes, net income, or earnings per share[231][232] Results of Operations This section analyzes the consolidated financial results, including revenue drivers, cost of goods sold, operating expenses, and net income, highlighting key changes and their causes Consolidated Results of Operations (2022 vs 2021) | Metric | 2022 (in millions) | 2021 (in millions) | $ Change | % Change | | :-------------------------------------- | :----------------- | :----------------- | :------- | :------- | | Net revenue | $6,370 | $5,846 | $524 | 9.0% | | Cost of goods sold | $4,604 | $4,262 | $342 | 8.0% | | Gross profit | $1,766 | $1,584 | $182 | 11.5% | | Gross profit % of Net Revenue | 27.7% | 27.1% | | | | Research and development expenses | $111 | $86 | $25 | 29.1% | | Selling, general and administrative expenses | $974 | $909 | $65 | 7.2% | | Intangible asset amortization | $35 | $30 | $5 | 16.7% | | Restructuring and impairment expenses | $35 | $— | $35 | 100.0% | | Income from operations | $611 | $559 | $52 | 9.3% | | Other expenses, net | $135 | $158 | $(23) | (14.6)% | | Interest expense, net | $58 | $48 | $10 | 20.8% |\ | Income before taxes | $418 | $353 | $65 | 18.4% | | Provision for income taxes | $135 | $111 | $24 | 21.6% | | Net income | $283 | $242 | $41 | 16.9% | | Basic EPS | $1.94 | $1.68 | $0.26 | 15.5% | | Diluted EPS | $1.90 | $1.63 | $0.27 | 16.6% | - Net revenue increased by $524 million (9.0%) in 2022, primarily driven by $427 million from acquisitions and $368 million from higher selling prices, partially offset by lower sales volume ($110 million) and unfavorable foreign currency fluctuations ($161 million)[157] - Gross profit margin improved by 60 basis points to 27.7% in 2022, with price increases and favorable sales mix contributing 200 bps, partially offset by higher costs (80 bps) and lower volume leverage (60 bps)[160] - Research and development expenses increased by $25 million (29%) in 2022, mainly due to the First Alert acquisition, new product launches, reallocation of engineering resources, and labor inflation[161] - Selling, general and administrative expenses increased by $65 million (7.2%) in 2022, primarily due to the First Alert acquisition, marketing/sales investments, labor inflation, and acquisition transaction costs, partially offset by foreign currency impacts and lower litigation/impairment expenses[162] - Income tax expense increased to $135 million in 2022, with an effective tax rate of 33.7% (excluding discrete benefits), up from 31.3% in 2021, driven by increased pre-tax earnings and non-deductible indemnification costs[167][168] Segment Results of Operations This section provides a detailed breakdown of net revenue and income from operations for the Products and Solutions and ADI Global Distribution segments Segment Net Revenue (2022 vs 2021) | Segment | 2022 (in millions) | 2021 (in millions) | $ Change | % Change | | :---------------------- | :----------------- | :----------------- | :------- | :------- | | Products and Solutions | $2,783 | $2,468 | $315 | 13.0% | | ADI Global Distribution | $3,587 | $3,378 | $209 | 6.2% | Segment Income from Operations (2022 vs 2021) | Segment | 2022 (in millions) | 2021 (in millions) | $ Change | % Change | | :---------------------- | :----------------- | :----------------- | :------- | :------- | | Products and Solutions | $527 | $541 | $(14) | (3.0)% | | ADI Global Distribution | $313 | $268 | $45 | 16.8% | | Corporate | $(229) | $(250) | $21 | (8.4)% | - Products and Solutions revenue increased by $315 million (13%), mainly due to the First Alert acquisition ($341 million) and price increases ($216 million), partially offset by lower volume and unfavorable foreign exchange[170] - ADI Global Distribution net revenue increased by $209 million (6.2%), driven by price increases ($153 million), acquisitions ($86 million), and higher volume ($36 million), partially offset by unfavorable foreign exchange[172] Capital Resources and Liquidity This section assesses the company's cash position and its ability to meet short-term and long-term capital requirements through existing cash and credit facilities - As of December 31, 2022, total cash and cash equivalents were $326 million, with 54% held by foreign subsidiaries[174] - The company believes its existing cash, cash equivalents, and availability under credit facilities are sufficient to meet capital requirements for at least the next 12 months and the longer term[175] Credit Agreement This section details the Amended and Restated Credit Agreement, including the Term B loan facility and revolving credit facility, and compliance with covenants - On March 28, 2022, the Amended & Restated Credit Agreement was further amended to increase the principal amount of the seven-year senior secured Term B loan facility by $200 million, bringing the total to $1,150 million[152][353] - The A&R Credit Agreement also provides for a five-year senior secured revolving credit facility in an aggregate principal amount of $500 million[353] - As of December 31, 2022, the weighted average interest rate for the A&R Term B Facility was 6.78%, and the company was in compliance with all related covenants[358] Senior Notes due 2029 This section describes the 4.000% senior unsecured notes due in 2029, their ranking, and associated guarantees - On August 26, 2021, Resideo issued $300 million in principal amount of 4.000% senior unsecured notes due in 2029[178][361] - These Senior Notes are senior unsecured obligations guaranteed by domestic subsidiaries and rank equally with other senior unsecured debt[361] Cash Flow Summary for the Years Ended December 31, 2022 and 2021 This section summarizes cash flows from operating, investing, and financing activities, highlighting significant changes and their drivers Cash Flow Summary (2022 vs 2021) | Activity | 2022 (in millions) | 2021 (in millions) | $ Change | | :------------------------------------------------ | :----------------- | :----------------- | :------- | | Net cash provided by operating activities | $152 | $315 | $(163) | | Net cash used for investing activities | $(764) | $(65) | $(699) | | Net cash provided by financing activities | $170 | $20 | $150 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(450) | $262 | $(712) | - Net cash provided by operating activities decreased by $163 million in 2022, primarily due to investments in working capital to support customer demand[181] - Net cash used for investing activities increased by $699 million in 2022, mainly as a result of acquisitions in both Products and Solutions and ADI Global Distribution segments[182] - Cash provided by financing activities increased by $150 million in 2022, primarily due to $200 million of proceeds from the Amended A&R Credit Agreement, partially offset by principal debt payments[183] Contractual Obligations and Probable Liability Payments This section outlines the company's contractual obligations and probable liability payments, including those under the Reimbursement Agreement with Honeywell - As of December 31, 2022, a liability of $614 million was deemed probable and reasonably estimable under the Reimbursement Agreement with Honeywell, with potential annual payments of $140 million until 2043 or earlier[185][187] - The company recorded a $22 million liability for environmental investigation and remediation related to sites it owns and operates as of December 31, 2022[188] Contractual Obligations (as of December 31, 2022) | Obligation Type | Total (in millions) | Within 12 Months (in millions) | | :---------------------- | :------------------ | :----------------------------- | | Operating Lease Payments| $203 | $37 | | Purchase Obligations | $115 | $51 | Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet financial arrangements that could impact the company's financial condition - Resideo does not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on its financial condition, results of operations, or liquidity[192] Critical Accounting Policies and Estimates This section details the critical accounting policies and estimates that require significant judgment, such as inventories, goodwill, revenue recognition, and Honeywell agreements - Critical accounting policies include inventories (lower of cost or net realizable value, FIFO), goodwill (annual impairment testing), warranties and guarantees (accrued based on estimates), and revenue recognition (majority recognized at point in time)[194][195][196][199] - The Reimbursement Agreement liability is recognized for 90% of Honeywell's environmental claims, capped at $140 million annually, and income taxes require significant judgment in evaluating tax positions[201][202] Cautionary Statement Concerning Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements, outlining factors that could cause actual results to differ materially - The report contains forward-looking statements based on current expectations, estimates, assumptions, and projections, which are inherently susceptible to uncertainty and changes in circumstances[205] - Numerous factors could cause actual financial results to differ materially, including market cyclicality, competition, technology development, supply chain issues, global economic conditions, acquisitions, customer retention, cybersecurity, international risks, and obligations under agreements with Honeywell[206] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from foreign currency, commodity prices, and interest rates, utilizing interest rate swaps for debt and natural offsets for currency exposure - As of December 31, 2022, $571 million of the $1,131 million A&R Term B Facility debt carried variable interest rates[210] - The company uses interest rate swap agreements for a combined notional amount of $560 million to convert a portion of its variable interest rate obligations to a base fixed weighted average rate of 0.9289%[210][365] - An increase in interest rates by 100 basis points would have an approximate $6 million impact on annual interest expense[210] - Resideo is exposed to foreign currency exchange rate risk from transactions in various foreign currencies (Euro, British Pound, Canadian Dollar, Mexican Peso, Czech Koruna, Indian Rupee) and manages this primarily through natural offsets, with no outstanding hedging arrangements as of December 31, 2022[211][376] - The company is exposed to commodity price risk but generally attempts to pass through significant changes in component and raw material costs to its customers[212] Financial Statements and Supplementary Data This section presents Resideo's audited consolidated financial statements and detailed notes for 2020-2022, covering balance sheets, operations, cash flows, and equity, with highlights on revenue growth, acquisition impacts, and significant liabilities Consolidated Balance Sheet Highlights (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--------------------------- | :----------- | :----------- | | Total assets | $6,387 | $5,853 | | Cash and cash equivalents | $326 | $775 | | Inventories, net | $975 | $740 | | Goodwill | $2,724 | $2,661 | | Intangible assets, net | $475 | $120 | | Total liabilities | $3,858 | $3,601 | | Long-term debt | $1,404 | $1,220 | | Total stockholders' equity | $2,529 | $2,252 | Consolidated Statements of Operations Highlights (in millions, except EPS) | Metric | 2022 | 2021 | 2020 | | :------------------------- | :----- | :----- | :----- | | Net revenue | $6,370 | $5,846 | $5,071 | | Gross profit | $1,766 | $1,584 | $1,344 | | Net income | $283 | $242 | $37 | | Diluted EPS | $1.90 | $1.63 | $0.29 | Consolidated Statements of Cash Flows Highlights (in millions) | Activity | 2022 | 2021 | 2020 | | :---------------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $152 | $315 | $244 | | Net cash used in investing activities | $(764) | $(65) | $(103) |\ | Net cash provided by financing activities | $170 | $20 | $253 | | Net (decrease) increase in cash | $(450) | $262 | $395 | - Goodwill increased to $2,724 million in 2022, primarily due to $109 million from acquisitions, while net intangible assets significantly increased to $475 million from $120 million in 2021[339] - Total long-term debt outstanding was $1,431 million as of December 31, 2022, including $300 million in 4.000% Senior Notes due 2029 and $1,131 million in variable rate A&R Term B Facility debt[349] - Liabilities related to the Reimbursement and Tax Matters Agreements totaled $720 million as of December 31, 2022, with $140 million classified as current accrued liabilities[396] Note 1. Nature of Operations and Basis of Presentation This note describes Resideo's business as a technology-driven product manufacturer and distributor, its spin-off from Honeywell, and the basis of its U.S. GAAP consolidated financial statements - Resideo Technologies, Inc. is a leading manufacturer and developer of technology-driven products for critical comfort, energy, home safety, and security solutions, and a wholesale distributor of low-voltage security products[226] - The company was incorporated in Delaware on April 24, 2018, and separated from Honeywell on October 29, 2018, becoming an independent publicly traded company[227] - The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries and are prepared in accordance with U.S. GAAP[228] Note 2. Summary of Significant Accounting Policies This note outlines key accounting policies and estimates, including those for inventories, revenue recognition, and liabilities under agreements with Honeywell - Key accounting policies involve significant estimates and assumptions for areas such as expected credit losses, inventory reserves, business combinations, goodwill impairment, employee benefits, stock-based compensation, pension benefits, indemnification liabilities, deferred taxes, warranties, and contingencies[235] - Inventories are stated at the lower of cost or net realizable value using the first-in-first-out (FIFO) method, with reserves maintained for obsolete and surplus items[238] - Revenue is primarily recognized at a point in time when products are shipped and control transfers to the customer, with adjustments for variable consideration like customer volume rebates and prompt payment discounts[199][255][256] - The company pays a royalty fee of 1.5% of net revenue from licensed products to Honeywell under a 40-year Trademark License Agreement[258] - The Reimbursement Agreement obligates Resideo to make cash payments to Honeywell equal to 90% of certain environmental liability payments, capped at $140 million annually[260] Note 3. Acquisitions This note details the company's 2022 acquisitions, including First Alert, and their impact on net revenue, goodwill, and intangible assets - In 2022, Resideo acquired Teknique Limited (AI-enabled video cameras), Electronic Custom Distributors (residential audio/video/security distributor), First Alert (home safety products), and Arrow Wire and Cable (data communications distributor)[278][279][280][283] - The First Alert acquisition contributed $341 million in net revenue for the year ended December 31, 2022, and resulted in the recording of $86 million in goodwill and $349 million in other intangible assets[280][281] - The company expensed $11 million in costs related to the First Alert acquisition during 2022, primarily for advisory, insurance, and legal fees[281] Note 4. Segment Financial Data This note provides financial data for Resideo's Products and Solutions and ADI Global Distribution segments, including net revenue and income from operations - Resideo operates through two reportable segments: Products and Solutions and ADI Global Distribution, with Corporate expenses reported separately[285] Segment Net Revenue (in millions) | Segment | 2022 | 2021 | 2020 | | :---------------------- | :----- | :----- | :----- | | Products and Solutions | $2,783 | $2,468 | $2,121 | | ADI Global Distribution | $3,587 | $3,378 | $2,950 | | Total net revenue | $6,370 | $5,846 | $5,071 | Segment Income from Operations (in millions) | Segment | 2022 | 2021 | 2020 | | :---------------------- | :----- | :----- | :----- | | Products and Solutions | $527 | $541 | $407 | | ADI Global Distribution | $313 | $268 | $194 | | Corporate | $(229) | $(250) | $(290) | | Total income from operations | $611 | $559 | $311 | Note 5. Revenue Recognition This note explains the company's revenue recognition policies, primarily at the point of product shipment, and disaggregates revenue by business line and geographic area - The majority of Resideo's revenue is recognized at a point in time when performance obligations are satisfied, typically when products are shipped and control transfers to the customer[294][295] Disaggregated Revenue by Business Line (in millions) | Products and Solutions | 2022 | 2021 | 2020 | | :--------------------- | :----- | :----- | :----- | | Air | $953 | $858 | $761 | | Safety and Security | $913 | $667 | $561 | | Energy | $595 | $594 | $505 | | Water | $322 | $349 | $294 | | Total P&S | $2,783 | $2,468 | $2,121 | | ADI Global Distribution | 2022 | 2021 | 2020 | | :---------------------- | :----- | :----- | :----- | | U.S. and Canada | $3,087 | $2,814 | $2,427 | | EMEA | $474 | $523 | $480 | | APAC | $26 | $41 | $43 | | Total ADI | $3,587 | $3,378 | $2,950 | | Total Net Revenue | $6,370 | $5,846 | $5,071 | Note 6. Restructuring Expenses This note details the $35 million in restructuring and impairment expenses recognized in 2022, primarily for employee termination costs and asset impairment - During 2022, Resideo recognized $35 million in restructuring and impairment expenses, primarily related to employee termination costs and asset impairment, as part of programs to lower costs and increase margins[298] - The 2022 restructuring initiatives are expected to be fully executed over the next 12-24 months, with potential for additional future expenses[298] Restructuring Expenses Rollforward (in millions) | Metric | 2022 | 2021 | 2020 | | :---------------- | :--- | :--- | :--- | | Beginning balance | $9 | $24 | $19 | | Charges | $26 | $— | $40 | | Usage | $(5) | $(11) | $(35) |\ | Other | $(3) | $(4) | $— | | Ending balance | $27 | $9 | $24 | Note 7. Pension Plans This note provides details on the company's U.S. and non-U.S. defined benefit pension plans, including funded status, actuarial gains, and expected future payments - Resideo sponsors multiple funded and unfunded U.S. and non-U.S. defined benefit pension plans[303] Pension Plan Funded Status (in millions, as of Dec 31, 2022) | Plan Type | Benefit Obligation | Fair Value of Plan Assets | Funded Status | | :---------- | :----------------- | :------------------------ | :------------ | | U.S. Plans | $281 | $262 | $(19) | | Non-U.S. Plans | $96 | $27 | $(69) | - A global net actuarial gain of $111 million was generated in 2022, primarily driven by a $140 million gain from increased discount rates, partially offset by asset losses[305][307] Expected Future Pension Benefit Payments (in millions) | Year | U.S. Plans | Non-U.S. Plans | | :-------- | :--------- | :------------- | | 2023 | $22 | $3 | | 2024 | $22 | $3 | | 2025 | $22 | $3 | | 2026 | $22 | $3 | | 2027 | $22 | $3 | | 2028-2032 | $105 | $26 | Note 8. Stock-Based Compensation Plans This note describes the Stock Incentive Plan, total stock-based compensation expense, and unrecognized compensation costs for unvested awards - The Stock Incentive Plan allows for grants of stock options, restricted stock units (RSUs), and performance stock units (PSUs), with 4 million shares available to be granted as of December 31, 2022[327] - Total stock-based compensation expense, net of tax, was $48 million for the year ended December 31, 2022, up from $36 million in 2021[328] - As of December 31, 2022, unrecognized compensation cost related to unvested awards totaled $41 million ($23 million for RSUs and $18 million for PSUs), expected to be recognized over weighted-average periods of 1 year, 5 months and 1 year, 9 months, respectively[333] Note 9. Goodwill and Intangible Assets, net This note details the composition and changes in goodwill and intangible assets, including increases from acquisitions and amortization expense Goodwill by Segment (in millions) | Segment | Dec 31, 2022 | Dec 31, 2021 | | :---------------------- | :----------- | :----------- | | Products and Solutions | $2,072 | $2,010 | | ADI Global Distribution | $652 | $651 | | Total Goodwill | $2,724 | $2,661 | - Goodwill increased by $109 million in 2022, primarily due to acquisitions, with $94 million allocated to Products and Solutions and $15 million to ADI Global Distribution[339] Net Carrying Amount of Intangible Assets (in millions) | Asset Type | Dec 31, 2022 | Dec 31, 2021 | | :------------------------------ | :----------- | :----------- | | Intangible assets subject to amortization | $295 | $120 | | Indefinite-lived intangible assets | $180 | $— | | Total intangible assets | $475 | $120 | - Intangible asset amortization expense was $35 million for the year ended December 31, 2022[341] Note 10. Leases This note provides financial data on operating lease arrangements for facilities and equipment, including assets, liabilities, and weighted-average terms - Resideo has operating lease arrangements for most of its manufacturing sites, offices, warehouses, and equipment[343] Operating Lease Financial Data (in millions, except years) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :-------------------------------------- | :----------- | :----------- | | Operating lease assets | $191 | $141 | | Operating lease liabilities - current | $37 | $32 | | Operating lease liabilities - non-current | $166 | $120 | | Weighted-average remaining term | 6.81 years | 6.04 years | | Weighted-average incremental borrowing rate | 5.78% | 5.42% | - Total operating lease costs were $69 million in 2022, including $19 million in variable lease costs[345] Note 11. Long-Term Debt This note details the company's long-term debt, including Senior Notes due 2029 and the Amended and Restated Term B Facility, along with interest rates and covenants Long-Term Debt Composition (in millions, as of Dec 31, 2022) | Debt Type | Amount | | :------------------------------ | :----- | | 4.000% senior notes due 2029 | $300 | | Variable rate A&R Term B Facility | $1,131 |\ | Gross debt | $1,431 | | Less: current portion | $(12) | | Less: unamortized deferred financing costs | $(15) | | Total long-term debt | $1,404 | - The A&R Credit Agreement includes a $1,150 million Term B loan facility and a $500 million revolving credit facility, with the Term B Facility having a weighted average interest rate of 6.78% as of December 31, 2022[353][358] - The 4.000% Senior Notes due 2029 are senior unsecured obligations guaranteed by domestic subsidiaries and contain certain financial covenants[361][363] Note 12. Derivative Financial Instruments This note describes the company's interest rate swap agreements used to hedge variable interest rate obligations and their fair value accounting - Resideo has eight interest rate swap agreements with a combined notional value of $560 million, entered in March 2021, to convert variable interest rate obligations to a fixed weighted average rate of 0.9289%[365] - These swap agreements are designated as cash flow hedges, with unrealized gains or losses recorded in accumulated other comprehensive loss[366] Fair Value of Derivative Assets (in millions, as of Dec 31, 2022) | Financial Statement Line Item | Fair Value | | :---------------------------- | :--------- | | Other current assets | $23 | | Other assets | $22 | | Total derivative assets | $45 | - Unrealized gains expected to be reclassified from accumulated other comprehensive loss into net income in the next 12 months are estimated to be $23 million as of December 31, 2022[368] Note 13. Fair Value This note explains the fair value measurements for long-term debt and derivative instruments, and the company's management of credit and market risks - The fair values of long-term debt instruments are determined using quoted market prices in inactive markets or discounted cash flows, classified as Level 2 measurements[373] Fair Value of Outstanding Debt (in millions, as of Dec 31, 2022) | Debt Type | Carrying Value | Fair Value | | :------------------------------ | :------------- | :--------- | | 4.000% Senior Notes due 2029 | $300 | $242 | | Variable rate A&R Term B Facility | $1,131 | $1,125 | | Total long-term debt | $1,431 | $1,367 | - The company manages credit risk by monitoring customer creditworthiness and market risk from foreign currency exchange rates through natural offsets[375][376] Note 14. Accrued Liabilities This note provides a breakdown of other current accrued liabilities, including obligations under indemnification agreements, compensation, and product warranties Other Current Accrued Liabilities (in millions, as of Dec 31, 2022) | Liability Type | Amount | | :-------------------------------------- | :----- | | Obligations payable under Indemnification Agreements | $140 | | Compensation, benefit and other employee-related | $108 | | Customer rebate reserve | $98 | | Product warranties | $40 | | Current operating lease liability | $37 | | Taxes payable | $38 | | Other (advertising, legal, freight, etc.) | $179 | | Total accrued liabilities | $640 | Note 15. Commitments and Contingencies This note details the company's environmental liabilities, obligations under the Reimbursement and Tax Matters Agreements with Honeywell, and product warranty accruals - Resideo has a $22 million liability for environmental investigation and remediation related to owned and operated sites as of December 31, 2022[385] - Under the Reimbursement Agreement, Resideo is obligated to pay Honeywell 90% of certain environmental liability payments, capped at $140 million annually, with a total liability of $614 million deemed probable and estimable as of December 31, 2022[388][391][396] - The Tax Matters Agreement requires Resideo to indemnify Honeywell for certain taxes, with an outstanding indemnity of $106 million as of December 31, 2022[393][396] - Royalty fees of 1.5% of net revenue from licensed products are paid to Honeywell under a 40-year Trademark Agreement, totaling $23 million in 2022[399] - A global settlement for derivative lawsuits was executed in February 2023, agreeing to corporate governance reforms and $1.6 million in plaintiffs' attorneys' fees[403] Product Warranties and Guarantees (in millions) | Metric | 2022 | 2021 | 2020 | | :-------------------------------------- | :--- | :--- | :--- | | Beginning balance | $23 | $22 | $25 | | Accruals for warranties/guarantees issued | $30 | $22 | $21 | | Adjustment of pre-existing warranties/guarantees | $(2) | $(3) | $(7) |\ | Settlement of warranty/guarantee claims | $(17) | $(18) | $(17) |\ | Reserve of acquired company at acquisition date | $14 | $— | $— | | Ending balance | $48 | $23 | $22 | Note 16. Other Expense, net This note itemizes the components of other expenses, net, including Reimbursement Agreement expenses and pension asset returns Other Expenses, Net (in millions) | Item | 2022 | 2021 | 2020 | | :------------------------------ | :--- | :--- | :--- | | Reimbursement Agreement expense | $157 | $146 | $146 | | Loss on extinguishment of debt | $— | $41 | $— | | Return on pension assets | $(39) | $(9) | $(17) |\ | Settlement of pre-Spin-Off litigation | $13 | $— | $— | | Other, net | $4 | $(20) | $18 | | Total other expenses, net | $135 | $158 | $147 | Note 17. Income Taxes This note provides a breakdown of income before taxes by region, components of the provision for income taxes, and the effective income tax rate reconciliation Income (Loss) Before Provision for Income Taxes (in millions) | Region | 2022 | 2021 | 2020 | | :-------- | :--- | :--- | :---- | | U.S. | $124 | $79 | $(93) |\ | Non-U.S. | $294 | $274 | $194 | | Total | $418 | $353 | $101 | Components of Provision for Income Taxes (in millions) | Type | 2022 | 2021 | 2020 | | :-------- | :--- | :--- | :--- | | Current | $138 | $105 | $42 | | Deferred | $(3) | $6 | $22 | | Total | $135 | $111 | $64 | Effective Income Tax Rate Reconciliation | Item | 2022 | 2021 | 2020 | | :------------------------------------ | :---- | :---- | :---- | | U.S. federal statutory income tax rate | 21.0% | 21.0% | 21.0% |\ | Non-deductible indemnification costs | 7.7% | 8.4% | 29.0% |\ | Effective income tax rate | 32.3% | 31.3% | 63.6% | - Net deferred tax assets were $59 million as of December 31, 2022, after a valuation allowance of $63 million, primarily against non-U.S. deferred tax assets related to foreign net operating loss carryforwards[416][417] Note 18. Earnings Per Share This note presents the calculation of basic and diluted earnings per share, including net income and weighted average shares outstanding Earnings Per Share (EPS) Data | Metric | 2022 | 2021 | 2020 | | :-------------------------------------- | :---- | :---- | :---- | | Net income (in millions) | $283 | $242 | $37 | | Weighted average basic shares outstanding (in millions) | 146 | 144 | 125 | | Weighted average diluted shares outstanding (in millions) | 149 | 148 | 126 | | Basic EPS | $1.94 | $1.68 | $0.30 |\ | Diluted EPS | $1.90 | $1.63 | $0.29 | - Diluted EPS is computed using the treasury stock method, including the dilutive effect of common stock equivalents[427] Note 19. Geographic Areas - Financial Data This note disaggregates net revenue and long-lived assets by geographic area, including the U.S., Europe, and other international regions Net Revenue by Geographic Area (in millions) | Region | 2022 | 2021 | 2020 | | :---------------- | :----- | :----- | :----- | | U.S. | $4,795 | $4,181 | $3,543 | | Europe | $1,111 | $1,196 | $1,121 | | Other International | $464 | $469 | $407 | | Total | $6,370 | $5,846 | $5,071 | Long-Lived Assets by Geographic Area (in millions) | Region | 2022 | 2021 | 2020 | | :---------------- | :--- | :--- | :--- | | U.S. | $347 | $244 | $260 | | Europe | $131 | $139 | $144 | | Other International | $79 | $46 | $47 | | Total | $557 | $429 | $451 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure matters - None[452] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding the recently acquired First Alert - The Chief Executive Officer and Chief Financial Officer concluded that Resideo's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022[455] - Management assessed and determined that the company maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO framework[459] - First Alert, acquired on March 31, 2022, was excluded from management's assessment of internal control over financial reporting, representing 11.5% of total assets and 5.4% of revenues[458] - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2022[460] Other Information No other information to disclose - None[461] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections No disclosures regarding foreign jurisdictions that prevent inspections - None[462] PART III. This part incorporates by reference information on directors, executive compensation, security ownership, related transactions, and accounting fees from the proxy statement Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information required by this item will be included in the 2023 Proxy Statement, to be filed within 120 days after December 31, 2022[465] Executive Compensation Executive compensation details are incorporated by reference from the 2023 Proxy Statement - Information required by this item will be included in the 2023 Proxy Statement, to be filed within 120 days after December 31, 2022[466] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - Information required by this item will be included in the 2023 Proxy Statement, to be filed within 120 days after December 31, 2022[467] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - Information required by this item will be included in the 2023 Proxy Statement, to be filed within 120 days after December 31, 2022[468] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement - Information relating to fees paid to and services performed by Deloitte & Touche LLP and the Audit Committee's pre-approval policies is incorporated by reference from the 2023 Proxy Statement[469] PART IV. This part lists financial statements, schedules, and exhibits, including key agreements related to the Honeywell Spin-Off Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including key agreements related to the Honeywell Spin-Off and recent equity purchase and credit agreements - The Consolidated Financial Statements and accompanying notes, along with the report of Deloitte & Touche LLP, are presented in Part II, Item 8 of this Form 10-K[471] - All financial statement schedules have been omitted because they are not required or the information is provided in the Consolidated Financial Statements or accompanying notes[472] - The exhibits include key agreements related to the Spin-Off from Honeywell, such as the Indemnification and Reimbursement Agreement, Separation and Distribution Agreement, Tax Matters Agreement, and Trademark License Agreement, along with their amendments[476] - Other exhibits include equity purchase agreements (e.g., for First Alert), the Amended and Restated Credit Agreement, and various stock incentive plan documents[478][480][482] Form 10-K Summary No Form 10-K Summary is provided - None[474]