Resideo(REZI) - 2021 Q4 - Annual Report

Part I Business Resideo Technologies, Inc. manufactures and distributes technology-driven products for comfort, thermal, and security, operating in Products & Solutions and ADI Global Distribution segments, targeting professional installers and connected home experiences - Resideo Technologies, Inc. separated from Honeywell International Inc. on October 29, 2018, becoming an independent publicly traded company under the ticker symbol "REZI" on the NYSE[13] - The company is a leading global manufacturer of technology-driven products for comfort, thermal, and security, serving over 150 million homes globally, and a leading wholesale distributor of low-voltage security products[14] - Resideo primarily focuses on the professional channel, partnering with over 110,000 professional installers[15] - The total addressable market is approximately $122 billion, with the global connected home market projected to grow at a 17% CAGR from $68 billion in 2019 to $208 billion in 2026[16] Net Revenue Contribution by Segment (Year Ended December 31, 2021) | Segment | Net Revenue Contribution % | | :---------------------- | :----------------------- | | Products & Solutions | 42.2 | | ADI Global Distribution | 57.8 | - The Products & Solutions segment serves over 150 million homes globally, with approximately 9.4 million connected customers and 15 million systems installed annually[19] - The ADI Global Distribution segment operates nearly 200 stocking locations in 16 countries, distributing over 350,000 products from more than 1,000 manufacturers to over 100,000 contractors[20] - The business strategy for Products & Solutions focuses on product innovation and connected ecosystems, while ADI Global Distribution aims to increase omni-channel presence and expand into adjacent growth markets[24][26] - As of December 31, 2021, the company employed approximately 13,300 employees in 32 countries[32] - The company owns approximately 2,300 worldwide active patents and pending patent applications to protect its research and development investments[54] Risk Factors The company faces various risks including intense competition, rapid technological changes, supply chain dependencies, macroeconomic impacts, cybersecurity threats, and substantial payments to Honeywell under the Reimbursement Agreement - The company operates in highly competitive markets across both segments, facing competition from global, national, regional, local providers, and new entrants with disruptive technologies[63][64] - Future results depend on the company's ability to develop and market new technologies, protect intellectual property, and defend against infringement in a rapidly changing technological landscape[71][73][74] - The business relies on third-party suppliers, making it vulnerable to supply disruptions, raw material price fluctuations (e.g., global semiconductor shortage), and increased freight costs[76] - The COVID-19 pandemic negatively impacted the global economy, causing supply chain disruptions, slowed customer demand, labor shortages, and increased material and freight costs, with ongoing uncertainty[79] - The company is required to make substantial cash payments to Honeywell under the Reimbursement Agreement (up to $140 million annually) for environmental liabilities, limiting liquidity and corporate actions[103][105] - Dependence on reliable IT infrastructure and increasing cybersecurity threats expose the company to risks of system interruptions, data breaches, financial loss, and reputational damage[98][100][101] - The company is subject to complex environmental, health, safety, data privacy, and consumer protection laws, with non-compliance potentially leading to substantial disruptions, costs, and liabilities[107][109] - The company is involved in various legal proceedings, including a class action securities suit, with an agreement in principle to settle for $55 million (net of $39 million in expected insurance recoveries)[112][114] - The company's debt documents impose restrictive covenants limiting its ability to incur additional indebtedness, pay dividends, make investments or acquisitions, and other corporate actions, affecting financial flexibility[126] - Future performance depends on the company's ability to recruit and retain qualified personnel across various functions in a competitive talent market[137] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[144] Properties Resideo's corporate headquarters is in Scottsdale, Arizona, with a global network of manufacturing, warehousing, and office sites for its Products & Solutions and ADI Global Distribution segments - The corporate headquarters is located in Scottsdale, Arizona[145] - The Products & Solutions segment owns or leases 16 manufacturing sites and 5 warehouses[145] - The ADI Global Distribution segment owns or leases 188 stocking locations and 2 warehouses[145] - The company also has 49 other sites owned or leased, including shared offices and engineering/lab sites[145] Regional Distribution of Sites | Region | Number of Sites | | :------- | :-------------- | | Americas | 154 | | EMEA | 89 | | Asia | 7 | | Pacific | 13 | Legal Proceedings The company is involved in various lawsuits and disputes typical of its operations, accruing liabilities when probable and estimable, but does not currently believe these are material to its results - The company is subject to various lawsuits, investigations, and disputes arising from its business conduct, including commercial transactions, product liability, intellectual property, and environmental matters[148] - Liabilities for contingencies are recognized when probable of occurrence and reasonably estimable[148] - The company does not currently believe that such matters are material to its results of operations[148] - Further information on legal proceedings is provided in Note 17. Commitments and Contingencies[149] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[150] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Resideo's common stock trades on the NYSE under "REZI", with 145 million shares outstanding as of February 14, 2022, and no intention to pay cash dividends due to reinvestment priorities and debt covenants - The company's common stock is traded on the New York Stock Exchange under the symbol "REZI"[152] Common Stock Information (as of February 14, 2022) | Metric | Value | | :--------------------- | :------------ | | Holders of Record | 36,479 | | Shares Outstanding | 145,018,673 | | Closing Price per Share| $24.37 | - The company has never declared or paid cash dividends and does not intend to, prioritizing retention of future earnings for business operations, expansion, and debt obligations[154] - The ability to pay cash dividends is limited by the terms of its indebtedness and obligations under the Reimbursement Agreement and other agreements with Honeywell[154] Reserved This item is reserved and contains no information - This item is reserved[156] Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Resideo's financial performance for the three years ended December 31, 2021, highlighting 15% net revenue growth and 554% net income growth in 2021, driven by volume and price increases despite material and labor cost challenges - Financial performance is influenced by macro factors including repair and remodeling activity, construction, employment rates, and the overall macro environment[161] - In 2021, customer demand improved, and cost actions positively impacted operations, despite global material shortages, labor shortages, material price inflation, and increased freight costs[161] Consolidated Statements of Operations Highlights (2021 vs. 2020) | Metric | 2021 (in millions) | 2020 (in millions) | % Change | | :--------------------------- | :----------------- | :----------------- | :------- | | Net Revenue | $5,846 | $5,071 | 15% | | Cost of Goods Sold | $4,285 | $3,758 | 14% | | Gross Profit | $1,561 | $1,313 | 19% | | Gross Profit Percentage | 27% | 26% | +100 bps | | Research and Development Exp.| $86 | $77 | 12% | | Selling, General & Admin Exp.| $916 | $925 | -1% | | Operating Profit | $559 | $311 | 80% | | Other Expense, Net | $158 | $147 | 7% | | Interest Expense | $48 | $63 | -24% | | Income Before Taxes | $353 | $101 | 250% | | Tax Expense | $111 | $64 | 73% | | Net Income | $242 | $37 | 554% | | Basic EPS | $1.68 | $0.30 | 460% | | Diluted EPS | $1.63 | $0.29 | 462% | - Gross profit percentage increased by approximately 200 basis points from sales price increases and sales mix, and 100 basis points from higher revenue volume, partially offset by 100 basis points from increased freight costs and 100 basis points from increased material costs[164][166][197] Segment Performance (2021 vs. 2020) | Segment | 2021 Revenue (in millions) | 2020 Revenue (in millions) | % Change Revenue | 2021 Operating Profit (in millions) | 2020 Operating Profit (in millions) | % Change Operating Profit | | :---------------------- | :------------------------- | :------------------------- | :--------------- | :---------------------------------- | :---------------------------------- | :------------------------ | | Products & Solutions | $2,468 | $2,121 | 16% | $541 | $407 | 33% | | ADI Global Distribution | $3,378 | $2,950 | 15% | $268 | $194 | 38% | - Corporate costs decreased by $40 million (14%) in 2021, driven by lower Spin-Off and restructuring expenses and transformation program savings, partially offset by litigation settlement, increased consulting, and labor inflation[208] - The company amended its credit facilities in February 2021, establishing a $950 million seven-year senior secured term B loan facility and a $500 million five-year senior secured revolving credit facility[170] - In 2021, the company redeemed $400 million of its 6.125% Senior Notes due 2026 and issued $300 million in 4% senior unsecured notes due 2029, incurring $41 million in debt extinguishment costs[171][172] - As of December 31, 2021, cash and cash equivalents totaled $779 million, with no borrowings under the $500 million revolving credit facility[169][209] Cash Flow Summary (in millions) | Activity | 2021 | 2020 | 2019 | | :----------------------- | :--- | :--- | :--- | | Operating Activities | $315 | $244 | $23 | | Investing Activities | $(65)| $(103)| $(112)| | Financing Activities | $20 | $253 | $(53)| | Net Increase (Decrease) | $262 | $395 | $(143)| - Cash provided by operating activities increased by $71 million in 2021 due to higher earnings, partially offset by increased working capital balances (higher accounts receivable and inventories)[219] - The company entered an Equity Purchase Agreement on February 6, 2022, to acquire First Alert, Inc. for $593 million, expected to close in Q1 2022 and funded by cash on hand and incremental borrowings[210][463] Contractual Obligations (as of December 31, 2021, in millions) | Obligation Type | Total Remaining Maturities | | :------------------------------ | :------------------------- | | Long-term debt | $1,230 | | Reimbursement Agreement Payments| $597 | | Environmental Liability Payments| $22 | | Operating Lease Obligations | $179 | | Purchase Obligations | $103 | Quantitative and Qualitative Disclosures About Market Risk Resideo is exposed to market risks from foreign currency and interest rates, managing them through operating activities and derivative instruments, with $943 million of variable-rate debt partially hedged by interest rate swaps - The company is exposed to market risks from foreign currency exchange rates and interest rates, which can affect operating results, financial position, and cash flows[256] - As of December 31, 2021, $943 million of the company's total debt ($1,243 million) carried variable interest rates[257] - In March 2021, the company entered into eight interest rate swap agreements for a combined notional amount of $560 million, converting a portion of its variable interest rate obligations to a base fixed weighted average rate of 0.9289% over three to five years[257] - A 100 basis point increase in interest rates would have an approximate $4 million impact on the company's annual interest expense[257] - For foreign currency exchange rate risk, the company primarily relies on natural offsets and had no outstanding hedging arrangements as of December 31, 2021[258] - The company attempts to pass through significant changes in component and raw material costs to its customers to manage commodity price risk[259] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for the years ended December 31, 2021, 2020, and 2019, along with the independent auditor's unqualified opinions on both financial statements and internal control over financial reporting - Deloitte & Touche LLP issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2021, based on COSO (2013) criteria[262] - Deloitte & Touche LLP also issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2021[269] - The critical audit matter identified relates to the Honeywell Reimbursement Agreement, specifically the subjectivity in estimating environmental remediation costs and management's judgments[274][275][276] Consolidated Statements of Operations (in millions, except per share data) | Metric | 2021 | 2020 | 2019 | | :--------------------------- | :----- | :----- | :----- | | Net Revenue | $5,846 | $5,071 | $4,988 | | Cost of Goods Sold | $4,285 | $3,758 | $3,711 | | Gross Profit | $1,561 | $1,313 | $1,277 | | Research and Development Exp.| $86 | $77 | $87 | | Selling, General & Admin Exp.| $916 | $925 | $932 | | Operating Profit | $559 | $311 | $258 | | Other Expense, Net | $158 | $147 | $118 | | Interest Expense | $48 | $63 | $69 | | Income Before Taxes | $353 | $101 | $71 | | Tax Expense | $111 | $64 | $35 | | Net Income | $242 | $37 | $36 | | Basic EPS | $1.68 | $0.30 | $0.29 | | Diluted EPS | $1.63 | $0.29 | $0.29 | Consolidated Balance Sheets (as of December 31, in millions) | Asset/Liability/Equity | 2021 | 2020 | | :--------------------- | :----- | :----- | | Cash and cash equivalents| $779 | $517 | | Accounts receivable – net| $876 | $863 | | Inventories – net | $740 | $672 | | Total current assets | $2,541 | $2,225 | | Property, plant & equip – net| $287 | $318 | | Goodwill | $2,661 | $2,691 | | Total assets | $5,853 | $5,610 | | Accounts payable | $883 | $936 | | Current maturities of debt| $10 | $7 | | Accrued liabilities | $601 | $595 | | Total current liabilities| $1,494 | $1,538 | | Long-term debt | $1,220 | $1,155 | | Obligations payable under Indemnification Agreements| $585 | $590 | | Total liabilities | $3,601 | $3,617 | | Total equity | $2,252 | $1,993 | Consolidated Statements of Cash Flow (in millions) | Cash Flow Activity | 2021 | 2020 | 2019 | | :----------------------------- | :---- | :---- | :---- | | Net cash provided by operating activities| $315 | $244 | $23 | | Net cash used for investing activities| $(65) | $(103)| $(112)| | Net cash provided by (used for) financing activities| $20 | $253 | $(53) | | Net increase (decrease) in cash and cash equivalents| $262 | $395 | $(143)| | Cash and cash equivalents at end of year| $779 | $517 | $122 | Disaggregated Revenue by Business Line (in millions) | Business Line | 2021 | 2020 | 2019 | | :------------------------ | :----- | :----- | :----- | | Comfort | $1,207 | $1,079 | $1,103 | | Security | $667 | $538 | $520 | | Residential Thermal Solutions| $594 | $504 | $552 | | Products & Solutions Total| $2,468 | $2,121 | $2,175 | | ADI Global Distribution Total| $3,378 | $2,950 | $2,813 | | Net Revenue Total | $5,846 | $5,071 | $4,988 | - Goodwill for Products & Solutions was $2,010 million and for ADI Global Distribution was $651 million as of December 31, 2021[385] - The company's obligation under the Reimbursement Agreement was $597 million as of December 31, 2021, with an annual payment cap of $140 million[397][398] - As of December 31, 2021, the company had an indemnity liability of $128 million owed to Honeywell for future tax payments under the Tax Matters Agreement[404] - Royalty fees paid to Honeywell under the Trademark Agreement were $21 million in 2021, representing 1.5% of net revenue from licensed products[405] - On February 6, 2022, the company entered into an agreement to acquire First Alert, Inc. for $593 million, expected to close in Q1 2022[463] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure matters - Not Applicable[465] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, and maintained effective internal control over financial reporting based on COSO criteria - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021[468] - Management determined that the company maintained effective internal control over financial reporting as of December 31, 2021, based on COSO (2013) criteria[470][471] - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2021[472] Other Information This item reports no other information - None[473] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item reports no disclosure regarding foreign jurisdictions that prevent inspections - None[474] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information required by this item will be included in the company's 2022 Annual Meeting of Stockholders Proxy Statement and is incorporated herein by reference[476] Executive Compensation Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information relating to executive compensation is contained in the 2022 Proxy Statement and is incorporated herein by reference[477] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information relating to security ownership of certain beneficial owners and management is contained in the 2022 Proxy Statement and is incorporated herein by reference[478] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information relating to certain relationships and related transactions, and director independence is contained in the 2022 Proxy Statement and is incorporated herein by reference[479] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2022 Proxy Statement - Information relating to principal accounting fees and services is contained in the 2022 Proxy Statement and is incorporated herein by reference[480] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the Form 10-K, noting that consolidated financial statements are in Item 8 and other schedules are omitted as not required - The Consolidated Financial Statements and related notes are presented in Part II, Item 8 of this Form 10-K[482] - All financial statement schedules have been omitted because they are not required or because the required information is provided in the Consolidated Financial Statements or Notes thereto[483] - An Exhibit Index is provided, listing various agreements such as the Indemnification and Reimbursement Agreement, Separation and Distribution Agreement, Tax Matters Agreement, Trademark License Agreement, Credit Agreement, and Stock Incentive Plans[484][486][487][490][491][492] Form 10-K Summary The company has elected not to include a Form 10-K summary under this item - The company has elected not to include a Form 10-K summary under this Item 16[495] Signatures Signatures This section contains the signatures of the registrant's authorized officers and directors, certifying the filing of the annual report on Form 10-K as of February 15, 2022 - The report was duly signed on behalf of Resideo Technologies, Inc. by Anthony L. Trunzo, Executive Vice President and Chief Financial Officer, on February 15, 2022[497][499] - The annual report was also signed by Jay Geldmacher (President, Chief Executive Officer and Director) and other directors[499]