RESIDEO TECHNOLOGIES, INC. (REZI) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(In millions, except per share amounts)

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

Overview and Business Trends

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

Our financial performance is influenced by several macro factors such as repair and remodeling activity, residential and non-residential construction, employment rates, and overall macro environment. The global outbreak of a novel coronavirus disease (“COVID-19”) in 2020 created economic disruption, and we experienced constrained supply and slowed customer demand, as well as temporary closures of several of our ADI Global Distribution branches, that adversely impacted business, results of operations, and overall financial performance. Although there remains uncertainty as to the continuing implications of COVID-19, customer demand improved throughout 2021 and ongoing cost actions and transformation efforts contributed to the Company’s operations and overall financial performance. However, we are experiencing global shortages in key materials and components in certain instances impacting our ability to supply certain products as well as labor shortages, materials price inflation, and increased freight costs.

During 2021, the Products & Solutions segment revenue increased 16% compared to 2020, driven by strong growth across all business segments as well as sales price increases. Operating profit increased 33% compared to 2020 and was positively impacted by higher revenue, a decrease in restructuring related expenses, favorable changes in sales mix, lower charges related to obsolete and surplus inventory, transformation program cost savings, and other cost reduction efforts totaling $324 million. These impacts were partially offset by increased material costs, increased freight costs, increased labor incentives expense, investments to support research and development, as well as labor inflation totaling $190 million.

Our ADI Global Distribution business revenue increased 15% compared to 2020. Throughout 2021, the business continued its strong performance, achieving solid growth in the U.S. and Canada, including the impact from the 2020 Herman ProAV acquisition and 2021 acquisitions of Norfolk Wire & Electronics and Shoreview Distribution; as well as in EMEA, and through the expansion of key product lines. ADI Global Distribution accelerated the adoption of digital tools, which is reflected in strong e-commerce growth. Operating profit grew 38% compared to 2020, driven by sales volume, favorable sales mix, pricing, and productivity totaling $108 million, partially offset by commercial investments, and other cost inflation of $34 million.

Current Period Highlights

Net revenue increased $775 million, or 15% in 2021 compared to 2020, primarily due to volume and sales price increases. Gross profit increased 19% compared to 2020. Gross profit as a percent of net revenue increased to 27% in 2021 compared to 26% in 2020. The primary items driving the increase in gross profit percentage were an approximately 200 basis point (“bps”) benefit from sales price increases and sales mix and an approximately 100 bps

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benefit resulting from higher revenue volume. These benefits were partially offset by an approximately 100 bps impact from increased freight costs and an approximately 100 bps impact from increased material costs.

Research and development expense for 2021 was $86 million, an increase of $9 million, or 12% from $77 million for 2020. The increase was driven by investments to support new product launches, labor inflation and other items totaling $17 million. These increases were partially offset by transformation program cost savings, lower restructuring related expenses, and other cost reductions totaling $8 million.

Selling, general and administrative expenses for the year ended December 31, 2021 was $916 million, a decrease of $9 million or 1% from $925 million for the year ended December 31, 2020. The decrease was driven by lower Spin-Off and restructuring related expenses, transformation program cost savings, and other cost reductions totaling $140 million. These decreases were partially offset by commercial investments, the pending securities class action litigation settlement net of insurance recoveries, increased labor incentives expense, foreign currency translation, impairment charges resulting from the relocation of our Austin, Texas corporate headquarters location to a lower cost site, increased stock-based compensation expense, and labor inflation and other items totaling $131 million.

Net income for 2021 was $242 million compared to $37 million for 2020, an increase of 554% year over year.

We ended 2021 with $779 million in cash and cash equivalents. Net cash provided by operating activities was $315 million for the year. At December 31, 2021, accounts receivable were $876 million, inventories were $740 million, accounts payable were $883 million, and there were no borrowings under our revolving credit facility.

Recent Developments

Amended and Restated Credit Facilities and Senior Notes

On February 12, 2021, we entered into an Amendment and Restatement Agreement (the “A&R Credit Agreement”). The A&R Credit Agreement provides for (i) a seven-year senior secured term B loan facility in an aggregate principal amount of $950 million (the “A&R Term B Facility”) and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of $500 million (the “A&R Revolving Credit Facility” and, together with the Term Loan Facilities, the “A&R Senior Credit Facilities”).

On February 16, 2021, we redeemed $140 million in principal amount of the Senior Notes at a redemption price of 106.125% of par plus accrued interest.

On August 26, 2021, we redeemed the remaining $260 million in principal amount of the Senior Notes due 2026 at a redemption price of 105.594% of par plus accrued interest and we issued $300 million in principal amount 4% senior unsecured notes due in 2029.

As a result of the Senior Notes redemption and the execution of the A&R Credit Agreement, debt extinguishment costs of $41 million were incurred in the year ended December 31, 2021 and recorded in Other expense, net.

COVID-19 Pandemic

The World Health Organization (“WHO”) declared COVID-19 a pandemic in March 2020. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain, as viruses constantly change through mutation, with new variants of the COVID virus occurring and expected to continue over time. As new information emerges it may have an impact on potential restrictions globally in areas including travel, freight, shipping and commercial operations. As there remains uncertainty around the impacts of the COVID-19 pandemic, we address and evaluate the impacts frequently. See “Item 1A. Risk Factors” of this Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.

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U.S. and international government responses to the COVID-19 outbreak have included “shelter in place,” “stay at home” and similar types of orders. In the United States, Canada and certain other countries globally, these orders exempted certain products and services needed to maintain continuity of operations of critical infrastructure sectors as determined by the federal government. If additional lockdown orders are put in place or if any of the applicable exemptions are curtailed or revoked in the future, that could adversely impact our business, operating results, and financial condition. Furthermore, to the extent these exemptions do not extend to our key suppliers and customers, this could also adversely impact our business, operating results, and financial condition. Finally, we are incurring increased costs associated with other employee safety measures.

Our visibility toward future performance is more limited than is typical due to the uncertainty surrounding the duration and ultimate impact of COVID-19 and its variants, and the mitigation measures that are implemented by governmental authorities. We also expect business conditions to remain challenging, with global shortages in key materials and components, in certain instances impacting our ability to supply certain products, as well as labor shortages, materials price inflation, and increased freight costs. In response to these challenges, we will continue to focus on those factors that we can control: closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of our manufacturing, selling and administrative activities.

Basis of Presentation

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

Reclassification

The prior year Consolidated Statements of Operations were reclassified to present Research and development expenses as a separate line item within the statements. Research and development expenses were formerly included within Selling, general and administrative expenses.

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

Components of Operating Results

Net Revenue

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

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

ADI Global Distribution: We generate revenue through the distribution of low-voltage electronic and security products, as well as smart home, fire, power, audio and ProAV, networking, communications, wire and cable, and data communications that are delivered through a comprehensive network of professional contractors, distributors and OEMs, as well as major retailers and online merchants. In addition to our own security products, ADI Global Distribution distributes products from industry-leading manufacturers and carries a line of private label products. We sell these products to contractors that service non-residential and residential end-users. 14% of ADI Global Distribution’s net revenue is supplied by our Products & Solutions Segment. Management estimates that in 2021 approximately two-thirds of ADI Global Distribution’s net revenue was attributed to non-residential end markets and one-third to residential end markets.

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Cost of Goods Sold

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

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

Research and Development Expense

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

Selling, General and Administrative Expense

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

Other Expense, Net

Other expense, net consists primarily of Reimbursement Agreement expenses. For further information see Note 17. Commitments and Contingencies of Notes to Consolidated Financial Statements for discussion of the Reimbursement Agreement. Other expense, net also includes debt extinguishment costs incurred as a result of the redemption of our Senior Notes due 2026 and the execution of the A&R Credit Agreement as well as foreign exchange gains and losses and other non-operating related expenses or income.

Interest Expense

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

Tax Expense

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

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Results of Operations

The following table sets forth our Consolidated Statements of Operations for the periods presented:

Consolidated Statements of Operations

(In millions except share and per share data)

A detailed discussion of the prior year 2020 to 2019 year-over-year changes are not included herein and can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the 2020 Annual Report on Form 10-K filed February 25, 2021.

The following discussions of year-over-year changes represent 2021 compared to 2020.

Net Revenue

Net revenue for the year ended December 31, 2021 was $5,846 million, an increase of $775 million, or 15% from the year ended December 31, 2020, which was negatively impacted by the emergence of COVID-19. The increase is mainly due to volume and sales price increases.

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

Cost of Goods Sold

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Cost of goods sold for the year ended December 31, 2021 was $4,285 million, an increase of $527 million, or 14%, from $3,758 million for the year ended December 31, 2020. This increase in cost of goods sold was driven by higher revenue volumes, increased material costs, increased freight costs, foreign currency translation, and labor inflation totaling $650 million. These increased costs were partially offset by favorable changes in sales mix, lower charges related to obsolete and surplus inventory, decreased restructuring related costs, transformation programs cost savings, and other cost savings totaling $123 million.

Gross profit percentage was 27% for the year ended December 31, 2021, compared to 26% for the year ended December 31, 2020. The primary items driving the increase in gross profit percentage were an approximately 200 bps benefit from sales price increases and sales mix and an approximately 100 bps benefit resulting from higher revenue volume. These benefits were partially offset by an approximately 100 bps unfavorable impact from increased freight costs and an approximately 100 bps unfavorable impact from increased material costs.

Research and Development Expense

Research and development expense for the year ended December 31, 2021 was $86 million, an increase of $9 million, or 12%, from $77 million for the year ended December 31, 2020. The increase was driven by investments to support new product launches, labor inflation and other items totaling $17 million. These increases were partially offset by transformation program cost savings, lower restructuring related expenses, and other costs reductions totaling $8 million.

Selling, General and Administrative Expense

Selling, general and administrative expense for the year ended December 31, 2021 was $916 million, a decrease of $9 million, or 1%, from $925 million for the year ended December 31, 2020. The decrease was driven by lower Spin-Off and restructuring related expenses, transformation program cost savings, and other cost reductions totaling $140 million. These decreases were partially offset by commercial investments, the pending securities class action litigation settlement net of insurance recoveries, increased labor incentives expense, foreign currency translation, impairment charges resulting from the relocation of our Austin, Texas corporate headquarters location to a lower cost site, increased stock-based compensation expense, and labor inflation and other items totaling $131 million.

Other Expense, Net

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Other expense, net for the year ended December 31, 2021 was $158 million, an increase of $11 million, or 7%, from $147 million for the year ended December 31, 2020. Other expense, net increased $41 million from debt extinguishment costs incurred as a result of the redemption of our Senior Notes due 2026 and the execution of the A&R Credit Agreement and $2 million in other non-operating expense, partially offset by an $11 million decrease in non-operating pension related expense, a $9 million reduction in the accruals related to the Tax Matters Agreement, an $8 million gain in sales of businesses, and $4 million of favorable foreign exchange impact.

Tax Expense

Our effective income tax rate is impacted by the mix of earnings across jurisdictions in which we operate, by U.S. taxation of foreign earnings, and by non-deductible expenses. Indemnification costs paid under the Reimbursement Agreement are generally non-deductible expenses for U.S. federal income tax purposes.

Income tax expense of $111 million in 2021 includes $1 million of discrete tax expense. Excluding discrete tax expense of $1 million, the overall effective tax rate was 30%.

Income tax expense increased in fiscal 2021 primarily due to an increase in pre-tax earnings. The decrease in the overall effective tax rate for 2021 is primarily driven by the effect higher earnings, compared with the prior year, have on the tax rate impact of non-deductible indemnification costs.

Review of Business Segments

Products & Solutions

Products & Solutions revenue increased 16% mainly due to increased volume driven by strong growth across all business lines as well as sales price increases. Operating profit increased from $407 million to $541 million or 33%. Operating profit increased 33% and was positively impacted by higher revenue, a decrease in restructuring related expenses, favorable changes in sales mix, lower charges related to obsolete and surplus inventory, transformation program cost savings, and other cost reduction efforts totaling $324 million. These impacts were partially offset by increased material costs, increased freight costs, increased labor incentives expense, investments to support research and development, as well as labor inflation totaling $190 million.

ADI Global Distribution

ADI Global Distribution revenue increased 15%, highlighted by strong growth in the U.S. and Canada, as well as EMEA. Operating profit increased 38% and was favorably impacted by favorable changes in sales mix, higher revenue, and other expense productivity totaling $108 million. These positive impacts were partially offset by commercial investments, increased freight costs, and increased labor incentives expense, as well as labor inflation totaling $34 million.

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Corporate

Corporate costs for 2021 were $250 million, a decrease of $40 million, or 14%, from $290 million in 2020.The decrease was driven by lower Spin-Off and restructuring related expenses, transformation programs cost savings, and other cost reductions totaling $95 million. These decreases were partially offset by the pending securities class action litigation settlement net of insurance recoveries, increased consulting expense, impairment charges resulting from the relocation of our Austin, Texas corporate headquarters location to a lower cost site, increased labor incentives expense, increased stock-based compensation expense, foreign currency translation, and labor inflation totaling $55 million.

Capital Resources and Liquidity

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

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As of December 31, 2021, total cash and cash equivalents were $779 million, of which 25% were held by foreign subsidiaries. At December 31, 2021, there were no borrowings and no letters of credit issued under our $500 million Revolving Credit Facility.

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Historically, we have delivered positive cash flows from operations. Operating cash flows from continuing operations were $315 million, $244 million and $23 million for the three years ended December 31, 2021, 2020 and 2019, respectively.

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. While we may elect to seek additional funding at any time, we believe our existing cash, cash equivalents and availability under our credit facilities are sufficient to meet our capital requirements through at least the next 12 months and the longer term. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.

On February 6, 2022, we entered into an Equity Purchase Agreement to acquire First Alert, Inc. a leading provider of home safety products, for $593 million. The acquisition is subject to customary closing conditions, including regulatory approvals, and is anticipated to be completed in our first quarter of 2022. We intend to fund this acquisition with a combination of cash on hand, and incremental borrowings under our term loan facility. For additional information see Note 23. Subsequent Events of Notes to Consolidated Financial Statements.

Credit Agreement

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”). This agreement effectively replaced our previous senior secured credit facilities.

See Note 18. Long-Term Debt of Notes to Consolidated Financial Statements for further discussion.

Senior Notes due 2029

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

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See Note 18. Long-Term Debt of Notes to Consolidated Financial Statements for further discussion.

Reimbursement Agreement

In connection with the Spin-Off, we entered into the Reimbursement Agreement, pursuant to which we have an obligation to make cash payments to Honeywell in amounts equal to 90% of payments for certain Honeywell environmental-liability payments, which include amounts billed, less 90% of Honeywell’s net insurance receipts relating to such liabilities, and less 90% of the net proceeds received by Honeywell in connection with (i) affirmative claims relating to such liabilities, (ii) contributions by other parties relating to such liabilities and (iii) certain property sales. The amount payable by us in respect of such liabilities arising in any given year is subject to a cap of $140 million. During 2020 and 2021, we entered into amendments with Honeywell. See Note 17. Commitments and Contingencies of Notes to Consolidated Financial Statements of this Form 10-K for a further discussion of the Reimbursement Agreement and amendments. The amount paid during the year ended December 31, 2021 was $140 million.

See Note 17. Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion.

Cash Flow Summary for the Years Ended December 31, 2021, 2020 and 2019

Our cash flows from operating, investing and financing activities for the years ended December 31, 2021, 2020 and 2019, as reflected in the audited Consolidated Financial Statements are summarized as follows:

2021 compared with 2020

Cash provided by operating activities for 2021 increased by $71 million, due to higher earnings, offset by an increase in working capital balances as accounts receivable balances were higher due to strong revenue growth, inventories were higher due to higher costs and volumes required to support higher revenues, and lower accounts payable attributable to managing vendor supply chain issues and the timing of certain vendor payments.

Cash used for investing activities for 2021 decreased by $38 million, primarily due to a 2021 decrease of $24 million cash paid for acquisitions compared to 2020, a $7 million decrease in capital expenditures, and a $7 million decrease in other investing activities.

Cash provided by financing activities for 2021 decreased by $233 million. The decrease was primarily due to $279 million of net proceeds from the issuance of common stock received in 2020, partially offset by $31 million of net proceeds resulting from the A&R Credit Agreement and redemption of the Senior Notes due 2026, $14 million of decreased debt repayments, and $1 million of other financing activities.

Contractual Obligations and Probable Liability Payments

Our material cash requirements include the following contractual obligations.

Long-term debt and interest payments

As of December 31, 2021, remaining maturities on our notes and term loan were $1,230 million, with $10 million payable within 12 months. See Note 18. Long-term Debt and Credit Agreement to Notes to Consolidated

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Financial Statements for more information about our debt and the timing of expected future principal and interest payments.

Reimbursement Agreement Payments

In connection with the Spin-Off, we entered into the Reimbursement Agreement with Honeywell. As of December 31, 2021, $597 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. For further discussion on the Reimbursement Agreement refer to Note 17. Commitments and Contingencies of Notes to Consolidated Financial Statements.

Environmental Liability Payments

We make environmental liability payments for sites which we own and are directly responsible for. As of December 31, 2021, $22 million was deemed probable and reasonably estimable.

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 December 31, 2021, we had operating lease payment obligations of $179 million, with $39 million payable within 12 months.

Purchase obligations

We enter into purchase obligations with various vendors in the normal course of business. As of December 31, 2021, we had purchase obligations of $103 million, with $34 million payable within 12 months.

Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. We expect to continue investing to expand and modernize our existing facilities and to create capacity for new product development.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our Consolidated Financial Statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated Financial Statements. As there remains uncertainty around the impacts of the COVID-19 pandemic, we intend to address and evaluate the impacts frequently. See Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements of this Form 10-K for a discussion of the accounting policies.

Revenue — Product and service revenues are recognized when we transfer control of the promised products or services to the customer, in an amount we expect to receive in exchange for transferring goods or providing services. Each distinct performance obligation within a contract is identified, and a contract’s transaction price is then allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

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In the sale of products, the terms of a contract or the historical business practice can give rise to variable consideration due to, but not limited to, discounts, rebates, and the right of return. We estimate variable consideration at the most likely amount that will be received from customers and reduces revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Reimbursement Agreement — In connection with the Spin-Off, we entered into the Reimbursement Agreement further described in the Capital Resources and Liquidity section.

Through the Reimbursement Agreement, we are subject to a number of environmental claims, remediation and potential, hazardous exposure or toxic tort claims. We continually assess the likelihood of any adverse judgments or outcomes related to the Reimbursement Agreement, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a thorough analysis of each matter with the assistance of outside legal counsel and Honeywell, and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future claims related to the sites covered by the Reimbursement Agreement, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, we do not currently possess sufficient information to reasonably estimate the amounts of the Reimbursement Agreement liabilities to be recorded upon future completion of studies, litigations or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined. Expenses related to the indemnification are presented within Other expense, net in the Consolidated Statements of Operations. See Note 17. Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our environmental liabilities.

Goodwill — We perform goodwill impairment testing annually on the first day of the fourth quarter of each year or more frequently if indicators of potential impairment exist. The goodwill impairment test is performed at the reporting unit level. We have two reporting units, Products & Solutions and ADI Global Distribution. In determining if goodwill is impaired, we compare the fair value of a reporting unit with its’ carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value provided the loss recognized does not exceed the total amount of goodwill allocated to that reporting unit. As of December 31, 2021, the Products & Solutions and ADI Global Distribution reporting units had estimated fair values in excess of carrying value of at least 90% and 20%, respectively, and we concluded that our goodwill was not impaired as of the 2021 annual impairment test.

For the 2021 annual impairment test, we determined the fair value of each reporting unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of operating results, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business’s ability to execute on the projected cash flows. The terminal value is estimated using a constant growth method which requires an assumption about the expected long-term growth rate. The estimates are based on historical data and experience, industry projections, economic conditions, and management’s expectations. Under the market approach, we estimate the fair value based on market multiples of cash flow and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit and considering a reasonable control premium. The weight assigned to the multiples requires judgement in qualitatively and quantitatively evaluating the size, profitability, and the nature of the business activities of the reporting units as compared to the comparable publicly traded companies. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.

We believe the estimates and assumptions used in the calculations are reasonable. In addition, the extent to which COVID-19 may adversely impact our business depends on future developments, which are uncertain and unpredictable, depending upon the severity and duration of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be reasonably estimated at this time

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but may adversely affect our business and financial results. It is possible that into 2022, macroeconomic conditions may have unexpected impacts on our business. If there was an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. Should the fair value of the Company’s reporting units fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. The Company monitors its reporting units to determine if there is an indicator of potential impairment.

Income Taxes — We utilize the asset and liability approach in accounting for income taxes. We recognize income taxes in each of the jurisdictions in which we have a presence. For each jurisdiction, we estimate the actual amount of income taxes currently payable or receivable, as well as deferred tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which they are expected to be realized. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets.

At December 31, 2021, we recorded net deferred tax assets of $57 million. The assets included $49 million for the value of net operating loss and credit carryforwards. A valuation allowance of $63 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce deferred tax assets.

In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We believe we made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. The Company maintains a reserve for uncertain tax benefits that are currently unresolved and routinely monitors the potential impact of such situations. The liability for unrecognized tax benefits, accrued interest and penalties was $16 million as of December 31, 2021.

Pension — We have defined benefit plans covering certain employees. The benefits are accrued over the employees’ service periods. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of net periodic pension income or expense. Differences between actual and expected results or changes in the value of defined benefit obligations and plan assets, if any, are not recognized in earnings as they occur but rather systematically over subsequent periods when net actuarial gains or losses are in excess of 10% of the greater of the fair value of plan assets or the plan’s projected benefit obligation.

A 25 basis point increase in the discount rate would result in a decrease of approximately $3 million to the net periodic benefit cost for 2021, while a 25 basis point decrease in the discount rate would result in an increase of approximately $3 million. The resulting impact on the pension benefit obligation would be a decrease of $20 million and an increase of $22 million, respectively.

Other Matters

Litigation, Environmental Matters and the Reimbursement Agreement

See Note 17. Commitments and Contingencies of Notes to Consolidated Financial Statements for a discussion of environmental and other litigation matters.

Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.

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RESIDEO TECHNOLOGIES, INC.

Cautionary Statement Concerning Forward-Looking Statements

This Annual Report on Form 10-K 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. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-K 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 successfully develop new technologies and products and develop and protect the intellectual property related to the same and to defend against IP threats of others;

•
inability to obtain necessary product components, production equipment or replacement parts;

•
the impact of pandemics, epidemics, natural disasters and other public health emergencies, such as COVID-19;

•
failure to achieve and maintain a high level of product and service quality;

•
inability to compete in the market for potential acquisitions;

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inability to consummate acquisitions on satisfactory terms or to integrate such acquisitions effectively;

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our ability to retain or expand relationships with significant customers;

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dependence upon information technology infrastructure having adequate cyber-security functionality;

•
economic, political, regulatory, foreign exchange and other risks of international operations, including the impact of tariffs;

•
changes in prevailing global and regional economic conditions;

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our failure to execute on key business transformation programs and activities;

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the failure to increase productivity through sustainable operational improvements;

•
fluctuation in financial results due to the seasonal nature of portions of our business;

•
our ability to recruit and retain qualified personnel;

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labor disputes, work stoppages, other disruptions, or the need to relocate any of our facilities;

•
changes in legislation or government regulations or policies;

•
the significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturers (“OEMs”) customers;

•
the operational constraints and financial distress of third parties;

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our ability to borrow funds and access capital markets;

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the amount of our obligations and nature of our contractual restrictions pursuant to, and disputes that have or may hereafter arise under, the Reimbursement Agreement and the other agreements we entered into with Honeywell in connection with the Spin-Off;

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our reliance on Honeywell for the Honeywell Home trademark;

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potential material environmental liabilities;

•
our inability to maintain intellectual property agreements necessary to our business;

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potential material costs as a result of warranty claims, including product recalls, and product liability actions that may be brought against us;

•
potential material litigation matters; including the Securities Litigation described in this Form 10-K;

•
unforeseen U.S. federal income tax and foreign tax liabilities; and

•
certain factors discussed elsewhere in this Form 10-K.

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RESIDEO TECHNOLOGIES, INC.

Any forward-looking statements made by us in this Form 10-K 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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RESIDEO TECHNOLOGIES, INC.