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 and six months ended July 2, 2022 and should be read in conjunction with the unaudited Consolidated Financial Statements and the notes thereto contained elsewhere in this Form 10-Q. The financial information as of July 2, 2022 should be read in conjunction with the consolidated and combined financial statements for the year ended December 31, 2021 contained in our 2021 Annual Report on Form 10-K (the "2021 Annual Report on Form 10-K").

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:


industry cyclicality;
•
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;
•
inability to consummate acquisitions on satisfactory terms or to integrate such
acquisitions effectively;
•
our ability to retain or expand relationships with significant customers;
•
dependence upon information technology infrastructure having adequate
cyber-security functionality;
•
economic, political, regulatory, foreign exchange and other risks of
international operations, including the impact of tariffs;
•
changes in prevailing global and regional economic conditions;
•
our failure to execute on key business transformation programs and activities;
•
the failure to increase productivity through sustainable operational
improvements;
•
fluctuation in financial results due to the seasonal nature of portions of our
business;
•
our ability to recruit and retain qualified personnel;
•
labor disputes, work stoppages, other disruptions, or the need to relocate any
of our facilities?
•
changes in legislation or government regulations or policies?
•
the significant failure or inability to comply with the specifications and
manufacturing requirements of our original equipment manufacturers ("OEMs")
customers;
•
the operational constraints and financial distress of third parties?
•
our ability to borrow funds and access capital markets?
•
the amount of our obligations and nature of our contractual restrictions
pursuant to, and disputes that have or may hereafter arise under, the
Reimbursement Agreement and the other agreements we entered into with Honeywell
in connection with the Spin-Off;

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our reliance on Honeywell for the Honeywell Home trademark;
•
potential material environmental liabilities?
•
our inability to maintain intellectual property agreements necessary to our
business;
•
potential material costs as a result of warranty rights or claims, including
product recalls, and product liability actions that may be brought against us?
•
potential material litigation matters;
•
unforeseen U.S. federal income tax and foreign tax liabilities? and
•
certain factors discussed elsewhere in this Form 10-Q.


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These and other factors are more fully discussed in our filings with the U.S. Securities and Exchange Commission, including the "Risk Factors" section in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report on Form 10-K") and "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in this Form 10-Q. There have been no material changes to the risk factors described in our 2021 Annual Report on Form 10-K. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.

Overview and Business Trends

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

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

Our 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. We are experiencing global shortages in key materials and components in certain instances impacting our ability to supply certain products. Additionally, the current inflationary environment has resulted in higher raw materials, freight, and other costs, and unfavorable foreign currency impacts from a stronger U.S. dollar.

Second Quarter Highlights

Net revenue increased $209 million, or 14%, over the second quarter prior year primarily from $128 million in revenue from the First Alert and Arrow acquisitions and higher selling prices for our products in response to the current inflationary environment. Partially offsetting these increases were foreign currency fluctuations of approximately 300 bps or $40 million.

Gross profit as a percent of net revenues was 28% for the three months ended July 2, 2022, an approximately 200 bps increase over the same period last year. The drivers of the increase include favorable price and positive sales mix, including from recent acquisitions, of 400 bps. Partially offsetting the increases were higher costs as a result of the current inflationary environment of 200 bps.

Research and development expenses for the three months ended July 2, 2022 was $28 million, an increase of $6 million from $22 million for the three months ended July 3, 2021. The increase was driven by acquisitions and new product investments.




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Selling, general and administrative expenses for the three months ended July 2, 2022 were $244 million, an increase of $8 million or 3% from $236 million for the three months ended July 3, 2021. The increase was primarily driven by increased costs associated with the First Alert acquisition of $16 million, labor inflation of $6 million, and investment of $4 million offset by lower legal and foreign currency impacts. As a percentage of net sales, selling, general and administrative expense improved 200 bps despite increases incurred as a result of acquisitions, labor inflation, and foreign currency fluctuations.

Net income for the three months ended July 2, 2022 was $94 million compared to net income of $58 million for the three months ended July 3, 2021, a 62% increase and $0.25 improvement in earnings per share. The improvement is a result of the discussion above.

Unrestricted cash on hand was approximately $251 million and liquidity was approximately $751 million as of July 2, 2022. Also, there were no borrowings under the $500 million revolving credit facility.

COVID-19 and Recent Macroeconomic Environment

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



Results of Operations


We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280, Segment Reporting. We have determined that we have two reportable segments, organized and managed principally by the different services provided. While the segments often operate using shared infrastructure, each reportable segment is managed to address specific customer needs in these diverse market sectors. We report all other business activities in Corporate and unallocated costs. Corporate assets consist primarily of cash, investments, prepaid expenses, current and deferred taxes and property, plant and equipment. These items are not allocated to the operating segments. Corporate unallocated expenses primarily include share-based compensation expenses, restructuring charges, acquisition costs, gain on legal settlements, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategy, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, and other income (expense).

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