Resideo Announces Third Quarter 2018 Financial Results

($ millions)

3Q
2017

3Q

2018

%

Change

YTD
2017

YTD
2018

%

Change

Net Sales

1,152

1,200

3,310

3,561

8%

   Organic

5%

6%

Net Income

23

311

1,252%

55

389

607%

Adjusted Net Income

62

88

42%

147

265

80%

EBITDA

75

192

114

(41%)

Adjusted EBITDA
(including environmental
indemnification payments)

121

117

304

361

19%

Adjusted EBITDA
(excluding environmental
indemnification payments)

156

152

(3%)

409

466

14%

Adjusted EBITDA less Capex

105

77

(27%)

266

298

12%

Table 2: Summary of Financial Results – Segment

($ millions)

3Q

2017

3Q

2018

%
Change

YTD
2017

YTD
2018

%
Change

Products

Sales

519

526

1%

1,461

1,567

7%

   Organic

2%

5%

Segment Profit

90

92

2%

239

290

21%

Distribution

Sales

633

674

6%

1,849

1,994

8%

   Organic

7%

7%

Segment Profit

38

39

3%

102

113

11%

Contacts:

Media:

Investors:

Dean Acosta

Joe Ragan

(832) 312-4768

(202) 957-5294

[email protected]

[email protected]

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM STATEMENT OF OPERATIONS

(unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

(Dollars in millions except per share data)

Net sales

$              1,200

$              1,152

$              3,561

$              3,310

Cost of goods sold 

853

816

2,525

2,355

Gross Profit

347

336

1,036

955

Selling, general and administrative expenses 

219

214

648

647

Other expense

146

65

322

165

Interest and other charges, net

-

(1)

-

(1)

365

278

970

811

Income (loss) before taxes

(18)

58

66

144

Tax expense (benefit)

(329)

35

(323)

89

Net income

$                 311

$                   23

$                 389

$                   55

Weighted Average Number of Common Shares Outstanding

Basic and Diluted (in thousands)

122,967

122,967

122,967

122,967

Per Share Amounts

Basic and Diluted net income per share

$                2.53

$                0.19

$                3.16

$                0.45

Table 4: COMBINED INTERIM BALANCE SHEET

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM BALANCE SHEET

(unaudited)

September 30,
2018

December 31,
2017

(Dollars in millions)

ASSETS

Current assets:

Cash and cash equivalents

$                 184

$                   56

Due from related parties, current

26

23

Accounts, notes and other receivables – net

783

779

Inventories

603

465

Other current assets

72

69

Total current assets

1,668

1,392

Property, plant and equipment – net

276

265

Goodwill

2,638

2,648

Other intangible assets - net

138

140

Deferred income taxes

4

5

Other assets

18

23

Total assets

$              4,742

$              4,473

LIABILITIES

Current liabilities:

Accounts payable

$                 850

$                 678

Due to related parties, current

162

60

Accrued liabilities

388

409

Total current liabilities

1,400

1,147

Deferred income taxes

100

377

Other liabilities

557

346

EQUITY

Invested equity

2,809

2,703

Accumulated other comprehensive (loss)

(124)

(100)

Total equity

2,685

2,603

Total liabilities and  equity

$              4,742

$              4,473

Table 5: COMBINED INTERIM STATEMENT OF CASH FLOWS

RESIDEO TECHNOLOGIES, INC.

COMBINED INTERIM STATEMENT OF CASH FLOWS

(unaudited)

Nine Months Ended
September 30,

2018

2017

(Dollars in millions)

Cash flows from operating activities:

Net income

$                389

$                  55

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

40

42

Amortization

9

8

Repositioning

5

21

Net payments for repositioning

(9)

(11)

Stock compensation expense

15

12

Pension expense

10

12

Deferred income taxes

(275)

-

Bad debt expense

7

2

Changes in assets and liabilities:

Accounts, notes and other receivables

(11)

(5)

Inventories

(142)

(90)

Other current assets

(4)

(18)

Other assets

(6)

(2)

Accounts payable

151

120

Accrued liabilities

(15)

(1)

Other Liabilities

211

35

Net cash provided by operating activities

375

180

Cash flows from investing activities:

Expenditures for property, plant and equipment

(63)

(38)

Proceeds received related to amounts due from related parties

7

13

Issuance related to amounts due from related parties

-

(13)

Net cash used for investing activities

(56)

(38)

Cash flows from financing activities:

Net (decrease) in invested equity

(300)

(142)

Proceeds received related to amounts due to related parties

1

-

Payments related to amounts due to related parties

(2)

(4)

Net cash flows from cash pooling

115

10

Net cash used for financing activities

(186)

(136)

Effect of foreign exchange rate changes on cash and cash equivalents

(5)

4

Net increase in cash and cash equivalents

128

10

Cash and cash equivalents at beginning of period

56

47

Cash and cash equivalents at end of period

$                184

$                  57

Table 6: RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME

RESIDEO TECHNOLOGIES, INC.

RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME

(unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

(Dollars in millions)

Net income (GAAP)

$                311

$                 23

$              389

$              55

Enviromental expense ⁽¹⁾

146

65

322

165

Estimated stand-alone costs ⁽²⁾

-

9

4

13

Stock compensation expense ⁽³⁾

6

4

15

12

Repositioning charges

-

2

5

21

Non-Operating (income) expense ⁽⁴⁾

-

(1)

1

1

Income tax adjustments ⁽⁵⁾

(340)

(5)

(366)

(15)

Adjusted Net Income (Non-GAAP)

123

97

370

252

Assumed cash payments related to Indemnification and Reimbursement Agreement obligations ⁽⁶⁾

35

35

105

105

Adjusted Net Income including Environmental indemnification payments (Non-GAAP)

$                  88

$                 62

$              265

$             147

(1) Represents historical environmental expenses as reported under 100% carryover basis.

(2) Represents the difference between our estimate of Selling, general and administrative costs as a stand-alone company and historical allocated costs, which includes corporate depreciation charges. The preliminary estimates at this time for the costs on a stand-alone basis would be approximately $265 million on an annual basis, which replaces the historical allocations on a carve-out basis of presentation.

(3) Stock compensation expense adjustment includes only non-cash expenses.

(4) Non-operating (income) expense adjustment excludes net interest (income).

(5) Represents the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of discrete tax items, including the income tax impacts of the Tax Act. The tax effect of pre-tax items excluded from Adjusted Net Income is computed using the statutory rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances.

(6) On a going forward basis, pursuant to the Indemnification and Reimbursement Agreement, we will be responsible to indemnify Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case including consequential damages in respect of specified properties contaminated through historical business operations, including the legal and other costs of defending and resolving such liabilities, 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; such payments will be subject to a cap of $140 million in respect of liabilities arising in any given year (exclusive of any late payment fees up to 5% per annum).

Table 7: RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

RESIDEO TECHNOLOGIES, INC.

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

(Dollars in millions)

Net income (GAAP)

$                 311

$                   23

$                 389

$                   55

Net interest (income) expense

-

-

(1)

(2)

Tax expense (benefit)

(329)

35

(323)

89

Depreciation

13

14

40

42

Amortization

3

3

9

8

EBITDA (Non-GAAP)

(2)

75

114

192

Enviromental expense ⁽¹⁾

146

65

322

165

Estimated stand-alone costs ⁽²⁾

2

11

9

18

Stock compensation expense ⁽³⁾

6

4

15

12

Non-Operating (income) expense ⁽⁴⁾

-

(1)

1

1

Repositioning charges

-

2

5

21

Adjusted EBITDA (Non-GAAP)

152

156

466

409

Assumed cash payments related to Indemnification and Reimbursement Agreement obligations ⁽⁵⁾

35

35

105

105

Adjusted EBITDA including Enviromental indemnification payments (Non-GAAP)

$                 117

$                 121

$                 361

$                 304

(1) Represents historical environmental expenses as reported under 100% carryover basis.

(2) Represents the difference between our estimate of Selling, general and administrative costs as a stand-alone company and historical allocated costs, which excludes corporate depreciation charges. The preliminary estimates at this time for the costs on a stand-alone basis would be approximately $265 million on an annual basis, which replaces the historical allocations on a carve-out basis of presentation.

(3) Stock compensation expense adjustment includes only non-cash expenses.

(4) Non-operating (income) expense adjustment excludes net interest (income).

(5) On a going forward basis, pursuant to the Indemnification and Reimbursement Agreement, we will be responsible to indemnify Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case including consequential damages in respect of specified properties contaminated through historical business operations, including the legal and other costs of defending and resolving such liabilities, 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; such payments will be subject to a cap of $140 million in respect of liabilities arising in any given year (exclusive of any late payment fees up to 5% per annum).

Table 8: RECONCILIATION OF SEGMENT PROFIT TO COMBINED INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES

RESIDEO TECHNOLOGIES, INC.

RECONCILIATION OF SEGMENT PROFIT TO COMBINED INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES

Three Months
Ended
September 30,

Nine Months
Ended
September 30,

2018

2017

2018

2017

(Dollars in millions)

Products segment profit

$                   92

$                   90

$                 290

$                 239

Distributions segment profit

39

38

113

102

Total segment profit

$                 131

$                 128

$                 403

$                 341

Pension expense

(3)

(4)

(10)

(12)

Repositioning

-

(2)

(5)

(21)

Other expense

(146)

(65)

(322)

(165)

Interest and other charges, net

-

1

-

1

Income (loss) before taxes

$                  (18)

$                   58

$                   66

$                 144

Table 9: RECONCILIATION OF ORGANIC SALES % CHANGE

RESIDEO TECHNOLOGIES, INC.

RECONCILIATION OF ORGANIC SALES % CHANGE

September 30, 2018

Three Months
Ended

Nine Months
Ended

(Dollars in millions)

Products sales growth

Net products sales growth (GAAP)

$                       7

$               106

% Change

1%

7%

Exclude: Foreign currency translation

-1%

2%

Organic growth (Non-GAAP)

2%

5%

Distribution sales growth

Net distribution sales growth (GAAP)

$                       41

$               145

% Change

6%

8%

Exclude: Foreign currency translation

-1%

1%

Organic growth (Non-GAAP)

7%

7%

Total sales growth

Total sales growth (GAAP)

$                       48

$               251

% Change

4%

8%

Exclude: Foreign currency translation

-1%

2%

Organic growth (Non-GAAP)

5%

6%

Table 10: ADJUSTED EBITDA INCLUDING ENVIRONMENTAL INDEMNIFICATION PAYMENTS LESS CAPEX

RESIDEO TECHNOLOGIES, INC.

ADJUSTED EBITDA INCLUDING ENVIRONMENTAL INDEMNIFICATION PAYMENTS LESS CAPEX

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

(Dollars in millions except per share data)

Cash flows from operating activities (GAAP)

$                 117

$                 111

$                 375

$                 180

Tax expense (benefit)

(329)

35

(323)

89

Net interest (income) expense

-

-

(1)

(2)

Deferred income tax

252

(1)

275

-

Change in operating assets and liabilities

(33)

(63)

(184)

(39)

Other non-cash expense ⁽¹⁾

(9)

(7)

(28)

(36)

EBITDA (Non-GAAP)

(2)

75

114

192

Enviromental expense ⁽²⁾

146

65

322

165

Estimated stand-alone costs ⁽³⁾

2

11

9

18

Stock compensation expense ⁽⁴⁾

6

4

15

12

Non-Operating (income) expense ⁽⁵⁾

-

(1)

1

1

Repositioning charges

-

2

5

21

Adjusted EBITDA (Non-GAAP)

152

156

466

409

Assumed cash payments related to Indemnification and Reimbursement Agreement obligations ⁽⁶⁾

35

35

105

105

Adjusted EBITDA including Environmental
indemnification payments (Non-GAAP)

117

121

361

304

Less Capex

40

16

63

38

Adjusted EBITDA including Environmental
indemnification payments less Capex (Non-GAAP)

$                   77

$                 105

$                 298

$                 266

(1) Includes non-cash stock compensation, pension, bad debt and repositioning expenses.

(2) Represents historical environmental expenses as reported under 100% carryover basis.

(3) Represents the difference between our estimate of Selling, general and administrative costs as a stand-alone company and historical allocated costs, which excludes corporate depreciation charges. The preliminary estimates at this time for the costs on a stand-alone basis would be approximately $265 million on an annual basis, which replaces the historical allocations on a carve-out basis of presentation.

(4) Stock compensation expense adjustment includes only non-cash expenses.

(5) Non-operating (income) expense adjustment excludes net interest (income).

(6) On a going forward basis, pursuant to the Indemnification and Reimbursement Agreement, we will be responsible to indemnify Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case including consequential damages in respect of specified properties contaminated through historical business operations, including the legal and other costs of defending and resolving such liabilities, 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; such payments will be subject to a cap of $140 million in respect of liabilities arising in any given year (exclusive of any late payment fees up to 5% per annum).

Table 11: RECONCILATION OF PRO FORMA NET INCOME TO PRO FORMA ADJUSTED EBITDA⁽¹⁾

RESIDEO TECHNOLOGIES, INC.

RECONCILIATION OF PRO FORMA NET INCOME TO PRO FORMA ADJUSTED EBITDA

(unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

(Dollars in millions except per share data)

Net income (Pro Forma)

$                   51

$                   15

$                 109

$                   30

Net interest (income) expense

15

17

48

48

Tax expense (benefit)

(76)

25

(78)

62

Depreciation

13

14

40

42

Amortization

3

3

9

8

EBITDA (Non-GAAP Pro Forma)

6

74

128

190

Environmental expense ⁽¹⁾

132

59

290

149

Estimated stand-alone costs ⁽²⁾

2

11

9

18

Stock compensation expense ⁽³⁾

6

4

15

12

Non-Operating (income) expense ⁽⁴⁾

(1)

(2)

(2)

(2)

Repositioning charges

-

2

5

21

Adjusted EBITDA (Non-GAAP Pro Forma)

145

148

445

388

Assumed cash payments related to Indemnification and Reimbursement Agreement obligations ⁽⁵⁾

35

35

105

105

Adjusted EBITDA including Environmental
indemnification payments (Non-GAAP Pro Forma)

$                 110

$                 113

$                 340

$                 283

(1) Represents environmental expenses under indemnification agreement on a 90% basis.

(2) Represents the difference between our estimate of Selling, general and administrative costs as a stand-alone company and historical allocated costs, which excludes corporate depreciation charges. The preliminary estimates at this time for the costs on a stand-alone basis would be approximately $265 million on an annual basis, which replaces the historical allocations on a carve-out basis of presentation.

(3) Stock compensation expense adjustment includes only non-cash expenses.

(4) Non-operating (income) expense adjustment excludes net interest (income).

(5) On a going forward basis, pursuant to the Indemnification and Reimbursement Agreement, we will be responsible to indemnify Honeywell in amounts equal to 90% of payments, which include amounts billed, with respect to certain environmental claims, remediation and, to the extent arising after the Spin-Off, hazardous exposure or toxic tort claims, in each case including consequential damages in respect of specified properties contaminated through historical business operations, including the legal and other costs of defending and resolving such liabilities, 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; such payments will be subject to a cap of $140 million in respect of liabilities arising in any given year (exclusive of any late payment fees up to 5% per annum).

Table 12: UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018⁽¹⁾

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(Dollars in millions)

Historical As

Pro Forma

Notes 

As Adjusted 

Reported 

Adjustments(1) 

Net sales

$                      3,561

$                             -

$                      3,561

Cost of goods sold 

2,525

-

2,525

Gross Profit

1,036

-

1,036

Selling, general and administrative expenses 

648

21

 a 

669

Other expense

322

(32)

 b 

290

Interest and other charges, net

-

46

 c, d, e 

46

Income (loss) before taxes

66

(35)

31

Tax expense (benefit)

(323)

245

 f 

(78)

Net income

$                         389

$                       (280)

$                         109

(1) The change in our cost structure related to our company becoming an independent, publicly traded company is not reflected above.

a)

Reflects the impact of the Trademark License Agreement with Honeywell in respect of certain Products segment sales. 

b)

Reflects the impact of the Indemnification and Reimbursement Agreement with Honeywell pursuant to which we will have an obligation to make cash payments to Honeywell in amounts equal to 90% of Honeywell's certain environmental-related liabilities, net of recoveries, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities. The amount payable by the Company in respect of such liabilities arising in any given calendar year will be subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). 

Accordingly, Other expense, net will decrease $32 million for nine months ended September 30, 2018, which is the difference between historical expense as reported under 100% carryover basis for such environmental expenses and the indemnified expense pursuant to the Indemnification and Reimbursement Agreement. The adjustment assumes that cash payments made by Honeywell related to indemnified environmental liabilities during a given year will not exceed $156 million in which case the cap on payments ($156 million x 90% = $140 million) to be made by Resideo to Honeywell would not be exceeded. 

c)

Adjustments reflect interest expense and commitment fees related to indebtedness in an aggregate principal amount of $1,225 million in connection with the consummation of the Spin-Off and that was used primarily to repay an obligation incurred as part of the separation from Honeywell.  The adjustment reflects that the indebtedness comprise loan facilities in an aggregate principal amount of $825 million and senior unsecured notes in an aggregate principal amount of $400  million and a revolving credit facility in an aggregate undrawn amount of $350 million. Total interest expense will increase by $50 million for the nine months ended September 30, 2018.

d)

Reflects the impact of the settlement of cash pooling and short-term notes receivables and payables.

e)

Reflects an estimate of interest costs and expected return on plan assets for the defined benefit pension plans.

f)

For nine months ended September 30, 2018, income tax expense increased by $245 million. This includes adjustments to the provisional tax amounts related to the deemed repatriation transition tax and taxes on undistributed earnings of an increase of $262 million, which is offset by a decrease of $17 million as a result of the income tax effects on adjustments included in pro forma notes a), c), d) and e).

Table 13: UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2018⁽¹⁾

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

(Dollars in millions)

Historical As

Pro Forma

Notes 

As Adjusted 

Reported 

Adjustments(1) 

Net sales

$                      1,200

$                             -

$                      1,200

Cost of goods sold 

853

-

853

Gross Profit

347

-

347

Selling, general and administrative expenses 

219

7

 a 

226

Other expense

146

(14)

 b 

132

Interest and other charges, net

-

14

 c, d, e 

14

Income (loss) before taxes

(18)

(7)

(25)

-

-

Tax expense (benefit)

(329)

253

 f 

(76)

-

-

Net income

$                         311

$                       (260)

$                           51

(1) The change in our cost structure related to our company becoming an independent, publicly traded company is not reflected above.

a)

Reflects the impact of the Trademark License Agreement with Honeywell in respect of certain Products segment sales. 

b)

Reflects the impact of the Indemnification and Reimbursement Agreement with Honeywell pursuant to which we will have an obligation to make cash payments to Honeywell in amounts equal to 90% of Honeywell's certain environmental-related liabilities, net of recoveries, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities. The amount payable by the Company in respect of such liabilities arising in any given calendar year will be subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). 

Accordingly, Other expense, net will decrease $14 million for three months ended September 30, 2018, which is the difference between historical expense as reported under 100% carryover basis for such environmental expenses and the indemnified expense pursuant to the Indemnification and Reimbursement Agreement. The adjustment assumes that cash payments made by Honeywell related to indemnified environmental liabilities during a given year will not exceed $156 million in which case the cap on payments ($156 million x 90% = $140 million) to be made by Resideo to Honeywell would not be exceeded. 

c)

Adjustments reflect interest expense and commitment fees related to indebtedness in an aggregate principal amount of $1,225 million in connection with the consummation of the Spin-Off and that was used primarily to repay an obligation incurred as part of the separation from Honeywell. The adjustment reflects that the indebtedness comprise loan facilities in an aggregate principal amount of $825 million and senior unsecured notes in an aggregate principal amount of $400  million and a revolving credit facility in an aggregate undrawn amount of $350 million. Total interest expense will increase by $17 million for the three months ended September 30, 2018.

d)

Reflects the impact of the settlement of cash pooling and short-term notes receivables and payables.

e)

Reflects an estimate of interest costs and expected return on plan assets for the defined benefit pension plans.

f)

For three months ended September 30, 2018, income tax expense increased by $253 million. This includes adjustments to the provisional tax amounts related to the deemed repatriation transition tax and taxes on undistributed earnings of an increase of $259 million, which is offset by a decrease of $6 million as a result of the income tax effects on adjustments included in pro forma notes a), c), d) and e).

Table 14: UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017⁽¹⁾

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(Dollars in millions)

Historical As

Pro Forma

Notes 

As Adjusted 

Reported 

Adjustments(1) 

Net sales

$                      3,310

$                             -

$                      3,310

Cost of goods sold 

2,355

-

2,355

Gross Profit

955

-

955

Selling, general and administrative expenses 

647

21

 a 

668

Other expense

165

(16)

 b 

149

Interest and other charges, net

(1)

47

 c, d, e 

46

Income (loss) before taxes

144

(52)

92

-

Tax expense (benefit)

89

(27)

 f 

62

-

Net income

$                           55

$                         (25)

$                           30

(1) The change in our cost structure related to our company becoming an independent, publicly traded company is not reflected above.

a)

Reflects the impact of the Trademark License Agreement with Honeywell in respect of certain Products segment sales. 

b)

Reflects the impact of the Indemnification and Reimbursement Agreement with Honeywell pursuant to which we will have an obligation to make cash payments to Honeywell in amounts equal to 90% of Honeywell's certain environmental-related liabilities, net of recoveries, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities. The amount payable by the Company in respect of such liabilities arising in any given calendar year will be subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). 

Accordingly, Other expense, net will decrease $16 million for nine months ended September 30, 2017, which is the difference between historical expense as reported under 100% carryover basis for such environmental expenses and the indemnified expense pursuant to the Indemnification and Reimbursement Agreement. The adjustment assumes that cash payments made by Honeywell related to indemnified environmental liabilities during a given year will not exceed $156 million in which case the cap on payments ($156 million x 90% = $140 million) to be made by Resideo to Honeywell would not be exceeded. 

c)

Adjustments reflect interest expense and commitment fees related to indebtedness in an aggregate principal amount of $1,225 million in connection with the consummation of the Spin-Off and that was used primarily to repay an obligation incurred as part of the separation from Honeywell.  The adjustment reflects that the indebtedness comprise loan facilities in an aggregate principal amount of $825 million and senior unsecured notes in an aggregate principal amount of $400  million and a revolving credit facility in an aggregate undrawn amount of $350 million. Total interest expense will increase by $51 million for the nine months ended September 30, 2017.

d)

Reflects the impact of the settlement of cash pooling and short-term notes receivables and payables.

e)

Reflects an estimate of interest costs and expected return on plan assets for the defined benefit pension plans.

f)

For nine months ended September 30, 2017, income tax expense decreased by $27 million, which are the result of the income tax effects on adjustments included in pro forma notes a), c), d) and e).

Table 15: UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2017⁽¹⁾

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

(Dollars in millions)

Historical As

Pro Forma

Notes 

As Adjusted 

Reported 

Adjustments(1) 

Net sales

$                      1,152

$                             -

$                      1,152

Cost of goods sold 

816

-

816

Gross Profit

336

-

336

Selling, general and administrative expenses 

214

8

 a 

222

Other expense

65

(6)

 b 

59

Interest and other charges, net

(1)

16

 c, d, e 

15

Income (loss) before taxes

58

(18)

40

-

-

Tax expense (benefit)

35

(10)

 f 

25

-

-

Net income

$                           23

$                           (8)

$                           15

(1) The change in our cost structure related to our company becoming an independent, publicly traded company is not reflected above.

a)

Reflects the impact of the Trademark License Agreement with Honeywell in respect of certain Products segment sales. 

b)

Reflects the impact of the Indemnification and Reimbursement Agreement with Honeywell pursuant to which we will have an obligation to make cash payments to Honeywell in amounts equal to 90% of Honeywell's certain environmental-related liabilities, net of recoveries, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities. The amount payable by the Company in respect of such liabilities arising in any given calendar year will be subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). 

Accordingly, Other expense, net will decrease $6 million for three months ended September 30, 2017, which is the difference between historical expense as reported under 100% carryover basis for such environmental expenses and the indemnified expense pursuant to the Indemnification and Reimbursement Agreement. The adjustment assumes that cash payments made by Honeywell related to indemnified environmental liabilities during a given year will not exceed $156 million in which case the cap on payments ($156 million x 90% = $140 million) to be made by Resideo to Honeywell would not be exceeded. 

c)

Adjustments reflect interest expense and commitment fees related to indebtedness in an aggregate principal amount of $1,225 million in connection with the consummation of the Spin-Off and that was used primarily to repay an obligation incurred as part of the separation from Honeywell. The adjustment reflects that the indebtedness comprise loan facilities in an aggregate principal amount of $825 million and senior unsecured notes in an aggregate principal amount of $400  million and a revolving credit facility in an aggregate undrawn amount of $350 million. Total interest expense will increase by $17 million for the three months ended September 30, 2017.

d)

Reflects the impact of the settlement of cash pooling and short-term notes receivables and payables.

e)

Reflects an estimate of interest costs and expected return on plan assets for the defined benefit pension plans.

f)

For three months ended September 30, 2017, income tax expense decreased by $10 million, which are the result of the income tax effects on adjustments included in pro forma notes a), c), d) and e).