EX-99.1 7 d601987dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

 

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            , 2018

Dear Honeywell Shareowner:

On October 10, 2017, we announced our intention to spin our Homes and ADI global distribution business. I am pleased to confirm that we expect to distribute shares in the new company, Resideo Technologies, Inc., before the end of the year. We will provide more details on this distribution as the effective spin date is finalized.

Honeywell has been helping homeowners stay comfortable since 1885 and has one of the broadest home security and safety and comfort portfolios in the industry, with approximately 3,000 active and pending patents worldwide and sales in approximately 40 countries. Thanks to its outstanding set of offerings, Resideo will be a leader in the home heating, ventilation and air conditioning (HVAC) controls and security markets, and a leading global distributor of security and fire protection products.

Resideo will enter a long-term license agreement with Honeywell for use of the Honeywell Home brand, which will give its offerings credibility with customers around the world. In addition, its pipeline of innovative products and software, unparalleled presence in the home and low-voltage product distribution markets, large network of professional partners and customers, and strong leadership team and Board of Directors will position this company extremely well for future success.

I encourage you to read the attached information statement about Resideo, as well as the supplemental information on Honeywell’s investor relations website. The information statement describes the spin in detail and contains important business and financial information. Once the spin is effective, each Honeywell shareowner will receive shares of Resideo Technologies, Inc. based on the number of shares of Honeywell common stock held by the shareowner as of the record date.

Today’s announcement reflects our continued commitment to generate shareowner value as Honeywell becomes the premier software-industrial company. I am confident that Resideo will be successful following its separation from Honeywell, and look forward to the bright futures of both companies.

Sincerely,

Darius Adamczyk

Chairman and CEO

Honeywell


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            , 2018

To Our Future Resideo Shareowners:

Thank you for your interest in Resideo, Honeywell’s planned spin company that is focused on technology for the residential homeowner. We understand that a house is the biggest investment most of us will ever make. While technology makes it possible to have a home that is smarter, more energy efficient, more secure, and easier to control, consumers face overwhelming choices when it comes to modernizing their home. We believe there’s a great opportunity for a company like Resideo to offer simple solutions to connect the systems and accessories that make a home smart.

When we launch Resideo as a standalone, publicly traded company, we will be uniquely positioned to lead the global smart home market for four key reasons:

 

  1)

We are a global leader in professionally installed residential comfort and security and the leading global wholesale distributor of security and low voltage products. We delivered more than $4.5 billion of sales in 2017, and that size allows us to achieve economies of scale in production, distribution and speed to market, while maintaining our status as the partner of choice in the smart home ecosystem. As a standalone company, we will be agile enough to respond to our dynamic markets and well-positioned to make strategic investments in our future.

 

  2)

We have a long-term agreement with Honeywell to license the Honeywell Home brand. That is an important ingredient to our success, but also an important recognition of our heritage. Resideo begins with more than 100 years of domain knowledge and expertise connecting the home. The Honeywell brand is in more than 150 million homes and reflects decades of trust built with dealers and installers, and a promise of reliability for consumers. More than one-third of our product sales come from connected devices, which unlock data to provide millions of consumers with better insights along with peace of mind knowing technology is making their home a better place to live.

 

  3)

We expect to benefit from major trends influencing consumer decisions around the globe. There are expected to be about 75 billion connected devices globally by 2025, up from just 20 billion in 2017. We currently have approximately 4.7 million connected customers and more than 30 million sensor points – and we expect these numbers to grow rapidly.

 

  4)

Our customers include professional contractors, service provider partners, and those who prefer to do it themselves (DIY). They want a smart home that integrates seamlessly, with devices that are compatible regardless of who manufactured them. This is why our products work effectively with the most widely used home automation systems – Amazon Alexa, Apple HomeKit, Google Home, and Samsung SmartThings. Our commitment to working well with others makes us an attractive and highly sought-after partner – in fact, it’s why we currently have 3,000 third party developers creating mobile apps to integrate with our solutions.

We are excited about the company Resideo will be on Day 1 and the ways we intend to advance the smart home industry in the years to come. We are passionate about improving lives around the globe through leading home technologies. We have assembled a world-class team of talent to lead Resideo with the know-how to make our spin successful. The attached information statement details our strategy and plans for near and long-term growth to generate value for our shareowners.

Sincerely,

Mike Nefkens

President and CEO

Resideo Technologies, Inc.


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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

SUBJECT TO COMPLETION—DATED OCTOBER 2, 2018

INFORMATION STATEMENT

Resideo Technologies, Inc.

Common Stock

(par value $.001 per share)

 

 

We are sending you this Information Statement in connection with the spin-off by Honeywell International Inc. (“Honeywell”) of its wholly owned subsidiary, Resideo Technologies, Inc. (the “Company” or “SpinCo”). To effect the spin-off, Honeywell will distribute all of the shares of SpinCo common stock on a pro rata basis to the holders of Honeywell common stock. We expect that the distribution of SpinCo common stock will be tax-free to holders of Honeywell common stock for U.S. federal income tax purposes, except for cash that stockholders may receive (if any) in lieu of fractional shares.

If you are a record holder of Honeywell common stock as of the close of business on October 16, 2018, which is the record date for the distribution, you will be entitled to receive one share of SpinCo common stock for every six shares of Honeywell common stock that you hold on that date. Honeywell will distribute the shares of SpinCo common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of SpinCo common stock.

The distribution will be effective as of 12:01 a.m., New York City time, on October 29, 2018. Immediately after the distribution becomes effective, SpinCo will be an independent, publicly traded company.

Honeywell’s stockholders are not required to vote on or take any other action to approve the spin-off. We are not asking you for a proxy, and request that you do not send us a proxy. Honeywell stockholders will not be required to pay any consideration for the shares of SpinCo common stock they receive in the spin-off, and they will not be required to surrender or exchange their shares of Honeywell common stock or take any other action in connection with the spin-off.

No trading market for SpinCo common stock currently exists. We expect, however, that a limited trading market for SpinCo common stock, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and we expect “regular-way” trading of SpinCo common stock will begin on the first trading day after the distribution date. We intend to list SpinCo common stock on the New York Stock Exchange, under the ticker symbol “REZI.”

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 25 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is October    , 2018.


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TABLE OF CONTENTS

 

     Page  

Trademarks and Copyrights

     ii  

Industry and Market Data

     ii  

Non-GAAP Financial Information

     ii  

Information Statement Summary

     1  

Risk Factors

     25  

Cautionary Statement Concerning Forward-Looking Statements

     57  

The Spin-Off

     59  

Dividend Policy

     68  

Capitalization

     69  

Selected Historical and Unaudited Pro Forma Combined Financial Data

     70  

Unaudited Pro Forma Combined Financial Statements

     75  

Business

     83  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     106  

Management and Board of Directors

     125  

Compensation Discussion and Analysis

     132  

Security Ownership of Certain Beneficial Owners and Management

     137  

Certain Relationships and Related Party Transactions

     139  

Description of Our Capital Stock

     148  

Where You Can Find More Information

     152  

Index to Combined Financial Statements

     F-1  

 

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TRADEMARKS AND COPYRIGHTS

We own or have rights to various trademarks, logos, service marks and trade names that we use in connection with the operation of our business (including the Honeywell trademarks, logos, service marks and trade names, which are used under license from Honeywell International Inc.). We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, certain of our trademarks, service marks, trade names and copyrights referred to in this Information Statement are listed without the ™, ® or © symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, trade names and copyrights included or referred to in this Information Statement.

INDUSTRY AND MARKET DATA

This Information Statement includes industry and market data that we obtained from various third party industry and market data sources. While we believe the projections of the industry sources referenced in this Information Statement are reasonable, forecasts based upon such data involve inherent uncertainties, and actual results are subject to change based upon various factors beyond our control. These third party sources include but are not limited to the Building Services Research and Information Association (“BSRIA”), the Bureau of Economic Analysis (“BEA”), the U.S. Census Bureau, Gartner Inc. (“Gartner”), International Data Corporation (“IDC”), IHS Markit (“IHS”), the National Association of Home Builders (“NAHB”), Parks Associates, Inc. (“Parks Associates”), Statista.com (“Statista”) and Navigant Consulting (“Navigant”). All such industry data is available publicly or for purchase and was not commissioned specifically for us. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, forecasts based upon such data involve inherent uncertainties, and actual results regarding the subject matter of such forecasts are subject to change based upon various factors, including those beyond our control and those discussed under the headings “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in this Information Statement.

NON-GAAP FINANCIAL INFORMATION

We provide financial information not in accordance with accounting principles generally accepted in the United States (“non-GAAP” financial information) to enhance the understanding of our financial information prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. The non-GAAP financial information presented may be determined or calculated differently by other companies. See “Selected Historical and Unaudited Pro Forma Combined Financial Data” for more information.

 

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INFORMATION STATEMENT SUMMARY

In this Information Statement, unless the context otherwise requires:

 

   

The “Company,” “Resideo,” “SpinCo,” “we,” “our” and “us” refer to Resideo Technologies, Inc. and its consolidated subsidiaries after giving effect to the Spin-Off; and

 

   

“Honeywell” or “Parent” refers to Honeywell International Inc. and its consolidated subsidiaries.

The transaction in which Honeywell will distribute to its stockholders all of the shares of our common stock is referred to in this Information Statement as the “Share Distribution” or the “Spin-Off.” Prior to Honeywell’s Share Distribution of the shares of our common stock to its stockholders, Honeywell will undertake a series of internal reorganization transactions, following which SpinCo will hold, directly or through its subsidiaries, Honeywell’s residential Comfort & Care and Security & Safety product portfolio and ADI Global Distribution businesses, which we refer to as the “Business.” We refer to this series of internal reorganization transactions as the “Reorganization Transactions.”

The Spin-Off

On October 10, 2017, Honeywell announced plans for the complete legal and structural separation of our Business from Honeywell. In reaching the decision to pursue the Spin-Off, Honeywell considered a range of potential structural alternatives for the Business and concluded that the Spin-Off is the most attractive alternative for enhancing stockholder value.

To effect the separation, first, Honeywell will undertake the series of Reorganization Transactions. Honeywell will subsequently distribute all of our common stock to Honeywell’s stockholders, and following the Share Distribution, SpinCo, holding the Business, will become an independent, publicly traded company.

Prior to completion of the Spin-Off, we intend to enter into a Separation and Distribution Agreement and several other agreements with Honeywell related to the Spin-Off. These agreements including Transition Services, Tax Matters, Employee Matters, Trademark License, Patent Cross-License and Indemnification and Reimbursement Agreements, will govern the relationship between Honeywell and SpinCo up to and after completion of the Spin-Off and allocate between Honeywell and SpinCo various assets, liabilities and obligations, including employee benefits, intellectual property, environmental and tax-related assets and liabilities and in certain cases will result in certain significant ongoing payments from SpinCo to Honeywell. See “Certain Relationships and Related Party Transactions” for more information.

Completion of the Spin-Off is subject to the satisfaction or waiver of a number of conditions. In addition, Honeywell has the right not to complete the Spin-Off if, at any time, Honeywell’s board of directors (the “Honeywell Board”) determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Honeywell or its stockholders, or is otherwise not advisable. See “The Spin-Off—Conditions to the Spin-Off” for more information.

Following the Spin-Off, SpinCo and Honeywell will each have a more focused business better positioned to invest in growth opportunities through tailored capital allocation and will be better able to execute on each company’s specific strategic plans. SpinCo primarily serves residential end markets through its Products segment and non-residential end markets through its Distribution segment. SpinCo will specifically focus on the professional installer and OEM channels while developing innovative consumer solutions. SpinCo also plans to target investments to grow in attractive distribution markets and invest selectively in growth areas including connected home solutions. Further, the Spin-Off will allow our management team to devote its time and attention to corporate strategies and policies that are based specifically on the needs of our Business and its dynamic end



 

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markets. We plan to create incentives for our management and employees that are more closely tied to business performance and our stockholders’ expectations, which we believe will help us attract and retain highly qualified personnel. Additionally, we believe the Spin-Off will help align our stockholder base with the characteristics and risk profile of our business. See “The Spin-Off—Reasons for the Spin-Off” for more information.

Aspects of the Spin-Off may increase the risks associated with ownership of shares of SpinCo. In connection with the Spin-Off, we expect to incur substantial indebtedness in an aggregate principal amount of approximately $1,225 million in the form of senior secured term loans and senior unsecured notes, the net proceeds of which will be received by Honeywell substantially concurrently with the consummation of the Spin-Off. We also intend to enter into a revolving credit facility to be available for our working capital and other cash needs from time to time in an aggregate committed amount as of the date of the Spin-Off of $350 million. The terms of such indebtedness are subject to change and will be finalized prior to the closing of the Spin-Off. See “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information. In addition, we intend to enter into an Indemnification and Reimbursement Agreement, pursuant to which we will have an obligation to make cash payments to Honeywell related to certain of Honeywell’s environmental-related liabilities (as defined herein). See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement.” Furthermore, as an independent entity we may lose some of the benefits of purchasing power, borrowing leverage and available capital for investments associated with being a larger entity. See “Risk Factors” in this Information Statement. As a consequence of the foregoing, there is no guarantee that any dividends will be declared on our common stock by our board of directors (our “Board”), or if so declared, will be continued in the future. For more information, see “Dividend Policy.”

Following the Spin-Off, we expect our common stock to trade on the New York Stock Exchange under the ticker symbol “REZI.”

On October 10, 2017, together with the announcement of the Spin-Off, Honeywell announced plans for the complete legal and structural separation of its Transportation Systems business, which business will be operated under the company name Garrett Motion Inc. We refer to this potential transaction as the “Garrett Spin-Off.” The Garrett Spin-Off is separate from the Spin-Off of our Company and neither spin-off is conditioned upon completion of the other.



 

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When it’s really important to your family and home, it’s Resideo

 

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Our Company

We are a leading global provider of critical comfort and security solutions primarily in residential environments, with a presence in over 150 million homes globally. Our products, which benefit from the trusted, well-established Honeywell brand, are installed in over 15 million homes annually, allowing SpinCo to launch innovative technologies and services at scale. After the Spin-Off, these products will be marketed and sold under the Honeywell Home brand pursuant to a 40 year license agreement with Honeywell. We have a long-standing leadership position in the traditional/non-connected products space that contributes significantly to our net sales. Our growing portfolio of connected home solutions is one of the largest and most comprehensive in the market. Our connected solutions are supported by software platforms (which we expect to consolidate in a single platform and mobile application) that allow consumers and channel partners to easily install, use and maintain our solutions and third party devices. These platforms interact with other ecosystems to control SpinCo’s and others’ home automation devices. Over 4.7 million of our customers are connected, providing access to control, monitoring and alerts, and we have approximately 30 million installed sensors generating more than 250 billion data transmissions annually. Our broad portfolio of innovative products is supported by approximately 3,000 worldwide active and pending patents, delivered through a comprehensive network of over 110,000 professional contractors, more than 3,000 distributors and over 1,200 original equipment manufacturers (“OEMs”), as well as major retailers and online merchants.

Our ADI Global Distribution business (“ADI”) is the leading wholesale distributor of security products, and is independently recognized for superior customer service. Through over 200 stocking locations in 17 countries, ADI distributes more than 350,000 products from over 1,000 manufacturers to a customer base of over 100,000 contractors. We believe this global footprint gives us distinct scale and network advantages in our core products over our competitors. Further, we believe our customers derive great value from the advice and recommendations of our knowledgeable design specialists allowing our customers to better meet the technical and systems integration expertise requirements to install and service professional security systems. We continue to transform the industry with value-added services such as presales system design and 24/7 order pick-up, and the selective introduction of new product categories such as professional audio visual. Additionally, ADI has long been an important channel to market for our security products, providing a level of end-customer intimacy that drives our ability to develop successful new products at an accelerated rate and insights into current market trends that help us quickly adapt our product portfolio to meet evolving customer needs. Similarly, ADI is an important channel to market for third party manufacturers, whose products represent a significant majority of ADI’s net sales.

We intend to expand and market our extensive portfolio and distribution base in several ways. We view our long-standing, mutually beneficial relationships with professional contractors and OEM channels as a key differentiator in our Products segment and plan to continue to invest in and grow with these channel partners. We believe the global connected home market is in the early stages of broad consumer adoption, with Gartner projecting the installed base of “connected things” in the consumer segment to grow from approximately four billion in 2016 to more than 12 billion in 2020 and we intend to expand our connected solutions and services offerings to capitalize on this trend. We also intend to expand ADI’s geographic footprint, product categories and services to drive overall sales, including SpinCo’s security products business.

Segments

We manage our business operations through two segments, Products and Distribution, which contributed 49% and 51%, respectively, of our net sales before intersegment eliminations for the year ended December 31, 2017.



 

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Products

Our Products segment had net sales before intersegment eliminations of $2,379 million for the year ended December 31, 2017, of which $337 million were sold to ADI. Management estimates that net sales generated from our Products segment are primarily from residential end-markets. Included in our Products segment are 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. Products consist of solutions in the following Comfort & Care and Security & Safety categories:

 

   

Comfort & Care: Our Comfort & Care solutions have historically been marketed and sold primarily under the Honeywell brand, and after the Spin-Off, these products and solutions will be marketed and sold under the Honeywell Home brand pursuant to a 40 year license agreement with Honeywell. These solutions include home products, services and technologies including:

 

   

Temperature and Humidity Control Solutions: Devices to control air conditioners and heating equipment, thermostats and zoning devices, control panels, dampers and actuators, through brands and product families such as Lyric, Prestige, RedLINK, T-Series, TrueZone, FocusPro and VisionPro.

 

   

Thermal Solutions: Devices to control heating and cooling equipment, such as water heaters, boilers, furnaces, heat pumps and air heaters and combustion critical components such as electronic controls, actuators, gas valves and ignition controls, through brands and product families such as SCOT and Ermaf.

 

   

Water Solutions: Devices to control hydronic heating, cooling, and potable water solutions, including control panels, zone valves, balancing valves, thermostatic radiator valves, temperature valves, floor temperature sensors and accessories, pressure regulators, backflow preventers and potable water care products to filter, clean and soften water, through brands and product families such as SmartT and Aquatrol.

 

   

Air Solutions: Devices to control air quality, such as whole home humidifiers and dehumidifiers, air filters, air purification and odor control solutions and ventilation systems and controls, through brands and product families such as TrueEASE, Micro Defense and TrueDRY.

 

   

Remote Patient Monitoring Software Solutions (telehealth): Systems that record, organize and transmit patient health data to health service providers to monitor patient well-being, helping patients continue treatment and recovery in their homes under remote supervision, through brands and product families such as Life Stream and Life Care Solutions.

 

   

Software Solutions: Global software platforms and mobile applications that provide contractors and consumers with access to services such as demand response, energy management, auto-replenishment services and predictive appliance diagnostics, through brands and product families such as Lyric and Total Connect Comfort.

 

   

Security & Safety: Our Security & Safety solutions have historically been marketed and sold primarily under the Honeywell brand and after the Spin-Off will be sold under the Honeywell brand. They include professionally-installed and monitored intrusion and life safety detection and alarm systems, as well as self-installed and self-monitored awareness solutions including:

 

   

Security Panels: Control devices that communicate with sensors that receive event or condition signals and send those signals to a monitoring station and cloud infrastructure, through brands and product families such as Vista, Lyric and Lynx.

 

   

Sensors: Devices that detect intrusion (for example, motion, opening of doors and windows and breaking of glass), smoke, carbon monoxide and water and transmit a signal to a security panel, through brands and product families such as 5800 and SiX.



 

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Peripherals: Accessories that interact with security systems, such as keypads and key-fobs, through brands and product families such as 5800 and Videofied.

 

   

Wire and Cable: Low voltage electrical wiring and category cable, through brands and product families such as Genesis Series.

 

   

Software Solutions: Global software platforms and mobile applications that provide contractors and consumers with access to services such as alarm monitoring, communication, automation and video services. In addition, we provide our contractors with data analytics tools, through our AlarmNet 360 software suite. These solutions are sold through brands and product families such as Total Connect 2.0 and AlarmNet 360.

 

   

Communication Devices: Devices that transmit notifications and security information from security systems to monitoring stations, such as cellular radios and internet and telephone line communicators, through brands and product families such as LTE radio.

 

   

Video Cameras: Battery-operated indoor and outdoor video motion viewers that detect motion and enable live “look-in” remotely, and Wi-Fi cameras for indoor and outdoor use, through brands and product families such as Videofied and Total Connect cameras.

 

   

Awareness Solutions: Self-installed and self-monitored systems that include a home gateway/hub, cameras and awareness sensors to detect motion and sounds, opening and closing of doors, entry and exit of known users of the system (facial recognition) and provide alerts to the user via a mobile app, through brands and product families such as Honeywell Smart Home System and Lyric.

 

   

Cloud Infrastructure: Network operating center that routes signals between home and monitoring station and enables secured, remote data transmissions, through brands and product families such as AlarmNet and Total Connect.

 

   

Installation and Maintenance Tools: Software tools and applications to enable security contractors to install, program and maintain security systems, through brands and product families such as AlarmNet 360 and Compass.

Eleven of the top twelve most appealing smart home use cases reported by Parks Associates concern comfort, security and safety solutions that are directly addressed by our product offerings, and a number of our end-to-end solutions have applications across Comfort & Care and Security & Safety products. We are strongly positioned to provide products that enhance consumers’ comfort, convenience and sense of security and work together to contribute to a connected home ecosystem. Some of these cross-product offerings are discussed in greater detail in “Business—Products.”



 

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Products Segment: Net Sales for the year ended December 31, 2017(1)

 

By Geography(2)

 

  

By Traditional/Connected

Status(3)

 

  

By Product Category

 

   
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(1)

Includes external and intercompany sales.

(2)

Americas represents North and South America. EMEA represents Europe, the Middle East and Africa. Other principally represents Australia, China, New Zealand and South Korea.

(3)

Connected is defined as any device with the capability to be monitored or controlled from a remote location by an end-user or service provider.

Distribution

ADI, our Distribution segment, is the leading wholesale distributor of security and low voltage electronics products, which include security, safety and audio visual products and related accessories. These products, which are commonly referred to as “low voltage”, are traditionally defined as products operating at or below 24 volts. According to IHS data, ADI has the leading global market share in security equipment distribution. ADI operates through a distribution network of over 200 stocking locations throughout the world, delivering to over 100,000 contractors. The Distribution segment had net sales of $2,477 million for the year ended December 31, 2017.

ADI distributes a broad selection of SpinCo and third party products to meet customer needs, including:

 

   

Security products

 

   

Video Surveillance: Internet protocol (“IP”) and high-definition analog cameras, recording and storage devices, video management and analytics software, and related system accessories.

 

   

Intrusion: Residential and commercial alarm systems, keypads, detection and sensing devices, alarm communication equipment, and related systems accessories.

 

   

Access Control: Access control panels and software, readers, credentials, locking hardware, gate control, intercoms and related system accessories.

 

   

Other products

 

   

Fire and Life Safety: Fire alarm control panels, fire detection equipment, fire notification equipment, manual call points/stations and related system accessories.

 

   

Wire, networking and professional audio visual systems.

In addition to our own Security & Safety products, ADI distributes products from industry-leading manufacturers including Assa Abloy, Axis Communications, Honeywell and Nortek Security & Control, and



 

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ADI also carries a line of private label products. ADI sells these products to contractors that service non-residential and residential end-users. Management estimates that in 2017 approximately two-thirds of ADI net sales were attributed to non-residential end markets and one-third to residential end markets.

Distribution Segment: Net Sales for the year ended December 31, 2017

 

   

By Geography(1)

 

  

By Product Category

 

 

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(1)

Americas represents North and South America. EMEA represents Europe, the Middle East and Africa. Other principally represents India.

(2)

Other includes fire and life safety, wire, networking and professional audio visual systems.

History of Innovation

We have a long history of innovation and industry firsts in our Comfort & Care and Security & Safety markets and have a reputation for providing trusted, tested and proven products and solutions. We trace some of our innovations as far back as the 1880s when we invented the predecessor to the modern thermostat. From the first clock thermostats to the world’s first gas burner control, we have consistently driven progress and innovation in home comfort and security, including the introduction of the iconic T-86 “Round” thermostat in 1952. In 2000, we acquired the ADEMCO business, a leader in monitored burglary and fire alarm systems with roots back to 1929 and the early days of wired burglar alarms, expanding our presence in fire and security systems.

In the 1980s, ADEMCO developed the first reliable wireless security system and sensor and the AlarmNet radio technology that served as the first affordable back-up and alternative to alarm transmission over telephone lines. Through ADI, we introduced large-scale wholesale security products distribution, and now contractors of all sizes count on ADI for convenient access to low voltage security products, local inventory, e-commerce ordering, as well as product training and the extension of credit.

SpinCo was the first company to introduce professionally-monitored residential smoke and carbon monoxide detection systems. We also invented the popular Dual Tech detector to detect both motion and heat from an intruder, and we were the first to widely deploy an alarm platform with cloud services to consumers and a mobile app for home security monitoring. As the world becomes more connected and mobile, we believe we are well positioned to extend our track record of delivering leading solutions for the home, combining our experience and expertise in hardware and sensor technology with a focus on world-class excellence in software.



 

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Our Strengths

We believe we benefit from the following competitive strengths:

 

I.

Global Leader with Iconic Brand and Unparalleled Presence in the Home

Our iconic Honeywell brand is globally recognized for quality, innovation, security and reliability. Our products and solutions are present in over 150 million homes worldwide and we believe, based on management estimates, that we have the leading global market position in thermostats and residential security products and in security products distribution. Our solutions are installed in more than 15 million homes annually, allowing SpinCo to launch innovative technologies and services at scale. Our leading position extends to our connected platform, where we currently have over 4.7 million connected customers and 30 million sensors generating over 250 billion data transmissions annually.

The brand recognition associated with our installed base provides an additional opportunity for expansion with new connected products and solutions, and after the Spin-Off, we will retain the right to market and sell these products under the Honeywell Home brand pursuant to a 40 year license agreement with Honeywell. We are actively facilitating the transition of our customers and end-users from traditional to connected products by transforming our product portfolio, educating professional installers, creating value for OEMs and engaging consumers. Through these efforts, we have increased the portion of our product sales generated by connected solutions to approximately 37% in 2017. Gartner projects the connected things consumer segment will grow from approximately four billion in 2016 to more than 12 billion in 2020.

 

II.

Broadest Portfolio Providing Innovative End-to-End Solutions Across Comfort & Care and Security & Safety with Domain and Regulatory Standards Expertise and Differentiated Technology

Our comprehensive Products portfolio provides end-to-end solutions that focus on critical needs within the home, where product reliability and ease of use are of utmost importance. This portfolio is comprised of traditional product offerings as well as a growing connected offering. Our deep domain expertise allows us to consistently provide trusted, tested and proven solutions that meet robust standards for cybersecurity and regulatory, as well as certification standards for devices addressing critical life safety needs. Our portfolio distinguishes us from our competitors, most of whom focus on niche solutions within the home. We provide solutions that address multiple consumer connected home needs under a common platform. As new devices and use-cases emerge, we believe the continuing development of our common platform across devices and all levels of connectivity (device, software, cloud, analytics and consumer interface) will become vital to ensure a seamless and reliable experience. Our broad portfolio also enables us to achieve profitable economies of scale in production, distribution and speed to market while making us a “go to” partner in the smart home ecosystem. However, after the Spin-Off our economies of scale with respect to the Products segment may be diminished with respect to certain purchasing activities, such as IT infrastructure and other support services, as compared to when we were a part of Honeywell.

Our innovation is supported by the SpinCo User Experience design group, which creates value by understanding and translating the needs of consumers and channel partners to develop intuitive, desirable and brand differentiated end-to-end experiences. Our products are regularly recognized in professionally judged international design competitions, winning the highly coveted iF Design Award, Red Dot Design Award and the IDEA Design Award over a dozen times since 2015.

We believe our product quality philosophy, which combines rigorous internal testing with external certification of our products, gives us a competitive advantage. Our laboratories are certified for testing to meet various industry standards, such as Underwriters Laboratories (“UL”), CSA Group and Intertek, combining



 

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SpinCo’s internal testing resources with these agencies’ global recognition to substantially reduce time-to-market for new solutions and to help ensure quality and reliability.

Our Secure Software Development Lifecycle initiative sets a robust protocol for establishing and enhancing product and system cybersecurity at the outset of, and throughout, product development and for responding to potential vulnerabilities in existing products.

We have over 1,300 engineers creating innovative solutions in dedicated software centers of excellence located in Atlanta, Georgia, Bengaluru and Madurai, India and other locations. Our deep domain expertise, proprietary technology and brands are protected by a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and contractual provisions. We own approximately 3,000 proprietary worldwide active patents and pending patent applications.

 

III.

Major Player in the Connected Home, Providing Solutions that Seamlessly Integrate with Leading Smart Home Players

Our broad suite of connected solutions allows end customers to use mobile apps to control their thermostats, security systems, cameras and home automation devices such as electronic locks, lights and garage doors. We currently service over 4.7 million connected customers and transmit over 40 million consumer notifications, including more than two million security panel signals, every day. Adoption rates of our connected home solutions in the future will depend on a number of factors, including development of competitive and attractive products and the cost to customers of installation of new solutions or upgrade or renovation from older connected platforms or products. We are well positioned to leverage the growing demand for connected home solutions with our innovative products that are easy to purchase, install and deploy within the broader smart home ecosystem including our thermostats portfolio. We expect to benefit from the over 17% compound annual growth rate (“CAGR”) projected by IDC for connected thermostats over the next five years. Beyond that, our expanding portfolio of self-installed and self-monitored solutions such as the Smart Home Security System and Lyric Cameras are well positioned to participate in the growth of DIY solutions unit sales which according to IHS are expected to grow at a rate of over 20% per year from 2015 through 2020. In security, we continue to see strong support for our professionally-installed and monitored solutions.

Our systems integrate easily with the most widely used home automation systems, including Amazon Alexa®, Apple HomeKit®, Google Home®, and Samsung SmartThings®. We have one of the widest portfolios of Apple HomeKit enabled connected products and were the first company whose security system communicated with the Apple HomeKit ecosystem. We plan to continue to expand the range of our ecosystem partners through, among other things, the “Works with Honeywell” program which currently has 3,000 third party developers creating mobile apps that integrate with our solutions. Approximately one in six of our users already connect their systems to partner APIs (application programming interfaces) or solutions from other manufacturers through this program, and we believe that the openness of our architecture and adaptability of our products reduce contractor training and installation time, which further enhances end-user demand for our products.

 

IV.

Well Positioned to Serve Professional, OEM and Consumer Channels

We have a multi-channel strategy to serve end-users through our professional contractors, OEMs, retail and e-commerce partners that allow end-users and consumers to purchase our products in ways that suit their needs, whether directly for DIY or through a professional installer.

Our security and Comfort & Care solutions are generally installed professionally, and our channel partners rely on our high-quality OEM parts for repair and remodel services to meet their customers’ needs. We have deep and long-standing relationships, many of which extend over 20 years, with our global contractor base and we continually strengthen and renew these relationships through various channel management and training



 

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programs. For example, Contractor Pro (loyalty program) has over 29,000 participants and has been a leading industry program for 14 years. Our training programs include Homes University (technical training) and S.T.E.P.S. (sales training). In 2017, through our trainings, we educated more than 31,000 contractors and distributors.

We also have long-standing relationships with important OEMs and service providers such as ADT Security Services, United Technologies and A.O. Smith Corporation. A number of these relationships extend more than 25 years, including some spanning over 40 years. These deep partnerships are possible because OEMs value our design capabilities, innovation, domain expertise, supply chain capabilities and product quality.

Our DIY and self-install products are sold through retail channels including direct-to-consumer, e-commerce and brick and mortar locations, such as The Home Depot, Lowe’s, Amazon.com, Walmart and Kingfisher. Our award-winning, best-selling thermostats are our most recognizable products and we market certain models directly to end consumers. Growth of the retail market, including the self-installed or do-it-yourself and e-commerce markets could affect our business by attracting new competitors. In addition, growth of these retail markets relative to the professional installation markets may negatively impact our margins.

 

V.

Pre-eminent Global Distributor of Security, Safety and Other Low Voltage Products

According to IHS, ADI has the leading global market share in security equipment distribution. ADI distributes a wide offering of low voltage product categories comprised of over 350,000 products from over 1,000 manufacturers, all supported by a disciplined category management process to ensure our offerings are comprehensive and meet the needs of important customer segments. ADI’s sizable market share, coupled with its breadth of inventory, creates opportunities for security contractors in particular to identify and purchase complementary ADI product offerings. ADI has over 200 stocking locations across 17 countries, supplemented by a customer friendly e-commerce platform that serves a customer base of over 100,000 contractors. Our extensive global footprint, combined with our strategic supplier relationships and focus on customer service, enables ADI to effectively serve both local and national customers with a range of product and service solutions. Additionally, we believe being the largest distributor of security equipment results in meaningful procurement efficiencies and that ADI’s offering of a line of private label products further enhances our margin profile. However, after the Spin-Off our economies of scale with respect to the ADI business may be diminished with respect to certain purchasing activities, such as IT infrastructure and other support services, as compared to when we were a part of Honeywell.

Manufacturers/Suppliers

ADI is an important channel to market for third party manufacturers, whose products represent a significant majority of ADI’s net sales. Through our global network of branches, inventory stocking programs and over 1,000 sales representatives, each of whom are highly trained in the brands and products that we distribute, we help manufacturers grow their business by facilitating direct and relevant engagement with our customers. We provide manufacturers the ability to offer in-store selling tools, such as interactive product displays and demonstration equipment, that help contractors evaluate products before purchase. We also offer branch stocking programs, which manufacturers use to make their products available in local markets, and provide local market inventory to serve contractors who require same day fulfillment. We believe this strong value proposition supports our position as a preferred channel to the market for leading industry manufacturers.

Contractors/Customers

ADI’s global presence enables the delivery of supply chain services that help contractors reduce their procurement costs, better manage working capital through the advancement of credit, and operate more



 

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efficiently. For example, we offer services such as job kitting and staging, IP device programming, 24/7 pick-up anytime lockers and one-hour pick up service at ADI branches for online orders. We also offer convenient electronic ordering options, which accounted for approximately 17% of our ADI net sales for the fiscal year ended December 31, 2017.

These services and convenient ordering options, combined with our global presence of more than 200 stocking locations, allow us to serve a range of customers across geographies and be a single source of supply for contractors in the industry. We also help our customers grow their businesses through services such as pre-sales technical support, product certifications and trainings, project support and knowledgeable sales specialists including third party certified systems design specialists. In 2017, we offered more than 1,500 manufacturer and industry association led training opportunities. Many of our trainings were conducted at ADI Expos, which are the largest series of one-day product showcase and training events in the security industry where manufacturers present the latest technology to our customers. In 2017, we held more than 80 ADI Expos globally, delivering more than 300 Continuing Education Unit accredited programs.

Inside an ADI Branch

 

LOGO

VI. Consistent Revenue Growth and Strong Segment Performance Supported by Best-in-Class Honeywell Operating System (“HOS”)

We believe we have an attractive financial profile highlighted by our diversified revenue streams, strong segment profits and limited capital expenditure needs. We have delivered strong net sales growth over the period from 2013 to 2017, during which our net sales grew at a CAGR of 3.7%. In addition, the overall nature of our business is not capital intensive. For the years 2015 to 2017, our capital expenditures averaged 1.3% of our net sales.

Our financial performance is underpinned by the foundation of the Honeywell Operating System (“HOS”). HOS is ingrained in our organization and was founded on the lean and six sigma principles of continuous improvement in quality, delivery, cost, growth and innovation, and we plan to continue the HOS model after the



 

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Spin-Off. Our commitment to HOS has resulted in improved manufacturing productivity, more rapid product innovation and increased cost efficiencies. Important parts of our supply chain are strategically positioned in low cost regions that are located in or near key markets, consistent with a strategy of optimizing our supply chain and reducing delivery times. We have extended HOS concepts beyond lean manufacturing to our Distribution business, customer service and product development areas. We are applying these practices to develop global platforms to drive standardization for scale and cost efficiency, while at the same time incorporating key technologies and functionalities to drive speed and faster innovation for customers.

The Company’s future growth may be limited due to the substantial indebtedness we expect to incur in connection with the Spin-Off and our payments under and the terms of the Indemnification and Reimbursement Agreement, as well as other risks which we may be presently unable to predict. See “Risk Factors.”

Our Growth Strategies

 

I.

Continue to Develop Innovative New Products and Solutions

We are developing new, innovative products and solutions across Comfort & Care and Security & Safety to grow our core business and differentiate ourselves from our competitors. Over the past three years, we have launched over 200 new products such as the Lyric family of connected home solutions, which includes thermostats, water leak detectors and awareness cameras. Our next generation alarm systems are expected to launch in late 2018. We have also launched cloud service offerings such as AlarmNet 360 and Total Connect 2.0 that allow consumers to control their systems remotely and contractors to provide efficient installation, maintenance and support services. We plan to further expand our portfolio by bringing to market an extensive set of new solutions for everyday problems, including remote furnace and boiler monitoring, smart vents, shut-off valve solutions, battery-operated video motion cameras and a residential global intrusion system. While we believe we are well positioned to capitalize on future trends and opportunities for innovation, the constantly evolving needs of our customers make it difficult to predict the pace or scope of future technological developments and our business may be affected if our new products or upgrades are not adopted by consumers.

We collaborate with consumer driven technology companies that have market-leading, complementary offerings such as August (door lock) to provide our customers with a seamless experience, which in turn supports customer acquisition and retention. Our systems are compatible with the most widely used home automation systems, including Amazon Alexa®, Apple HomeKit®, Google Home® and Samsung SmartThings®. Our compatibility with these platforms, some of which are owned by competitors and may compete with our solutions, has helped anchor our devices in millions of homes around the world, and we expect these relationships to continue to drive growth.

We employ Agile methods for software development, and are developing a single mobile application which, together with our global platforms, is designed to enable faster introduction of new products and implementation of new features while driving cost efficiencies through our global scale. At the same time, our Secure Software Development Lifecycle initiative sets a robust protocol for establishing and enhancing product and system cybersecurity at the outset of, and throughout, product development and for responding to potential vulnerabilities in existing products.

 

II.

Continue to Invest in and Grow with Professional and OEM Channel Partners

Our professional channel partners are an integral part of our sales and go to market strategy, and we invest in their growth to help drive our product sales. While the DIY and e-commerce markets for our solutions continue to grow, the vast majority of our products are installed professionally through our contractor and OEM channels. We plan to continue to extend growth in these professional channels through channel partner marketing



 

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programs, designing solutions with simplified installation and maintenance, and by helping contractors provide better service to the end customer. We plan to continue investment in these programs, as well as to provide enhanced sales and technical training, hiring and talent development for our contractors. For example, we host the annual CONNECT national conference, the largest independent dealer event in the security industry which gives security contractor partners the opportunity to share best practices and participate in specialized trainings. In addition, our plan is to continue to develop new relationships with leading channel partners, using these strategies to expand our presence in the market in all regions. We plan to continue to collaborate with OEM channel partners to provide design services, bring to market new technologies and deliver innovative, connected solutions that increase the lifetime value of their equipment. For example, we plan to deliver remote diagnostic capabilities for furnaces and water heaters that will enable technicians to resolve problems quickly and improve equipment uptime.

 

III.

Leverage Connected Home Expertise to Grow Software and Services Revenue

We believe we are well positioned to benefit from the growing demand for connected solutions in homes due to our breadth of offerings, customer reach and strong brand. As consumer preferences drive increasing demand for connected home solutions, we believe our portfolio of end-to-end solutions will become increasingly important. Compelling connected home use cases require careful orchestration of multiple solutions to create an ecosystem that can be reliably accessed by consumers on a common platform. A seamless experience is a key differentiator relative to single-purpose product providers.

We plan to further enhance the customer value proposition by expanding remote functionality and real-time access to information and analytics that help the end-user control their home environment. We also intend to support this effort by extending our suite of proprietary service offerings as well as the range of options for controlling our devices in conjunction with third party systems. These innovations require that we navigate a complex and changing technological and regulatory landscape.

We have recently launched Software as a Service (“SaaS”) subscription services to consumers and intend to grow through services such as video storage, energy management and automated replenishment services. We also provide Platform as a Service (“PaaS”) offerings such as AlarmNet and Total Connect as fee-based services to the professional channel to enable remote management, control and monitoring of security systems, and plan to provide Honeywell Home, a global cloud and application platform for use by consumers and professional channel partners. We intend to consolidate our service offerings under Honeywell Home to increase scale efficiencies and improve speed to market with new features and enhancements and to drive global expansion of connected offerings and services. This platform is expected to make it easier for partners to integrate with our solutions, and allow SpinCo to host third party connected products in our cloud as well as enable faster implementation of new connected device products and services such as demand response and security monitoring services, allowing them to use the ecosystem of their choice and providing customers with energy savings, security and peace of mind. This platform will enable meaningful new services for our professional channels, our connected consumers and third parties that value the insights derived from data. Connectivity also enables data analytics and Data-as-a-Service (“DaaS”), which allows service technicians to provide after-sales services in the form of remote diagnostics and preventive maintenance and also enables them to resolve more problems on the first service call. Furthermore, our LifeCare telehealth DaaS enables remote patient monitoring and assists hospitals in significantly reducing readmission rates. We believe analytics provide a growing service revenue opportunity.

 

IV.

Expand Presence of Product Portfolio Through Alternative Channels and Geographies

According to IHS, DIY and self-installed solutions unit sales are expected to grow by over 20% per year from 2015 through 2020. We are increasing our presence in retail and e-commerce channels by expanding our



 

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range of partners and the breadth of products with self-install capabilities, such as Lyric Thermostats and Cameras and the Honeywell Smart Home Security System.

We are developing new relationships with utilities, insurance providers, telecom and cable companies, homebuilders and property managers for multifamily residences, all of which are looking to provide value-added services to their customer base. For example, utilities offer our connected thermostats for energy demand management and insurance companies offer water leak detectors for risk mitigation of property damage and to reduce claims. Our connected home solutions help property managers remotely manage heating and cooling to reduce energy costs and help homebuilders improve the commercial value of new homes.

We plan to expand our presence in certain high growth regions (“HGRs”) as favorable macro trends such as urbanization, improving living standards and growing internet and smartphone usage support adoption of our solutions. As large, growing markets, China and India present near-term opportunities to grow with our professional and OEM channel partners. Local legislation, driven by safety and security concerns, should also provide an opportunity to expand our presence in the Middle East and Latin American regions. We expect to localize our portfolio in HGRs, primarily by investing in tailored solutions to be competitive in local markets. However, competition in HGRs is often intense, which may affect our ability to execute our strategy.

 

V.

Grow ADI by Expanding Geographic Footprint, Product Categories and Services

We intend to increase our geographic footprint for distribution by expanding our presence in markets where we already operate and entering selected new geographies within established distribution markets. We plan to implement this by opening new branches, deploying field sales and telesales teams, and taking advantage of e-commerce opportunities. For example, we have established a strong foundation in India, where according to IHS we already have a market share of approximately 18% and the distribution market is expected to grow at an approximate 11% CAGR from 2016 through 2021.

We intend to continue expanding our portfolio of core and adjacent products that are relevant and attractive to our customers to drive incremental sales across our existing footprint. In 2016, we added professional audio visual products, a growing and attractive product category to respond to customer demand and since then we have added many well-recognized brands to supplement our core product lines, including Kantech access control systems, Code Blue emergency communications, Seagate storage solutions, Sonos wireless audio, and LG professional displays. We have also added a line of new ADI private label products.

We intend to continue to introduce new value-added services and electronic ordering options to deepen relationships with our contractors. Recently, we launched a feature called “Shop My Branch”, which allows customers to shop and place orders for products that are specifically available in their local branch, along with a one-hour pick up service for orders placed online or through the ADI app. We also plan to continue to improve our capabilities in electronic data interchange (“EDI”) through our customized integration with SedonaOffice, a leading business management software for security companies, which allows contractors to establish electronic data transmission with ADI without requiring significant IT support.

 

VI.

Accelerate Growth Through Selective Strategic Acquisitions

We intend to selectively pursue acquisitions that will broaden our product portfolio, gain access to new technologies, expand our geographic footprint and enhance our position in strategic market segments. For example, our acquisition in 2016 of RSI Video Technologies, a company that manufactures battery-powered cameras, allowed us to offer security solutions that combine video clips and motion sensors to provide video alarm verification, which mitigates false alarms, a key differentiator in our security platform. The substantial indebtedness we expect to incur in connection with the Spin-Off and our payments under and the terms of the Indemnification and Reimbursement Agreement may limit our ability to successfully pursue certain transactions.



 

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Industry Overview

Our Markets

Our business operations are conducted through two segments, Products and Distribution, serving multiple customer segments through multiple channels. We separate our Products segment into Comfort & Care and Security & Safety. Through ADI, we are a distributor of security and low voltage products such as video surveillance, intrusion, access control, and fire and life safety.

Trends and Drivers

We believe our addressable markets benefit from several favorable trends:

 

   

Growth in Residential Construction and Renovation and Remodeling (“R&R”). Recent years in the U.S. have been characterized by rising new housing starts and an increase in investment in residential construction. According to the U.S. Census Bureau, new housing starts reached 1.2 million units in 2017, growing at a CAGR of approximately 10% since 2009. However, new housing starts remain significantly below the long term annual median of 1.5 million units since 1960, and we believe this represents significant growth potential over the next several years. The NAHB projects that new housing starts will grow at a CAGR of approximately 4% through 2019. Additionally, per the BEA, R&R spend, as measured by U.S. residential private fixed investment (“RPFI”), has grown at a CAGR of approximately 8% since 2009 to reach approximately $748 million in 2017. U.S. RPFI as a percentage of U.S. gross domestic product (“GDP”) reached 3.9% in 2017, but remains below the long term median of 4.5% since 1960, which we believe represents significant growth potential over the next several years. Continued growth in residential housing spending has the potential to generate increased demand for home comfort and security products and services.

 

   

Energy Efficiency and Safety Megatrends. Higher energy efficiency standards, driven by legislation, industry and consumer preferences, are leading to faster adoption of advanced energy control devices for furnaces, boilers and cooling equipment. Similarly, legislation in the area of fire safety is driving greater use of smoke and carbon monoxide detection and monitoring.

 

   

Internet of Things and Proliferation of Connected Devices. The connectivity driven by the Internet and various communication protocols and technologies, such as Wi-Fi, Bluetooth, Z-Wave and Zigbee, has led to a massive expansion in the number of connected devices and enables the expansion of DIY solutions available to homeowners. According to Statista, the Internet of Things (“IoT”) installed base worldwide is expected to grow from 20 billion connected devices in 2017 to over 75 billion connected devices in 2025. The desire to monitor and control devices remotely through cloud based applications is creating a growing market for connected solutions.

 

   

Mobile Lifestyle and Ubiquity of Broadband. The proliferation of smartphones, tablets, and high speed, high bandwidth data networks including 4G, LTE, next generation 5G and other wireless technologies have changed the way people communicate, use information and manage various applications in their lives. Consumers are increasingly expecting a similarly convenient and mobile experience to manage their homes and businesses.

 

   

Cloud and Connectivity Infrastructure. Advances in cloud technologies, software and wireless technologies have improved reliability and enabled efficient scale in a way that facilitates delivery of connected home services at an exponential rate. The ability to provide such services at an affordable price is helping grow the connected solution market.

 

   

Big Data and Data Analytics Capabilities. The increasing number of connected devices, combined with the decreasing cost of connectivity, results in the generation of vast amounts of data related to



 

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equipment operation and consumer interaction with these devices. Synthesizing this information provides useful insight for manufacturers, contractors and service providers to diagnose and fix problems quickly, schedule preventive maintenance, and provide better customer service.

 

   

Need for Technical Expertise and Training. New technologies, fueled by the proliferation of connected devices, require greater technical know-how to design, install and maintain. Contractors, therefore, increasingly rely on distribution partners and manufacturers to provide design services, product and services consultation and training to support their business needs.

 

   

Demand for Same Day Order Fulfillment. Contractors are increasingly being asked to install complex inter-connected systems. As a result, they tend to place frequent orders across a broad range of low voltage technologies and depend on distributors and manufacturers to stock these products locally for immediate fulfillment.

 

   

Non-Residential Construction and Equipment Replacement. The majority of our distribution sales are to non-residential end markets, driven by investment in construction and equipment replacement. Adjusted for inflation, total non-residential construction remains 14% below peak levels. According to JP Morgan estimates, annual non-residential construction is expected to grow at a CAGR of approximately 3 to 4% through 2019. Sustained strength and further growth in new and replacement non-residential construction could lead to increased demand for low voltage products.

Addressable Markets

Products and Solutions

The elements of the addressable market for Comfort & Care products and solutions are analyzed by IHS, Navigant and BSRIA. Based on management analysis of these sources, we believe that the total addressable market is approximately $10 billion in annual sales for 2018, of which $0.6 billion is comprised of services associated with Comfort & Care solutions which includes demand management and telehealth.

The elements of the addressable market for Security & Safety products and solutions are analyzed by IHS and management estimates. Based on management analysis of this source, we believe that the total addressable market is approximately $4.5 billion in annual sales for 2018, of which $1.1 billion is comprised of services associated with Security & Safety solutions which includes security monitoring services and remote video services.

Distribution

Based on IHS, we estimate that the global total addressable market for the security and low voltage products (which includes video surveillance, intrusion, access control and fire and life safety) distribution market is approximately $20 billion in sales in 2018.

Corporate Information

We are a Delaware corporation that was incorporated on April 24, 2018. Our principal executive offices are located at 1985 Douglas Drive North, Golden Valley, Minnesota 55422. Our telephone number is (763) 954-5204. Our website address is https://www.resideo.com. Information contained on, or connected to, our website or Honeywell’s website does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website. On July 24, 2018 the Company was renamed Resideo Technologies, Inc.



 

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Risk Factors

You should carefully consider all of the information in this Information Statement and each of the risks described in this Information Statement, which we believe are the principal risks that we face, including but not limited to:

 

   

Risks relating to our business, as described in “Risk Factors—Risks Relating to Our Business,”

 

   

Risks relating to the Spin-Off, as described in “Risk Factors—Risks Relating to the Spin-Off,”

 

   

Risks relating to ownership of our common stock and the securities markets, as described in “Risk Factors—Risks Relating to Our Common Stock and the Securities Market.”

Among the factors included in these risk factors are risks related to the substantial indebtedness expected to be incurred in connection with the Spin-Off, our payments under the Indemnification and Reimbursement Agreement, and the benefits associated with Honeywell’s size, reputation and purchasing power that will not be available to us following the Spin-Off.

Questions and Answers about the Spin-Off

The following provides only a summary of certain information regarding the Spin-Off. You should read this Information Statement in its entirety for a more detailed description of the matters described below.

 

  Q:

What is the Spin-Off?

 

  A:

The Spin-Off is the method by which we will separate from Honeywell. In the Spin-Off, Honeywell will distribute to its stockholders all the outstanding shares of our common stock. Following the Spin-Off, we will be an independent, publicly traded company, and Honeywell will not retain any ownership interest in our Company.

 

  Q:

What are the reasons for the Spin-Off?

 

  A:

The Honeywell Board believes that the separation of the residential Comfort & Care and Security & Safety product portfolio and ADI Global Distribution from Honeywell is in the best interests of Honeywell stockholders and for the success of the Business for a number of reasons. Primarily, Honeywell and SpinCo will each have a more focused business and be better able to dedicate financial, management and other resources to leverage their respective areas of strength and differentiation once the Spin-Off occurs. See “The Spin-Off—Reasons for the Spin-Off” for more information.

 

  Q:

Is the completion of the Spin-Off subject to the satisfaction or waiver of any conditions?

 

  A:

Yes, the completion of the Spin-Off is subject to the satisfaction, or the Honeywell Board’s waiver, of certain conditions. Any of these conditions may be waived by the Honeywell Board to the extent such waiver is permitted by law. In addition, Honeywell may at any time until the Share Distribution decide to abandon the Share Distribution or modify or change the terms of the Share Distribution. See “The Spin-Off—Conditions to the Spin-Off” for more information.

 

  Q:

Will the number of Honeywell shares I own change as a result of the Spin-Off?

 

  A:

No, the number of shares of Honeywell common stock you own will not change as a result of the Spin-Off.



 

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  Q:

Will the Spin-Off affect the trading price of my Honeywell common stock?

 

  A:

We expect the trading price of shares of Honeywell common stock immediately following the Share Distribution to be lower than the trading price immediately prior to the Share Distribution because the trading price will no longer reflect the value of SpinCo. There can be no assurance that, following the Share Distribution, the combined trading prices of the Honeywell common stock and our common stock will equal or exceed what the trading price of Honeywell common stock would have been in the absence of the Spin-Off.

 

    

It is possible that after the Spin-Off, the combined equity value of Honeywell and SpinCo will be less than Honeywell’s equity value before the Spin-Off.

 

  Q:

What will I receive in the Spin-Off in respect of my Honeywell common stock?

 

  A:

As a holder of Honeywell common stock, you will receive a dividend of one share of our common stock for every six shares of Honeywell common stock you hold on the Record Date (as defined below). The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “The Spin-Off—Treatment of Fractional Shares” for more information on the treatment of the fractional share you may be entitled to receive in the Share Distribution. Your proportionate interest in Honeywell will not change as a result of the Spin-Off. For a more detailed description, see “The Spin-Off.”

 

  Q:

What is being distributed in the Spin-Off?

 

  A:

Honeywell will distribute approximately 123,451,420 shares of our common stock in the Spin-Off, based on the approximately 740,708,523 shares of Honeywell common stock outstanding as of September 18, 2018. The actual number of shares of our common stock that Honeywell will distribute will depend on the total number of shares of Honeywell common stock outstanding on the Record Date. The shares of our common stock that Honeywell distributes will constitute all of the issued and outstanding shares of our common stock immediately prior to the Share Distribution. For more information on the shares being distributed in the Spin-Off, see “Description of Our Capital Stock—Common Stock.”

 

  Q:

What is the record date for the Share Distribution?

 

  A:

Honeywell will determine record ownership as of the close of business on October 16, 2018, which we refer to as the “Record Date.”

 

  Q:

When and how will the Share Distribution occur?

 

  A:

The Share Distribution will be effective as of 12:01 a.m., New York City time, on October 29, 2018, which we refer to as the “Share Distribution Date.” On the Share Distribution Date, Honeywell will release the shares of our common stock to the distribution agent to distribute to Honeywell stockholders. The whole shares of our common stock will be credited in book-entry accounts for Honeywell stockholders entitled to receive the shares in the Share Distribution.

 

  Q:

What do I have to do to participate in the Share Distribution?

 

  A:

You are not required to take any action in order to participate, but we urge you to read this Information Statement carefully. All holders of Honeywell’s common stock as of the Record Date will participate in the Share Distribution. Holders of Honeywell common stock on the Record Date will not need to pay any cash or deliver any other consideration, including any shares of Honeywell common stock, in order to receive shares of our common stock in the Share Distribution. In addition, no stockholder approval of the Share Distribution is required. We are not asking you for a vote and request that you do not send us a proxy card.



 

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  Q:

If I sell my shares of Honeywell common stock on or before the Share Distribution Date, will I still be entitled to receive shares of SpinCo common stock in the Share Distribution?

 

  A:

If you sell your shares of Honeywell common stock before the Record Date, you will not be entitled to receive shares of SpinCo common stock in the Share Distribution. If you hold shares of Honeywell common stock on the Record Date and you decide to sell them on or before the Share Distribution Date, you may have the ability to choose to sell your Honeywell common stock with or without your entitlement to receive our common stock in the Share Distribution. You should discuss the available options in this regard with your bank, broker or other nominee. See “The Spin-Off—Trading Prior to the Share Distribution Date” for more information.

 

  Q:

How will fractional shares be treated in the Share Distribution?

 

  A:

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Honeywell stockholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees, transfer taxes and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within two trading days following the Share Distribution Date. See “How will our common stock trade?” for additional information regarding “when-issued” trading and “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation of the treatment of fractional shares. The distribution agent will, in its sole discretion, without any influence by Honeywell or us, determine when, how, through which broker-dealer and at what price to sell the whole shares of our common stock. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Honeywell or us.

 

  Q:

What are the U.S. federal income tax consequences to me of the Share Distribution?

 

  A:

For U.S. federal income tax purposes, no gain or loss will be recognized by, or be includible in the income of, a Holder (as defined in “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off”) as a result of the Share Distribution, except with respect to any cash (if any) received by Honeywell stockholders in lieu of fractional shares. After the Share Distribution, Honeywell stockholders will allocate their basis in their Honeywell common stock held immediately before the Share Distribution between their Honeywell common stock and our common stock in proportion to their relative fair market values on the date of Share Distribution.

 

  Q:

Does SpinCo intend to pay cash dividends?

 

  A:

Subject to the sole discretion of our Board and the considerations discussed below, once the Spin-Off is effective, we anticipate paying cash dividends on our common stock, in an amount yet to be determined. Among the items we will consider when establishing a dividend policy will be the capital needs of our business and opportunities to retain future earnings for use in the operation of our business and to fund future growth. Additionally, the terms of the indebtedness we intend to incur in connection with the Spin-Off and of the Indemnification and Reimbursement Agreement each will limit our ability to pay cash dividends. We will also be subject to certain cash payment obligations, including under the Indemnification and Reimbursement Agreement with Honeywell. There is no guarantee that any dividends will be declared by our Board, or if so declared, will be continued in the future. See “Dividend Policy” for more information.



 

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  Q:

Will SpinCo incur any debt prior to or at the time of the Share Distribution?

 

  A:

In connection with the Spin-Off, we expect to incur substantial indebtedness in an aggregate principal amount of approximately $1,225 million in the form of senior secured term loans and senior unsecured notes, the net proceeds of which will be received by Honeywell substantially concurrently with the consummation of the Spin-Off. We also intend to enter into a revolving credit facility to be available for our working capital and other cash needs from time to time in an aggregate committed amount of $350 million. The terms of such indebtedness are subject to change and will be finalized prior to the closing of the Spin-Off. See “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information.

 

  Q:

How will our common stock trade?

 

  A:

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “REZI.” Currently, there is no public market for our common stock.

 

    

We cannot predict the trading prices for our common stock before, on or after the Share Distribution Date. We anticipate that trading in our common stock will begin on a “when-issued” basis as early as one trading day prior to the Record Date for the Share Distribution and will continue up to and including the Share Distribution Date. “When-issued” trading in the context of a spin-off refers to a sale or purchase made conditionally on or before the Share Distribution Date because the securities of the spun-off entity have not yet been distributed. “When-issued” trades generally settle within two trading days after the Share Distribution Date. On the first trading day following the Share Distribution Date, any “when-issued” trading of our common stock will end and “regular-way” trading will begin. Regular-way trading refers to trading after the security has been distributed and typically involves a trade that settles on the second full trading day following the date of the trade. See “The Spin-Off—Trading Prior to the Share Distribution Date” for more information.

 

  Q:

Do I have appraisal rights in connection with the Spin-Off?

 

  A:

No. Holders of Honeywell common stock are not entitled to appraisal rights in connection with the Spin-Off.

 

  Q:

Who is the transfer agent and registrar for SpinCo common stock?

 

  A:

Equiniti Trust Company is the transfer agent and registrar for SpinCo common stock.

 

  Q:

Are there risks associated with owning shares of SpinCo common stock?

 

  A:

Yes, there are substantial risks associated with owning shares of SpinCo common stock. Accordingly, you should read carefully the information set forth under “Risk Factors” in this Information Statement.



 

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  Q:

Where can I get more information?

 

  A:

If you have any questions relating to the mechanics of the Share Distribution, you should contact the distribution agent at:

Equiniti Trust Company

1110 Centre Pointe Curve Suite 101

Mendota Heights, Minnesota 55120

Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact Honeywell at:

Investor Relations

Honeywell International Inc.

115 Tabor Road

Morris Plains, New Jersey 07950

After the Spin-Off, if you have any questions relating to SpinCo, you should contact us at:

Investor Relations

Resideo Technologies, Inc.

1985 Douglas Drive North

Golden Valley, Minnesota 55422

(763) 954-5204



 

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RISK FACTORS

You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock.

Any of the following risks, as well as other risks not currently known to us or that we currently consider immaterial, could materially and adversely affect our business, financial condition, results of operations and cash flows and the actual outcome of matters as to which forward-looking statements are made in this Information Statement.

The following risk factors are not necessarily presented in order of relative importance and should not be considered to represent a complete set of all potential risks that could affect us.

Risks Relating to Our Business

We have no operating history as an independent, publicly traded company, and our historical combined financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived the historical combined financial information included in this Information Statement from Honeywell’s consolidated financial statements, and this information does not necessarily reflect the results of operations and financial position we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

 

   

Prior to the Spin-Off, we operated as part of Honeywell’s broader corporate organization, and Honeywell performed various corporate functions for us. Our historical combined financial information reflects allocations of corporate expenses from Honeywell for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent publicly traded company.

 

   

We will enter into transactions with Honeywell that did not exist prior to the Spin-Off, such as Honeywell’s provision of transition and other services and brand licensing agreements, and undertake indemnification obligations, which will cause us to incur new costs. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell.”

 

   

Our historical combined financial information does not reflect changes that we expect to experience in the future as a result of our separation from Honeywell, including changes in the financing, cash management, operations, cost structure and personnel needs of our business. As part of Honeywell, we enjoyed certain benefits from Honeywell’s operating diversity, size, purchasing power, borrowing leverage and available capital for investments, and we may lose these benefits after the Spin-Off. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets on terms as favorable to us as those we obtained as part of Honeywell prior to the Spin-Off, and our business, financial condition, results of operations and cash flows may be adversely affected. In addition, our historical combined financial data do not include an allocation of interest expense comparable to the interest expense we will incur as a result of the Reorganization Transactions and the Spin-Off, including interest expense in connection with the incurrence of indebtedness at the Company.

We have no operating history as an independent, publicly traded company. Furthermore, while the individualized businesses or their predecessors have a history of product development going back over 100 years, we have neither operated with a residential Comfort & Care, Security & Safety, or home solutions business focus, nor combined that with a distribution business in the past, and we may not be successful in continuing to operate and grow our business with a narrower focus and outside the broader Honeywell operating environment.

 

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We may face operational inefficiencies as we continue to integrate our business after the Spin-Off. Following the Spin-Off, we will also face additional costs and demands on management’s time associated with being an independent, publicly traded company, including costs and demands related to corporate governance, investor and public relations and public reporting. In addition, while we have been profitable as part of Honeywell, we cannot assure you that our profits will continue at a similar level when we are an independent, publicly traded company. For additional information about our past financial performance and the basis of presentation of our Combined Financial Statements, see “Selected Historical and Unaudited Pro Forma Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined Financial Statements, and the Notes thereto, included elsewhere in this Information Statement.

We operate in highly competitive markets.

We operate in highly competitive markets and compete directly with global, national, regional and local providers of our products, services and solutions including manufacturers, distributors, service providers, retailers and online commerce providers. The most significant competitive factors we face are product and service innovation, reputation of our Company and brands, sales and marketing programs, product performance, quality of product training and events, product availability, speed and accuracy of delivery, service and price, technical support, furnishing of customer credit and product reliability and warranty, with the relative importance of these factors varying among our two segments and products. In addition to current competitive factors, there may be new market entrants with non-traditional business and customer service models or disruptive technologies and products, resulting in increased competition and changing business dynamics. See “Risks Relating to Our Business—The market for connected home solutions is fragmented, highly competitive, continually evolving and subject to disruptive technologies.” Existing or future competitors may seek to gain or retain market share by reducing prices, and we may be required to lower our prices or may lose business, which could adversely affect our business, financial condition, results of operations and cash flows. Also, to the extent that we do not meet changing customer preferences or demands or other market changes, or if one or more of our competitors introduces new products, becomes more successful with private label products, online offerings or establishes exclusive supply relationships, our ability to attract and retain customers could be adversely affected.

To remain competitive, we will need to invest continually in product development, marketing, customer service and support, manufacturing and our distribution networks. We may not have sufficient resources to continue to make such investments and we may be unable to maintain our competitive position. In addition, we anticipate that we may have to reduce the prices of some of our products to stay competitive, potentially resulting in a reduction in the profit margin for, and inventory valuation of, these products. It is possible that competitive pressures resulting from consolidation, including customers taking manufacturing or distribution in house and consolidation among our customers, could affect our growth and profit margins. In addition, competitors in certain high growth regions may have lower costs than we do due to lower local labor costs and favorable government regulation. Countries in high growth regions may have differing codes and standards impacting the cost of doing business and may have fewer protections for, or offer less ability to utilize, existing intellectual property. We may not be able to compete effectively with new competitors from such regions. Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price for, and reducing the number of, suitable acquisitions.

Our competitors may have more substantial resources than we do.

Our current and potential competitors may have greater resources, access to capital, including greater research and development or sales and marketing funds, more customers, and more advanced technology platforms, particularly with our newly-launched products and services in connected services and in our newer geographic regions. Many of our competitors may be able to develop offerings that have alternate income streams such as data and advertising revenue which we may not have, and therefore may be able to offer their service products for a lower price or for free and offset any business losses with profits from the rest of their

 

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broad product portfolios. Some of our competitors may also be able to deliver their service solutions more quickly to market than we can by capitalizing on technology developed in connection with their substantial existing service models. In addition, some of our competitors have significant bases of customer adoption in other services and in online content, which they could use as a competitive advantage in the growing connected home solutions services market or otherwise in our product or distribution businesses. New entrants into the wholesale distribution business or products business could include companies with significant presence in Homes and could put us at a competitive disadvantage if they enter the market. Current and future competitive pressures may cause us to reduce our prices or lose market share, or could negatively affect our cash flow, all of which could have an adverse effect on our business, financial condition, results of operations and cash flows.

The market for connected home solutions is fragmented, highly competitive, continually evolving and subject to disruptive technologies.

The market for connected home solutions is fragmented, highly competitive, continually evolving and subject to disruptive technologies. Cable and telecommunications companies actively focusing on competing in connected home solutions and expanding into the monitored security space, and large technology companies expanding into connected home solutions, could result in pricing pressure, a shift in customer preferences towards the services of these companies and a reduction in our market share. Many of these companies already have significant presence in residential environments and may be able to leverage this presence into the connected home solution. New market entrants with non-traditional business and customer service models or disruptive technologies and products could result in increased competition and changing business dynamics. Continued pricing pressure from these competitors or other new entrants, failure to successfully partner with these companies or failure to achieve pricing based on competitive advantages could prevent us from maintaining competitive price points for our products and services resulting in loss of customers or in our inability to attract new customers and have an adverse effect on our business, financial condition, results of operations and cash flows. Based on these or other factors described herein, we may not be able to grow our connected home solutions business as anticipated.

Competition in the distribution business is significant.

If end customers of our distribution business are not convinced of the reputation of our Company and brands and of our ability to compete on product performance, quality of product training and events, product availability, speed and accuracy of delivery, service and price, technical support, credit availability and product reliability and warranty, we could lose business, which could have an adverse effect on our business, financial condition, results of operations and cash flows. In addition, most of our products are available from several sources and our customers tend to have relationships with several distributors. Furthermore, if retail outlets, including online commerce or big box stores were to increase their participation in wholesale distribution markets, or if buying patterns for our products become more retail or e-commerce based through these outlets, we may not be able to effectively compete, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Also, other sources of competition are buying groups that consolidate purchasing power, which if successful could have an adverse effect of our business, financial condition, results of operations and cash flows. The security industry is also undergoing consolidation as many residential and commercially-focused companies combine to leverage product and vertical market expertise and expand their service footprint. In recent years, this trend of consolidation has accelerated, and many of our customers have combined with companies with whom we have little or no prior relationship. In addition, if manufacturers of products sold through our distribution business increase their direct-to-customer or retail distribution, it could have an adverse effect on our business, financial condition, results of operations and cash flows.

Growth of the retail market and e-commerce market could adversely affect our business.

Our solutions are primarily sold through a network of professional contractors, distributors, OEMs, retailers and online merchants. Growth of the retail market, including the self-installed or do-it-yourself retail markets and

 

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e-commerce markets could affect our business by attracting new competitors, some of whom may be larger and have more resources than we do. In addition, growth of these retail markets relative to the professional installation markets may negatively impact our margins, which could negatively affect our cash flow and have an adverse effect on our business, financial condition and results of operations and cash flows.

Technology in our markets is changing rapidly and our future results and growth are largely dependent upon our ability to develop new technologies and introduce new products that achieve market acceptance.

Technology in our markets is in a continuing and often rapid state of change as new technologies and enhancements to existing technologies continue to be introduced both in our traditional and connected product markets. There is increasing customer demand for connected home solutions and the development of new technologies as well as increasing emphasis on product efficiency in our traditional products. Our future results depend upon a number of factors, including our ability to (i) identify emerging technological trends, (ii) develop and maintain competitive products, in part by adding innovative features that differentiate our products from those of our competitors and prevent commoditization of our products, (iii) grow our market share, (iv) develop, manufacture and bring compelling new products to market quickly and cost-effectively, (v) find and effectively partner with home connected device platforms and (vi) attract, develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop new technologies and introduce new products.

We can offer no assurance that we will be able to keep pace with technological developments. It is also possible that one or more of our competitors could develop a significant technical advantage or breakthrough that allows them to provide additional or superior products or services, or to lower their price for similar products or services, that could put us at a competitive disadvantage. Our inability to predict the growth of and respond in a timely way to customer preferences and other developments could have an adverse effect on our business, financial condition, results of operations and cash flows.

Our customer service model has historically been based largely around individualized product support, primarily through telephone communications. Although this allows a high degree of personalized and interactive dialogue, it differs from the highly-scalable and rapid electronic response systems pioneered by technology companies that operate in or may enter our markets. As such, we may be disadvantaged in terms of cost and overall customer satisfaction if we are unable to successfully adapt our support model to changes in customer expectations for our products.

Our connected solutions platform allows for integration and connection to third party solutions and for application designs. This interoperability is designed to reduce the barriers to using our software and panels with different devices, but could also have the effect of encouraging competitors to produce devices that operate on our platform, which could lower sales of our products. Adoption rates of our connected home solutions will also depend on a number of factors, including development of competitive and attractive products and the cost to customers of installation of new solutions or upgrade or renovation from older connected platforms or products. In addition to our application products, we rely on third party designers to create applications connecting our products to other platforms. If developers choose not to develop on our system, the accessibility of our solutions across other systems, devices and platforms might not expand in line with our competitors.

In addition, if we are unable to effectively protect our trade secreted or proprietary technology from third parties or other competitors that may have access to our technology through our open architecture model, our business and competitive position may be harmed.

We expect that the growth of our business may depend on our development of new technologies in response to legislation and regulation related to efficiency standards, safety and security and environmental concerns. Agreement on legislation and regulation may be slow and implementation of any such reforms may take many years. As a result, any growth related to solutions that are responsive to such reforms may be delayed.

 

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Our connected solutions and other products and services rely on enabling technology, connectivity, software and intellectual property that in certain instances we do not own or control.

Our operations depend upon third party technologies, software and intellectual property. Additionally, our connected solutions and our security monitoring services may be accessed through the Internet and using connectivity infrastructures (for example, 4G, LTE and next generation 5G and other wireless technologies) and cloud-based technologies. We rely on cellular and other telecommunications and network providers to communicate signals to and from customers using our connected solution applications in a timely, cost-efficient and consistent manner.

The failure of one or more of these providers or technologies to transmit and communicate signals in a timely manner could affect our ability to provide services to our customers or for our connected solution products to work as designed. There can be no assurance that third party telecommunications and network providers and signal-processing centers will continue to transmit and communicate signals to or from our third party providers and the monitoring stations without disruption. Any such disruption, particularly one of a prolonged duration, could have an adverse effect on our business, financial condition, results of operations and cash flows. In addition, failure to renew contracts with existing providers or licensors of technology, software, intellectual property or connectivity solutions, or to contract with other providers or licensors on commercially acceptable terms or at all may adversely impact our business, financial condition, results of operations and cash flows.

Market and economic conditions may adversely affect the economic conditions of our customers, demand for our products and services and our results of operations.

As a global provider of Comfort & Care and Security & Safety products, services and technologies for the home, as well as a worldwide wholesale distributor of security and low voltage electronics products, our business is affected by the performance of the global new and repair and remodel construction industry. Our markets are sensitive to changes in the regions in which we operate and are also influenced by cyclical factors such as interest rates, inflation, availability of financing, consumer spending habits and confidence, employment rates and other macroeconomic factors over which we have no control and which could adversely affect our business, financial condition, results of operations and cash flows. For example, downward changes in the housing market would be expected to depress sales to professional contractors and result in substantially all of our professional contractor and OEM customers lowering production schedules, which would have a direct impact on our business, financial condition, results of operations and cash flows.

Our sales are also affected by fluctuations in demand for Internet-connected devices. If the market for connected home solutions grows more slowly than anticipated, whether as a result of unfavorable economic conditions, uncertain geopolitical environments, budgetary constraints of our consumers or other factors, we may not be able to increase our revenue and earnings.

Portions of our revenue and cash flow are seasonal, which could cause our financial results and liquidity to fluctuate.

A portion of our revenue is seasonal, which impacts the comparison of our financial condition and results of operations on a quarter-by-quarter basis. Sales activity is generally lowest during the first calendar quarter when it is winter in the majority of our geographical markets.

Global climate change could negatively affect our business.

Responses to climate change may cause a shift away from fossil fuels to alternative power sources. Many of our thermal solutions are designed for application with oil and gas systems. A shift away from fossil fuels could affect our OEM customers business and result in a loss of business for them and for us. If we fail to adapt our solutions to alternative power sources, it could have an adverse effect on our business, financial condition, results of operations and cash flows.

 

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Cooler than normal summers and warmer than normal winters may depress our sales. In addition, stable temperatures may result in less wear and tear on cooling and heating equipment which may depress Comfort & Care sales. Demand for our products and our services, particularly our products and solutions geared toward the home construction repair and remodel industry, including our Comfort & Care business, is seasonal and strongly affected by the weather. Cooler than normal summers depress our sales of replacement controls for heating, ventilation, cooling and water heating equipment in certain larger markets. Similarly, warmer than normal winters have the same effect on our heating products and services. Increased public awareness and concern regarding global climate change have led to our development of social responsibility, sustainability and other business policies, which in some instances are more restrictive than current laws and regulations. In light of the current regulatory environment, we also face uncertainty with respect to future climate change initiatives, including regional and/or federal requirements to reduce greenhouse gas emissions.

Moreover, climate change itself creates financial risk to our business. Unseasonable weather conditions may impact the availability and cost of materials needed for manufacturing and increase insurance and other operating costs and, especially in the case of disruptions at our ADI stores, our ability to make sales during the pendency of site closures. These factors may influence our decisions to construct new facilities or maintain existing facilities in areas that are prone to physical climate risks. We could also face indirect financial risks passed through the supply chain, and process disruptions due to physical climate changes could result in price modifications for our products and the resources needed to produce them.

Failure to achieve and maintain a high level of product and service quality could damage our image with customers and negatively impact our results.

Product and service quality issues could result in a negative impact on customer confidence in our Company and our brand image. If our product and service offerings do not meet applicable safety standards or our customers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial and reputational risks. Actual, potential or perceived product safety concerns could expose us to litigation as well as government enforcement action. In addition, in the event that any of our products fail to perform as expected, we may face direct exposure to warranty and product liability claims or may be required to participate in a government or self-imposed recall involving such products which could result in costly product recalls and other liabilities. As a result, our reputation as a manufacturer and distributor of high quality products and services could suffer and impact customer loyalty.

We maintain strict quality controls and procedures, including the testing of raw materials and safety testing of selected finished products. However, we cannot be certain that our testing will reveal latent defects in our products or the materials from which they are made, which may not become apparent until after the products have been sold into the market. We also cannot be certain that our suppliers will always eliminate latent defects in products we purchase from them. Accordingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be expensive to implement, and, if a product recall occurs during the product’s warranty period, we may be required to replace the defective product. In addition, a product recall may damage our relationship with our customers and we may lose market share with our customers.

In many jurisdictions, product liability claims are not limited to any specified amount of recovery. If any such claims or contribution requests exceed our available insurance or if there is a product recall, there could be an adverse impact on our results of operations. In addition, a recall claim could require us to review our entire product portfolio to assess whether similar issues are present in other product lines, which could result in significant disruption to our business and could have a further adverse impact on our business, financial condition, results of operations and cash flows. We cannot assure you that we will not experience any material warranty or product liability claim losses in the future or that we will not incur significant costs to defend such claims. There can be no assurance that we will have adequate reserves to cover any recalls, repair and replacement costs. Our customers that are not end-users of our products, including our OEM customers, may face similar claims or be obliged to conduct recalls of their own, which could result in lost business to us, or these customers may seek contribution from us for defects.

 

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As an independent, publicly traded company, we may not enjoy the same benefits that we did as a segment of Honeywell.

Currently, our business is integrated with the other businesses of Honeywell. Thus, we have benefitted from Honeywell’s size, brand, reputation and purchasing power in procuring various goods and services and have shared economies of scope and scale in costs, employees, supplier relationships and customer relationships. Following the Spin-Off, we will be a smaller and less diversified company than Honeywell, and will not have access to financial and other resources comparable to those of Honeywell prior to the Spin-Off. As a stand-alone company, we will not have the same product diversity or scale and may not have similar purchasing power or access to capital markets, and we may be unable to obtain goods and services at the prices and terms obtained prior to the Spin-Off, which could decrease our overall profitability. Uncertainty related to the Spin-Off may lead customers and other parties with which we currently do business or may do business in the future to terminate or attempt to negotiate changes in our existing business relationships, or cause them to consider entering into business relationships with parties other than us.

Our business is dependent upon substantial investment in information technology.

The efficient operation of our business will require substantial investment in technology infrastructure systems, including enterprise resource planning (“ERP”) systems, supply chain management systems, digital commerce systems and connected solutions platforms. The inability to fund, acquire and implement these systems may impact our ability to respond effectively to changing customer expectations, manage our business, scale our solutions effectively or impact our customer service levels, which may put us at a competitive disadvantage and negatively impact our financial results. Repeated or prolonged interruptions of service, due to problems with our systems or third party technologies, whether or not in our control, could have a significant negative impact on our reputation and our ability to sell products and services.

We are highly dependent upon a variety of internal computer and telecommunication systems to operate our business. In order to support our continued operational ability and growth, we must maintain and continuously upgrade our ERP and other information systems, which are critical to our operational, accounting and financial functions. Failure to properly or adequately invest in and maintain these systems could result in the diversion of management’s attention and resources and could materially adversely affect our operating results and impact our ability to efficiently manage our business. Our existing information systems may become obsolete, requiring us to transition our systems to a new platform. Such a transition would be time consuming and costly, and would require management resources in excess of those we currently have.

Further, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations, financial condition and cash flows may be adversely affected if our information systems do not allow us to transmit accurate information, even for a short period of time. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could adversely affect our reputation, competitive position, business, results of operations, financial condition and cash flows.

We must attract and retain qualified people to operate our systems, expand and improve them, integrate new programs effectively with our existing programs, and convert to new systems efficiently when required. Any disruption to our business due to such issues, or an increase in our costs to cover these issues that is greater than what we have anticipated, could have an adverse effect on business, financial condition, results of operations and cash flows. Our customers rely increasingly on our electronic ordering and information systems as a source for product information, including availability and pricing. There can be no assurance that our systems will not fail or experience disruptions, and any significant failure or disruption of these systems could prevent us from making sales, ordering and delivering products and otherwise conducting our business. Many of our customers use our website to check real-time product availability, see their customized pricing and place orders, and to access our connected solution platforms. Any material disruption of our website, our connected solution applications, or the Internet in general could impair our order processing or prevent our manufacturers and customers from accessing information and cause us to lose business or damage our reputation.

 

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Risks associated with data privacy issues, including evolving laws and regulations and associated compliance efforts, could adversely affect our business, financial conditions, results of operations and cash flows.

Our business depends on the processing of data (some of which contains personal data), including the transfer of data between our affiliated entities, to and from our business partners and customers, and with third-party service providers. The laws and regulations relating to personal data constantly evolve, as federal, state and foreign governments continue to adopt new measures addressing data privacy and processing (including collection, storage, transfer, disposal and use) of personal data. Moreover, the interpretation and application of many existing or recently enacted privacy and data protection laws and regulations in the European Union, the U.S. and elsewhere are uncertain and fluid, and it is possible that such laws and regulations may be interpreted or applied in a manner that is inconsistent with our existing data management practices or the features of our products and services. Any such new laws or regulations, any changes to existing laws and regulations and any such interpretation or application may affect demand for our products and services, impact our ability to effectively transfer data across borders in support of our business operations, or increase the cost of providing our products and services. Additionally, any actual or perceived breach of such laws or regulations may subject us to claims and may lead to administrative, civil or criminal liability, as well as reputational harm to SpinCo or our employees. We could also be required to fundamentally change our business activities and practices, or modify our products and services, which could have an adverse effect on our business, financial condition, results of operations and cash flows.

In the U.S., various laws and regulations apply to the collection, processing, transfer, disposal, unauthorized disclosure and security of personal data. For example, data protection laws passed by most states within the U.S. require notification to users when there is a security breach for personal data. Additionally, the Federal Trade Commission (“FTC”) and many state attorneys general are interpreting federal and state consumer protection laws as imposing standards for the online collection, use, transfer and security of personal data. In particular, our privacy policy and other statements we publish provide promises and assurances about privacy and security that could subject us to potential regulatory action or other liabilities if such statements are found to be deceptive or misrepresentative of our privacy and data security practices. The U.S. Congress and state legislatures, along with federal regulatory authorities have recently increased their attention to matters concerning personal data, and this may result in new legislation which could increase the cost of compliance. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us or our customers.

In the European Union, some of our operations are subject to the European Union’s General Data Protection Regulation (“GDPR”), which took effect from May 25, 2018. The GDPR introduces a number of new obligations for subject companies and we will need to continue dedicating financial resources and management time to GDPR compliance in the future. The GDPR enhances the obligations placed on companies that control or process personal data of residents of the European Union including, for example, expanded disclosures about how personal data is to be used, new mechanisms for obtaining consent from data subjects, new controls for data subjects with respect to their personal data (including by enabling them to exercise rights to erasure and data portability), limitations on retention of personal data and mandatory data breach notifications. Additionally, the GDPR places companies under new obligations relating to data transfers and the security of the personal data they process, as well as in relation to third-party data processors they use. The GDPR provides that supervisory authorities in the European Union may impose administrative fines for certain infringements of the GDPR of up to EUR 20,000,000 or 4% of a company’s total, worldwide, annual turnover of the preceding financial year, whichever is higher. Individuals who have suffered damage as a result of a subject company’s non-compliance with the GDPR also have the right to seek compensation from such company. Given the breadth of the GDPR, compliance with its requirements is likely to continue to require significant expenditure of resources on an ongoing basis, and there can be no assurance that the measures we have taken for the purposes of compliance will be successful in preventing breach of the GDPR. Given the potential fines, liabilities and damage to our reputation in the event of an actual or perceived breach of the GDPR, such a breach may have an adverse effect on our business, financial condition, results of operations and cash flows.

 

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Outside of the U.S. and the European Union, many jurisdictions have adopted or are adopting new data privacy laws that may impose further onerous compliance requirements, such as data localization, which prohibits companies from storing outside the jurisdiction data relating to resident individuals. The proliferation of such laws within the jurisdictions in which we operate may result in conflicting and contradictory requirements, particularly in relation to evolving technologies. Any failure to successfully navigate the changing regulatory landscape could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Privacy-related claims or lawsuits initiated by governmental bodies, customers or other third parties, whether meritorious or not, could be time consuming, result in costly regulatory proceedings, litigation, penalties and fines, or require us to change our business practices, sometimes in expensive ways, or other potential liabilities. Unfavorable publicity regarding our privacy practices could injure our reputation, harm our ability to keep existing customers or attract new customers or otherwise adversely affect our business, assets, revenue, brands and reputation which may have an adverse effect on our business, financial condition, results of operations and cash flows.

Internal system or service failures, including as a result of cyber or other security incidents, could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation, our business, financial condition, results of operations and cash flows. Our connected products potentially expose our business to cybersecurity threats.

We create, deploy and maintain information technology (“IT”) and engineering systems, some of which involve sensitive information, including personal data, trade secrets and other proprietary information. In addition, our connected products potentially expose our business to cybersecurity threats. As a result, we are subject to systems, service or product failures, not only resulting from our own failures or the failures of third party service providers, natural disasters, power shortages or terrorist attacks, but also from exposure to cyber or other security threats. Most of the jurisdictions in which we operate have laws and regulations relating to data security and protection of information. See “Risks Relating to Our Business—Risks associated with data privacy issues, including evolving laws and regulations and associated compliance efforts, could adversely affect our business, financial condition, results of operations and cash flows.” We have certain measures to protect our information systems against unauthorized access and disclosure of personal information and of our confidential information and trade secrets and confidential information and trade secrets belonging to our customers. However, there is no assurance that the security measures we have put in place will be effective in every case.

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to IT systems to sophisticated and targeted measures known as advanced persistent threats directed at our products, our customers, vendors and/or our third party service providers, including cloud providers. There has been an increase in the frequency and sophistication of cyber and other security threats we face, and our customers are increasingly requiring cyber and other security protections and standards in our products, and we may incur additional costs to comply with such demands. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to our business.

We sell security and life safety solutions, which are designed to secure the safety of our subscribers and their residences or commercial properties. If these solutions fail for any reason, including due to defects in our software, a carrier outage, a failure of our network operating center, a failure on the part of one of our service provider partners, user error or cybersecurity incident, we could be subject to liability and reputational damage for such failures and our business could suffer.

We seek to deploy comprehensive measures to deter, prevent, detect, respond to and mitigate these threats, including identity and access controls, data protection, vulnerability assessments, product software designs that we believe are less susceptible to cyber-attacks, continuous monitoring of our IT networks and systems and

 

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maintenance of backup and protective systems. Despite these efforts, cyber and other security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, misuse or unavailability of personal data, critical data and confidential or proprietary information (our own or that of third parties), product failure and the disruption of business operations. Moreover, employee error or malfeasance, faulty password management or other intentional or inadvertent non-compliance with our security protocols may result in a breach of our information systems. Our efforts to protect our company data and the information we receive may also be unsuccessful due to software “bugs,” system errors or other technical deficiencies, or vulnerabilities of our vendors and service providers. Cyber and other security incidents aimed at the software embedded in our products could lead to third party claims that our product failures have caused a similar range of damages to our customers, and this risk is enhanced by the increasingly connected nature of our products.

The potential consequences of a material cyber or other security incident include financial loss, reputational damage, negative media coverage, litigation with third parties, including class-action litigation, regulatory investigations or actions, theft of intellectual property, fines, diminution in the value of our investment in research, development and engineering, and increased cyber and other security protection and remediation costs due to the increasing sophistication and proliferation of threats, which in turn could adversely affect our competitiveness, business, financial condition, results of operations and cash flows. In addition to any costs resulting from contract performance or required corrective action, these incidents could generate increased costs or loss of revenue if our customers choose to postpone or cancel previously scheduled orders or decide not to renew any of our existing contracts. Breaches in security could also result in a negative impact for our customers and thus affect our relations with our customers, injure our reputation and harm our ability to keep existing customers and to attract new customers. Some jurisdictions have enacted law requiring companies to notify individuals of data security breaches involving certain types of personal data. Such mandatory disclosures could lead to negative publicity and may cause our current and prospective customers to lose confidence in the effectiveness of our data security measures.

We could incur significant costs in protecting our data centers and servers against, or remediating, security vulnerabilities or breaches and cyber-attacks. Additionally, the costs related to cyber or other security incidents may not be fully insured or indemnified by other means. The successful assertion of a large claim against us with respect to a cyber or other security incident could seriously harm our business. Even if not successful, these claims could result in significant legal and other costs and may be a distraction to our management and harm our customer relationships and reputation.

The failure of our network operations centers and data back-up systems could put our users at risk.

Many of our solutions operate with a hosted architecture, and we update our solutions regularly while our solutions are operating. If our solutions and/or upgrades fail to operate properly, our solutions could stop functioning for a period of time, which could put our users at risk. Our ability to keep our business operating is highly dependent on the proper and efficient operation of our network operations centers and data back-up systems. Although our network operations centers have back-up computer and power systems, if there is a catastrophic event, adverse weather conditions, natural disaster, terrorist attack, security breach or other extraordinary event, we may be unable to provide our subscribers with uninterrupted monitoring service. Furthermore, because data back-up systems are susceptible to malfunctions and interruptions (including those due to equipment damage, power outages, human error, computer viruses, computer hacking, data corruption and a range of other hardware, software and network problems), we cannot guarantee that we will not experience data back-up failures in the future. A significant or large-scale, security breach, malfunction or interruption of our network operations centers or data back-up systems could adversely affect our ability to keep our operations running efficiently. If a malfunction or security breach results in a wider or sustained disruption, it could have an adverse effect on our reputation, business, financial condition, results of operations or cash flows. See “Risks Relating to Our Business—Internal system or service failures, including as a result of cyber or other security incidents, could disrupt business operations, result in the loss of critical and confidential information, and

 

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adversely impact our reputation, our business, financial condition, results of operations and cash flows. Our connected products potentially expose our business to cybersecurity threats.”

Disruptions, or the need to relocate any of our facilities, could significantly disrupt our business.

We manufacture many of products at single-location production facilities and rely on certain suppliers who also may concentrate production in single locations. A disruption, including work stoppage, supply chain failures, natural disasters, weather-related disruptions, or other disruptions at one or more of our production facilities could have adverse effects on our business, financial condition, results of operations and cash flows. Moreover, due to unforeseen circumstances or factors beyond our control, we may be forced to relocate our operations from one or more of our existing facilities to new facilities and may incur substantial costs, experience program delays and sacrifice proximity to customers and geographic markets as a result, potentially for an extended period of time. Any significant interruption in production at one or more of these facilities could negatively impact our ability to deliver our products to our customers.

A significant disruption in the supply of a key component due to a work stoppage or other disruption at one of our suppliers or any other supplier could impact our ability to make timely deliveries to our customers and, accordingly, have an adverse effect on our business, financial condition, results of operations and cash flows. Where a manufacturer halts production because of another supplier failing to deliver on time, or as a result of a work stoppage or other disruption, it is unlikely we will be fully compensated, if at all.

We rely on certain suppliers of materials and components for our products.

Certain of the materials and components for products we manufacture and those manufactured on our behalf are supplied by single or limited source suppliers. Our business, results of operations, financial condition and cash flows could be adversely affected by disruptions in supply from our third party suppliers, whether from supply chain disruptions or if suppliers lack sufficient quality control or if there are significant changes in their financial or business condition. See “Business—Materials and Suppliers.”

If our third party suppliers and manufacturers fail to deliver products, parts and components of sufficient quality on time and at reasonable prices, we could have difficulties fulfilling our orders or stocking our distribution centers on similar terms or at all, sales and profits could decline, and our commercial reputation could be damaged. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ inability to scale production and adjust delivery of long-lead-time products during times of volatile demand. Our inability to fill our supply needs would jeopardize our ability to fulfill obligations which could, in turn, result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships.

If we fail to adequately assess the creditworthiness and operational reliability of existing or future suppliers, if there is any unanticipated deterioration in their creditworthiness and operational reliability, or if our suppliers do not perform or adhere to our existing or future contractual arrangements, any resulting inability to otherwise obtain the supplies or our inability to enforce the terms of the contract or seek other remedies could have an adverse effect on our financial condition and results of operations and could cause us to incur significant liabilities.

We obtain many of the products for our ADI distribution business from third parties.

Most of the low voltage products we distribute through our ADI business are manufactured by third parties. As a result, terminations of supply or services agreements or a change in terms or conditions of sale from one or more of our key manufacturers could negatively affect our operating margins, net sales or the level of capital required to fund our operations. We have standard distribution contracts with our manufacturers which are subject to renegotiation or non-renewal. Our dependence on third party manufacturers leaves us vulnerable to having an inadequate supply of demanded products, price increases, late deliveries and poor product quality.

 

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Our ability to obtain particular products or product lines in the required quantities and our ability to fulfill customer orders on a timely basis is critical to our success. Our manufacturers have experienced product supply shortages from time to time due to the inability of certain of their suppliers to supply certain products on a timely basis. As a result, we have experienced, and may in the future continue to experience, short-term shortages of specific products. We cannot provide any assurances that manufacturers will be able to maintain an adequate supply of products to fulfill all of our customer orders on a timely basis. Our reputation, sales and profitability may suffer if manufacturers are not able to provide us with an adequate supply of products to fulfill our customer orders on a timely basis or if we cannot otherwise obtain particular products or a product lines.

Manufacturers who currently distribute their products through us may decide to shift to or substantially increase their existing distribution with other distributors, their own dealer networks, or directly to resellers or end-users. Increasingly, our manufacturers are combining, leaving us with fewer alternative sources. This could result in more intense competition as distributors strive to secure distribution rights with these manufacturers, which could have an adverse impact on our business, financial condition, results of operations and cash flows. If we are unable to maintain an adequate supply of products, or if manufacturers do not regularly invest in, introduce to us, and/or make new products available to us for distribution, our net sales and gross profit could suffer considerably.

Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and cause us to incur significant liabilities.

The cost and availability of raw materials (such as copper, steel, aluminum, plastics, printed circuit boards, semiconductors and passive electronics) is a key factor in the cost of our products. Our inability to offset material price inflation through increased prices to customers, formula or long-term fixed price contracts with suppliers, productivity actions or through commodity hedges could adversely affect our business, financial condition, results of operations and cash flows. Supply interruptions could arise from shortages of raw materials, effects of economic, political or financial market conditions on a supplier’s operations, labor disputes or weather conditions affecting products or shipments, transportation disruptions, information system disruptions or other reasons beyond our control.

The profitability of our business is also dependent upon the efficiency of our supply chain. An inefficient or ineffective supply chain strategy or operations could increase operational costs, reduce profit margins and adversely affect our business, financial condition, results of operations and cash flows. Short- or long-term capacity constraints or financial distress at any point in our supply chain could disrupt our operations and adversely affect our financial performance, particularly when the affected suppliers and manufacturers are the sole sources of products that we require or that have unique capabilities, or when our customers have directed us to use those specific suppliers and manufacturers. We incur significant freight expenses related to the purchase of products for distribution and fluctuations in fuel costs may cause us to incur additional expense.

We are subject to the economic, political, regulatory, foreign exchange and other risks of international operations.

Our international sales are approximately 32% of our net sales for the year ended December 31, 2017. Our international geographic footprint subjects us to many risks including: exchange control regulations; wage and price controls; antitrust/competition and environmental regulations; employment regulations; foreign investment laws; monetary and fiscal policies and protectionist measures that may prohibit acquisitions or joint ventures, establish local content requirements, or impact trade volumes; import, export and other trade restrictions (such as embargoes); violations by our employees of anti-corruption laws (despite our efforts to mitigate these risks); changes in regulations regarding transactions with state-owned enterprises; nationalization of private enterprises; natural and man-made disasters, hazards and losses; backlash from foreign labor organizations related to our repositioning or restructuring actions; violence, civil and labor unrest; acts of terrorism; and our ability to hire and maintain qualified staff and maintain the safety of our employees in these regions. For more information on

 

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our international footprint, see “Business—Properties.” Additionally, certain of the markets in which we operate have adopted increasingly strict data privacy and data protection requirements or may require local storage and processing of data or similar requirements. See “Risks Relating to Our Business—Risks associated with data privacy issues, including evolving laws and regulations and associated compliance efforts, could adversely affect our business, financial condition, results of operations and cash flows.”

Instabilities and uncertainties arising from the global geopolitical environment can negatively impact our business. The U.K.’s referendum to leave the European Union, commonly known as “Brexit,” has caused and may continue to cause interest rate, exchange rate and other market and economic volatility. As negotiations relating to the future terms of the U.K.’s relationship with the European Union proceed, our manufacturing operations and the businesses of our customers and suppliers could be negatively impacted if tariffs, new compliance requirements or other restrictions (such as embargoes) are imposed on the free flow of goods to and from the U.K. Similarly, the implementation of more restrictive trade policies or the renegotiation of existing trade agreements in the U.S. or other countries where we sell or manufacture large quantities of products and services or procure supplies and other materials incorporated into our products could negatively impact our business results of operations, cash flows and financial condition. For example, a government’s adoption of “buy national” policies or retaliation by another government against such policies, such as tariffs or quotas, could have a negative impact on our results of operations.

Tariffs, quotas and other barriers to trade could adversely affect the business of our customers and suppliers, which could in turn negatively impact our net sales and results of operations. In addition, a substantial volume of our Comfort & Care products benefit from the favorable tariff rates established under the North American Free Trade Agreement, renegotiation of which is the subject of on-going discussion among the parties thereto. These and other instabilities and uncertainties arising from the global geopolitical environment, along with the cost of compliance with increasingly complex and often conflicting regulations worldwide, can impair our flexibility in modifying product, marketing, pricing or other strategies for growing our businesses, as well as our ability to improve productivity and maintain acceptable operating margins.

As a result of our global presence, a portion of our net sales are denominated in currencies other than the U.S. Dollar, whereas a significant amount of our payment obligations, including pursuant to the Indemnification and Reimbursement Agreement and Tax Matters Agreement are denominated in U.S. Dollars, which exposes us to foreign exchange risk. We monitor and seek to reduce such risk through hedging activities; however, foreign exchange hedging activities bear a financial cost and may not always be available to us or be successful in eliminating such volatility. Finally, we generate significant amounts of cash outside of the United States that is invested with financial and non-financial counterparties. While we employ comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure our ability to fund our operations and commitments, a material disruption to the counterparties with whom we transact business could expose us to financial loss.

We operate in many high-growth regions that require modifications to our products based on local building codes, regulations, standards, certifications and other factors, which may impact our cost to serve and profitability as we continue our penetration into these regions.

We operate in regulated markets.

Many of our products, technologies and services, in particular products implicating life safety, are subject to regulatory agency oversight, such as the U.S. Consumer Product Safety Commission, the FTC, the Federal Communications Commission (“FCC”), the U.S. Environmental Protection Agency, the European Union’s CE mark (“CE”), the European Community directive “Waste Electrical and Electronic Equipment Directive” (“WEEE Directive”), the regulation Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”), the Gulf Mark standard for low voltage electric products required in Gulf Member States (“G Mark”), the EurAsian Conformity Mark for member countries of Customs Union (“EAC”), the China Compulsory Certification (“CCC”) and the Regulatory Compliance Mark for Australia which may contribute to

 

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our compliance expenses. Many state regulators, such as the California Department of Toxic Substances Control, also have an impact on our markets. For example, 23 states have specific mercury thermostat regulations which require business compliance due to decades of sales of thermostats containing mercury. Mandatory collection requirements, penalties and federal legislation can have an impact on the expense. It is also important that our products comply with various third party standards, such as those of UL.

In addition, the FCC recently repealed net neutrality rules. Because the repeal is recent, we do not yet know the impact it may have on our business. Interference with our services or higher charges to customers by broadband service providers for using our products and services could cause us to lose existing subscribers, impair our ability to attract new subscribers and adversely affect our business, financial condition, results of operations and cash flows.

In addition, telecommunication service providers are subject to extensive regulation in the markets where we operate or may expand in the future. The FTC and the FCC have issued regulations that place restrictions on, among other things, unsolicited automated telephone calls to residential and wireless telephone subscribers by means of automatic telephone dialing systems and the use of prerecorded or artificial voice messages. If our service provider partners were to take actions in violation of these regulations, such as telemarketing to individuals on the “Do Not Call” registry, we could be subject to fines, penalties, private actions or enforcement actions by government regulators. Although we have taken steps to insulate ourselves from any such wrongful conduct by our service provider partners and require our service provider partners to comply with these laws and regulations, no assurance can be given that we will not be exposed to liability as result of our service provider partners’ conduct. Changes in the applicable laws, regulations and technology affecting telecommunication services could require us to change the way we operate, which could increase costs or otherwise disrupt our operations, which in turn could adversely affect our business, financial condition, results of operations and cash flows.

Some local governments impose assessments, fines, penalties and limitations on either customers or companies for false alarms. Certain municipalities have adopted ordinances under which both permit and alarm dispatch fees are charged directly to companies. Service providers generally pass these charges on to customers but may not be able to collect if customers are unwilling or unable to pay them, and this may require the service provider to suspend or terminate service and as a result adversely affect our business, financial condition, results of operations and cash flows. Furthermore, our customers may elect to terminate or not renew services if assessments, fines, or penalties for false alarms become significant. If more local governments were to impose assessments, fines or penalties or requirements for response such as video verification, it could adversely affect our customer base, business, financial condition, results of operations and cash flows.

The net sales and margins of our business are directly impacted by government regulations, including safety, performance and product certification regulations, particularly those driven by customer demands and national approvals, as well as changes in trade agreements and environmental and energy efficiency standards. Growth within emerging markets may be adversely impacted by the inability to acquire and retain qualified employees where local employment law mandates may be restrictive.

Our growth strategy is dependent on expanding our distribution business.

Part of our growth strategy is to expand our geographic footprint and to increase the types and number of products sold through ADI. Our ability to open new ADI locations in both existing and new markets could be affected by local regulations and the availability of suitable real estate. We may not be able to acquire from manufacturers certain product lines that we are interested in adding to our distribution business, and if we are able to add products, they may not result in sales as expected and may not be profitable. If we are unable to execute on any part of our growth strategy, our business, financial condition, results of operations and cash flows could be adversely affected.

 

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Our profitability and results of operations may be adversely affected by a significant failure or inability to comply with the specifications and manufacturing requirements of our OEM customers.

We generally have to qualify, and are required to maintain our status, as a supplier for each of our OEM customers. This is a lengthy process that involves the inspection and approval by a customer of our engineering, documentation, manufacturing and quality control procedures before that customer will place volume orders. If we are successful in qualifying, there is no assurance that any OEM will purchase products from us. Given the length of this qualification process, the risk that our business, operating results and financial condition would be adversely affected by the loss of, or any reduction in orders by, any of our significant OEM customers is increased. Accordingly, the success of our business depends on OEMs continuing to outsource the manufacturing of critical products to us. It would be difficult to replace lost revenue resulting from the loss of, or the reduction, cancellation or delay in purchase orders by, any one of these customers, whether due to their decision to not continue to outsource all or a portion of their critical parts for their capital equipment, their giving market share to our competitors or otherwise. A significant failure or inability to comply with customer specifications and manufacturing requirements or delays or other problems with existing or new products (including program launch difficulties) could result in financial penalties, cancelled orders, increased costs, loss of sales, loss of customers or potential breaches of customer contracts, which could have an adverse effect on our profitability and results of operations. We have in the past lost business from OEM customers who have taken the manufacturing of our products in-house or given market share to our competitors. If we are unable to replace revenue from lost OEM customers it could have an adverse impact on our financial position, results of operation and cash flows. In addition, if we are unable to obtain additional business from OEMs the potential growth of our business results could be adversely affected.

We may not be able to retain or expand relationships with certain large customers.

A number of our customers are large and contribute significantly to our net sales and operating income. Consolidation or change of control, particularly among our OEM customers, or a decision by any one or more of our customers to outsource all or most manufacturing work to a single equipment manufacturer, may concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on a smaller number of customers. By virtue of our largest customers’ size and the significant portion of revenue that we derive from them, they are able to exert significant influence in the negotiation of our commercial agreements and the conduct of our business with them. Furthermore, there is significant consolidation of companies focused on security products, and we have had customers combine with companies with whom we have little or no prior relationship, putting us at risk of loss of sales. If we are unable to retain and expand our business with these large customers on favorable terms, our business, financial condition, results of operations and cash flows will be adversely affected.

We have credit exposure to our customers.

Any adverse trends in our customers’ businesses could cause us to suffer credit losses. As is customary in our markets, we extend credit to our customers. A portion of our customers are small contractors with inconsistent cash flow. As such, they rely on us to provide their businesses with credit and to carry specified inventory to support their operations. We may be unable to collect on receivables if our customers experience decreases in demand for their products and services, do not manage their businesses adequately, or otherwise become less able to pay due to adverse economic conditions or refinancing events. While we evaluate our customers’ qualifications for credit and monitor our extensions of credit, these efforts cannot prevent all credit losses, and credit losses negatively impact our performance. In addition, for financial reporting purposes, we establish reserves based on our historical experience of credit losses. To the extent that our credit losses exceed those reserves, our financial performance will be negatively impacted beyond what is expected. If there is deterioration in the collectability of our receivables, or we fail to take other actions to adequately mitigate such credit risk, our earnings, cash flows and our ability to utilize receivable-based financing could deteriorate. In addition, if we are unable to extend credit to our customers, we may experience loss of certain contracts or business.

 

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In addition, extending credit to international customers involves additional risks. It is often more difficult to evaluate credit of a customer or obtain credit protections in our international operations. Also, credit cycles and collection periods are typically longer in our international operations. We are also subject to credit risk associated with customer concentration. If one or more of our largest customers were to become bankrupt or insolvent, or otherwise were unable to pay for our products, we may incur significant write-offs of accounts that may have an adverse effect on our business, financial condition, results of operations and cash flows. As a result of these factors and other challenges in extending credit to international customers, we generally face greater credit risk from sales internationally compared to domestic sales.

Failure to protect our intellectual property could adversely affect our business, financial condition and results of operations and cash flows.

We rely on a combination of patents, copyrights, trademarks, tradenames, trade secrets and other proprietary rights, as well as contractual arrangements, including licenses, to establish, maintain and protect our intellectual property rights. Effective intellectual property protection may not be available in every country in which we do business. We may not be able to acquire or maintain appropriate registered or unregistered intellectual property in all countries in which we do business. Companies that license intellectual property we own or use, especially, the Honeywell brand, also may take actions that diminish the value of our intellectual property or harm our reputation.

Our intellectual property rights may not be sufficient to permit us to take advantage of some business opportunities. As a result, we may be required to change our plans or acquire the necessary intellectual property rights, which could be costly. Furthermore, our ability to enforce our intellectual property rights in emerging markets may be limited by legal or practical considerations that have not historically affected our business in markets with more established intellectual property protection systems.

The protection of our intellectual property may be expensive and time-consuming. There can be no assurance that the steps we take to maintain and protect our intellectual property will be adequate, or that third parties will not infringe, circumvent, misappropriate or violate our intellectual property. If our efforts to protect our intellectual property are not adequate, the value of our goods and services may be harmed, which could have an adverse effect on our business, financial condition, results of operations and cash flows. Any impairment of our intellectual property, including due to changes in U.S. or worldwide intellectual property laws or the absence of effective legal protection or enforcement measures, could adversely impact our business, financial condition, results of operations and cash flows.

We may incur material losses and costs as a result of intellectual property infringement actions that may be brought against us.

As we adopt new technology, we face an inherent risk of exposure to the claims of others that we have allegedly violated their intellectual property rights. Successful claims that we infringe on the intellectual property rights of others could require us to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability, be prohibited preliminarily or permanently from further use of the intellectual property in question or require us to change our business practices to stop the infringing use, which could limit our ability to compete effectively. In addition, our customer agreements can require us to indemnify the customer for infringement. The time and expense of defending against these claims, whether meritorious or not, may have a material and adverse impact on our profitability and can be time-consuming and costly and divert management’s attention and resources away from our businesses. Furthermore, the publicity we may receive as a result of infringing intellectual property rights may damage our reputation and adversely impact our existing customer relationships and our ability to develop new business.

We cannot assure you that we will not experience any material intellectual property claim losses in the future or that we will not incur significant costs to defend such claims.

 

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Failure to increase productivity through sustainable operational improvements, as well as an inability to successfully execute repositioning projects or to effectively manage our workforce, may reduce our profitability or adversely impact our businesses.

Our profitability and margin growth are dependent upon our ability to drive sustainable improvements. In addition, we seek productivity and cost savings benefits through repositioning and other projects, such as consolidation of manufacturing facilities, transitions to cost-competitive regions, workforce reductions, asset impairments, product line rationalizations and other cost-saving initiatives. Risks associated with these actions include delays in execution of the planned initiatives, additional unexpected costs, realization of fewer than estimated productivity improvements and adverse effects on employee morale. We may not realize the full operational or financial benefits we expect and the recognition of these benefits may be delayed and these actions may potentially disrupt our operations. In addition, organizational changes, attrition, labor relations difficulties, or workforce stoppage could have an adverse effect on our business, reputation, financial condition, results of operations and cash flows.

We may not be able to successfully acquire and integrate other products, technologies or businesses or realize the anticipated benefits of acquisitions.

As part of our strategy, we expect to evaluate acquisitions and strategic investments in products or technologies and businesses that could complement or expand our business or otherwise offer growth or cost-saving opportunities. An investment in, or acquisition of, complementary products or technologies or businesses in the future could materially decrease the amount of our available cash or require us to seek additional equity or debt financing, particularly if we face competition for acquisition opportunities in the various markets in which we operate.

In connection with any acquisitions we complete, we may have difficulty integrating the acquired business, may not achieve the synergies or other benefits we expected to achieve, and we may incur unanticipated expenses, write-downs, impairment charges or unforeseen liabilities that could negatively affect our business, financial condition, results of operations and cash flows. Further, contemplating or completing an acquisition and integrating an acquired product or technology or business could divert management and employee time and resources from other matters.

We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could adversely affect our business, financial condition, results of operations and cash flows.

Due to the complex nature of our business, our future performance is highly dependent upon the continued services of our employees and management who have significant industry expertise, including our engineering and design personnel and trained sales force. Our performance is also dependent on the development of additional personnel and the hiring of new qualified engineering, design, manufacturing, marketing, sales and management personnel for our operations. Competition for qualified personnel in our markets is intense, and we may not be successful in attracting or retaining qualified personnel. The loss of key employees, our inability to attract new qualified employees or adequately train employees, or the delay in hiring key personnel could negatively affect our business, financial condition, results of operations and cash flows.

We may not be able to obtain additional capital that we need in the future on favorable terms or at all.

We may require additional capital in the future to finance our growth and development, upgrade and improve our manufacturing capabilities, implement further marketing and sales activities, fund ongoing R&D activities, satisfy regulatory and environmental compliance obligations and national approvals requirements, satisfy post-Spin-Off indemnity obligations to Honeywell, and meet general working capital needs. Our capital requirements will depend on many factors, including acceptance of and demand for our solutions, the extent to which we invest in new technology and R&D projects and the status and timing of these developments. If our access to capital were to become constrained significantly, or if costs of capital increased significantly, due to

 

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lowered credit ratings, prevailing business conditions, the volatility of the capital markets or other factors, our business, financial condition, results of operations and cash flows could be adversely affected.

Moreover, we have historically relied on Honeywell for assistance in satisfying our capital requirements. After the Spin-Off, we will not be able to rely on the earnings, assets or cash flow of Honeywell, and Honeywell will not provide funds to finance our capital requirements. As a result, after the Share Distribution, we will be responsible for obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements independent of Honeywell, and debt or equity financing may not be available to us on terms we find acceptable, if at all. Even if we are able to obtain financing or access the capital markets, incurring additional debt may significantly increase our interest expense and financial leverage, and our level of indebtedness could restrict our ability to fund future development and acquisition activities. Also, regardless of the terms of our debt or equity financing, our agreements and obligations under the Tax Matters Agreement that address compliance with Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”), may limit our ability to issue stock. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Tax Matters Agreement.” We believe that, at the time of the Spin-Off, we will have adequate capital resources to meet our projected operating needs, capital expenditures and other cash requirements, including payments to Honeywell under the Indemnification and Reimbursement Agreement. However, we may need additional capital resources in the future and if we are unable to obtain sufficient resources for our operating needs, capital expenditures and other cash requirements for any reason, our business, financial condition and results of operations could be adversely affected. See “—Risks Relating to the Spin-Off—We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent, publicly traded company, and we may experience increased costs after the Spin-Off.”

We are subject to risks associated with the Indemnification and Reimbursement Agreement, pursuant to which we will be required to make substantial cash payments to Honeywell, measured in substantial part by reference to estimates by Honeywell of certain of its liabilities.

In connection with the Spin-Off, we intend to enter into an Indemnification and Reimbursement Agreement (as defined below), pursuant to which we will have an obligation to make cash payments to Honeywell in amounts equal to 90% of payments, which include amounts billed (“payments”), 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 (the “liabilities”) 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 (the “recoveries”). The amount payable by the Company in respect of such liabilities arising in respect of any given year will be subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum). Payments in respect of the liabilities arising in a given year will be made quarterly throughout such year on the basis of an estimate of the liabilities and recoveries provided by Honeywell. Following the end of any such year, Honeywell will provide us with a calculation of the amount of payments and the recoveries actually received. Subject to the aforementioned cap, if the amount of payments (net of recoveries) is greater than the previously provided estimate, we will pay Honeywell the amount of such difference (the “true-up payment”) and, if the amount of the previously provided estimate is greater than the amount of payments (net of recoveries), we will receive a credit in the amount of such difference that will be applied to future payments. If a true-up payment exceeds $30 million, such true-up payment will be made in equal installments, payable on a monthly basis following the date the true-up payment is due.

For example, if in any given year, Honeywell’s estimated annual payments that are within the scope of the Indemnification and Reimbursement Agreement totaled $140 million, and if Honeywell’s estimated associated recoveries totaled $20 million, then our quarterly payment obligations in respect of that year would be 90% of the net amount (or $108 million) divided by four, or $27 million. If, for such year, Honeywell’s annual payments

 

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actually totaled $165 million, and if Honeywell’s associated recoveries actually totaled $10 million, our additional true-up payment obligation in respect of that year would be 90% of the net amount (or $139.5 million) minus the sum of our quarterly payments, or $108 million, resulting in an aggregate payment in respect of such year of $31.5 million, which, because it exceeds $30 million, would be made in equal installments, payable on the true-up date and on a monthly basis following the date the true-up payment is due. However, if in any given year, Honeywell’s estimated annual payments totaled $175 million, and the estimated associated recoveries totaled $5 million, then our quarterly payment obligations in respect of that year would be capped at $35 million even though 90% of the net amount (or $153 million) divided by four is higher at $38.25 million, resulting in an aggregate maximum payment for such year equal to the cap of $140 million (regardless of whether or not actual liabilities (net of recoveries) exceeded the previously provided estimates).

Historically, Honeywell’s environmental claim and remediation payments in respect of the sites that are within the scope of the Indemnification and Reimbursement Agreement for the years 2017, 2016 and 2015, including any legal fees, were approximately $200 million, $221 million and $259 million, respectively, and Honeywell’s associated receipts for insurance and amounts received by Honeywell in connection with affirmative claims, contributions and property sales for 2017, 2016 and 2015 were approximately $2 million, $10 million and $18 million, respectively.

In the event that Honeywell completes a transfer to a third party in respect of a portion of the remediation liabilities that are within the scope of the Indemnification and Reimbursement Agreement, the Company will be obligated to pay 90% of the amount paid or payable by Honeywell in connection with such liability transfer, less any applicable recoveries. Amounts payable in respect of liability transfers for any given year are paid in the year following the year in which they occur, at the time that the true-up payment is made. If the amounts payable in respect of a liability transfer, together with any true-up payment, exceeds $30 million, such amounts will be made in equal installments, payable on the true-up date and on a monthly basis following the date the true-up payment is due. While any amount in respect of a liability transfer is outstanding, the annual payment by us to Honeywell will be first allocated towards the liabilities described above relating to environmental claims, remediation, hazardous exposure and toxic tort claims arising outside of the scope of the liability transfer, and then towards the liability transfer payment. The amount payable by the Company in respect of (i) any such liability transfers and (ii) the liabilities described above relating to environmental claims, remediation, hazardous exposure and toxic tort claims arising in any given year, will be subject to a cap of $140 million (exclusive of any late payment fees up to 5% per annum).

The scope of our current environmental remediation obligations subject to the Indemnification and Reimbursement Agreement relates to approximately 230 sites or groups of sites that are undergoing environmental remediation under U.S. federal or state law and agency oversight for contamination associated with Honeywell legacy business operations. The ongoing environmental remediation is designed to address contaminants at upland and sediment sites, which include, among others, metals, organic compounds and polychlorinated biphenyls, through a variety of methods, which include, among others, excavation, capping, in-situ stabilization, groundwater treatment and dredging. In addition, our obligations subject to the Indemnification and Reimbursement Agreement will include certain liability with respect to (i) hazardous exposure or toxic tort claims associated with the specified sites that arise after the Spin-Off, if any, (ii) currently unidentified releases of hazardous substances at or associated with the specified sites, (iii) other environmental claims associated with the specified sites and (iv) consequential damages.

Payment amounts under the Indemnification and Reimbursement Agreement will be deferred to the extent that a specified event of default has occurred and is continuing under certain indebtedness, including under our principal credit agreement, or the payment thereof causes us to not be compliant with certain financial covenants in certain indebtedness, including our principal credit agreement on a pro forma basis, including the maximum total leverage ratio (ratio of consolidated debt to consolidated EBITDA, which excludes any amounts owed to Honeywell under the Indemnification and Reimbursement Agreement), and the minimum interest coverage ratio. A 5% late payment fee will accrue on all amounts that are not otherwise entitled to be deferred under the terms of

 

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the Indemnification and Reimbursement Agreement, without prejudice to any other rights that Honeywell may have for late payments. In each calendar quarter, our ability to pay dividends and repurchase capital stock in such calendar quarter will be restricted until any amounts payable under the Indemnification and Reimbursement Agreement in such quarter (including any deferred payment amounts) are paid to Honeywell and we will be required to use available restricted payment capacity under our debt agreements to make payments in respect of any such deferred amounts. Payment of deferred amounts and certain other amounts could cause the amount we are required to pay under the Indemnification and Reimbursement Agreement in respect of liabilities arising in any given calendar year to exceed $140 million (exclusive of any late payment fees up to 5% per annum). All amounts payable under the Indemnification and Reimbursement Agreement will be guaranteed by certain of our subsidiaries that act as guarantors under our principal credit agreement, subject to certain exceptions. Under the Indemnification and Reimbursement Agreement, we will also be subject to certain of the affirmative and negative covenants to which we are subject under our principal credit agreement. Further, pursuant to the Indemnification and Reimbursement Agreement, our ability to (i) amend or replace our principal credit agreement, (ii) enter into another credit agreement and make amendments or waivers thereto, or (iii) enter into or amend or waive any provisions under other agreements, in each case, in a manner that would adversely affect the rights of Honeywell under the Indemnification and Reimbursement Agreement, will be subject to Honeywell’s prior written consent. This consent right will significantly limit our ability to engage in many types of significant transactions on favorable terms (or at all), including, but not limited to, equity and debt financings, liability management transactions, refinancing transactions, mergers, acquisitions, joint ventures and other strategic transactions. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement.”

The Indemnification and Reimbursement Agreement may have material adverse effects on our liquidity and cash flows and on our results of operations, regardless of whether we experience a decline in net sales. The Indemnification and Reimbursement Agreement may also require us to accrue significant long-term liabilities on our consolidated balance sheet, the amounts of which will be dependent on factors outside our control, including Honeywell’s responsibility to manage and determine the outcomes of claims underlying the liabilities. This may have a significant negative impact on the calculation of key financial ratios and other metrics that are important to investors, rating agencies and securities analysts in evaluating our creditworthiness and the value of our securities. Accordingly, our access to capital to fund our operations may be materially adversely affected and the value of your investment in our company may decline. The Indemnification and Reimbursement Agreement also includes other obligations that may impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement.” Moreover, the payments that we will be required to make to Honeywell pursuant to the Indemnification and Reimbursement Agreement will not be deductible for U.S. federal income tax purposes.

Although we will have access to information regarding these liabilities as we may reasonably request for certain purposes, as well as the ability to participate in periodic standing meetings with Honeywell’s remediation management team responsible for management of the underlying claims, including outside litigation or environmental counsel if necessary, the payment obligations under the Indemnification and Reimbursement Agreement relate to legal proceedings and remediation efforts that we will not control, and we accordingly do not expect to be able to make definitive decisions regarding settlements or other outcomes that could influence our potential related exposure.

Independent of our payments under the Indemnification and Reimbursement Agreement, we will have ongoing liability for certain environmental claims which are part of SpinCo’s going forward business. For the year ended December 31, 2017, these payments totaled $1.1 million.

 

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Our operations and the prior operations of predecessor companies expose us to the risk of material environmental liabilities.

We are subject to potentially material liabilities related to the investigation and cleanup of environmental hazards and to claims of personal injuries or property damages that may arise from hazardous substance releases and exposures. These liabilities arise out of our current and past operations and the operations and properties of predecessor companies (including offsite waste disposal). In connection with the Spin-Off, we intend to enter into an Indemnification and Reimbursement Agreement, pursuant to which we will have an obligation to make cash payments to Honeywell related to certain of Honeywell’s environmental-related liabilities. See “Risks Relating to Our Business—We are subject to risks associated with the Indemnification and Reimbursement Agreement, pursuant to which we will be required to make substantial cash payments to Honeywell, measured in substantial part by reference to estimates by Honeywell of certain of its liabilities.”

We are also subject to potentially material liabilities related to the compliance of our operations with the requirements of various federal, state, local and foreign governments that regulate the discharge of materials into the environment and the generation, handling, storage, treatment and disposal of and exposure to hazardous substances. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that our handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. However, if we are found to be in violation of these laws and regulations, we may be subject to substantial fines, criminal sanctions, trade restrictions, product recalls, public exposure and be required to install costly equipment or make operational changes to achieve compliance with such laws and regulations.

In addition, changes in laws, regulations or government enforcement of policies concerning the environment, the discovery of previously unknown contamination or new technology or information related to individual contaminated sites, the establishment of stricter state or federal toxicity standards with respect to certain contaminants, or the imposition of new clean-up requirements or remedial techniques, could require us to incur additional currently unanticipated costs in the future that would have a negative effect on our business, financial condition, results of operations and cash flows.

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

In the ordinary course of business, we may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses, and issue guarantees of third party obligations. We are subject to various lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. Our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may become subject to or be required to pay damage awards or settlements that could have an adverse effect on our business, financial condition, results of operations and cash flows. If we were required to make payments, such payments could be significant and could exceed the amounts we have accrued with respect thereto, adversely affecting our business, financial condition, results of operations and cash flows. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. The incurrence of significant liabilities for which there is no or insufficient insurance coverage could adversely affect our liquidity and financial condition, results of operations and cash flows.

Our effective tax rate will be affected by factors including changes in tax rules, and in the interpretation and application of those rules, in the countries in which we operate.

Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in tax laws, regulations

 

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and judicial rulings (or changes in the interpretation thereof), changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently reinvested offshore, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures and various other governmental enforcement initiatives. Our tax expense includes estimates of tax reserves and reflects other estimates and assumptions, including assessments of future earnings of the Company which could impact the valuation of our deferred tax assets. Changes in tax laws or regulations, including multi-jurisdictional changes enacted in response to the guidelines provided by the Organization for Economic Co-operation and Development (“OECD”) to address base erosion and profit shifting, and the interpretation and application of comprehensive U.S. tax reform legislation enacted in December of 2017, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), will increase tax uncertainty and may adversely impact our provision for income taxes. As noted under “—Risks Relating to Our Business—We are subject to risks associated with the Indemnification and Reimbursement Agreement, pursuant to which we will be required to make substantial cash payments to Honeywell, measured by reference to estimates by Honeywell of certain of its liabilities,” the payments that we will be required to make to Honeywell pursuant to the Indemnification and Reimbursement Agreement will not be deductible for U.S. federal income tax purposes.

U.S. federal income tax reform could adversely affect us.

The TCJA made fundamental changes to the U.S. taxation of multinational corporations. Significant changes include the provision of an exemption for certain active foreign earnings (subject to a cap determined by reference to a specified return on tangible assets), a minimum tax on foreign earnings in excess of the cap, expansion of the current anti-deferral rules, and new measures to deter base erosion. The TCJA also introduced a reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of certain capital investment, and limitation of the deduction for interest expense. Although the TCJA is generally effective January 1, 2018, U.S. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. The impact on the year ended December 31, 2017 was, and the impact on future years may be, material to our financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations for the Years Ended December 31, 2017, 2016 and 2015—Tax Expense.” We continue to examine the impact this tax reform legislation may have on our business.

We may be required to make significant cash contributions to the defined benefit pension plans that we intend to sponsor after the Spin-Off.

After the Spin-Off, we intend to sponsor defined benefit pension plans under which certain eligible Company employees will earn pension benefits following the Spin-Off. Plans will be established in several countries including the U.S. The Federal Pension Protection Act of 2006, which is generally applicable to U.S. defined benefit pension plans, generally requires that defined benefit pension plans maintain certain capitalization levels. We are currently still in negotiations related to the U.S. defined benefit pension plan and are not able to estimate the timing or amount of the cash contributions we will be required to make in the future to meet the requirements of applicable law. However, we expect that, as pension liabilities accrue under this defined benefit pension plan, we may be required by law to make future plan contributions that may be material and could adversely affect our business, financial condition, results of operations and cash flows.

Risks Relating to the Spin-Off

If the Spin-Off does not qualify for its intended U.S. tax treatment, Honeywell and its stockholders could incur significant costs.

Completion of the Spin-Off is conditioned on Honeywell’s receipt of separate written opinions from Cleary Gottlieb Steen & Hamilton LLP and KPMG LLP to the effect that the Share Distribution will qualify for

 

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non-recognition of gain and loss under Section 355 and related provisions of the Code. Honeywell can waive receipt of either or both tax opinions as a condition to the completion of the Spin-Off.

The opinions do not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinions assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents. In addition, the opinions are based on certain representations as to factual matters from, and certain covenants by, Honeywell and us. The opinions cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect.

The opinions are not binding on the Internal Revenue Service (the “IRS”) or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. If the conclusions expressed in the opinions are challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences of the Spin-Off could be materially less favorable. Honeywell has not requested, and does not intend to request, a ruling from the IRS regarding the U.S. federal income tax consequences of the Spin-Off.

If the Spin-Off were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, then a U.S. Holder who receives our common stock in the Share Distribution generally would be treated as receiving a distribution in an amount equal to the fair market value of our common stock received. The distribution would be treated as: (1) a taxable dividend to the extent of the holder’s pro rata share of Honeywell’s current or accumulated earnings and profits; (2) a reduction in the holder’s basis (but not below zero) in Honeywell common stock to the extent the amount received exceeds the holder’s share of Honeywell’s earnings and profits; and (3) taxable gain from the exchange of Honeywell common stock to the extent the amount received exceeds the sum of the holder’s share of Honeywell’s earnings and profits and its basis in its Honeywell common stock. See below and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

We will agree in the Tax Matters Agreement not to take actions that could affect Honeywell’s tax treatment. The need to comply with these provisions of the Tax Matters Agreement could reduce our strategic and operating flexibility. If we fail to comply with them, or breach representations or covenants made in the Tax Matters Agreement or in connection with the receipt of the tax opinion, we could incur material indemnification obligations to Honeywell, which could adversely affect our business, financial condition, results of operations and cash flows.

If one or more persons acquire a 50% or greater interest (measured by vote or value) in the stock of Honeywell or SpinCo, directly or indirectly (including through acquisitions of stock after the completion of the Transactions), as part of a plan or series of related transactions that includes the Share Distribution, then the Share Distribution would be taxable to Honeywell, but not to Honeywell stockholders. Current law generally creates a presumption that any direct or indirect acquisition of stock of Honeywell or SpinCo within two years before or after the Share Distribution is part of a plan that includes the Share Distribution, although the parties may be able to rebut that presumption in certain circumstances. The process for determining whether an acquisition is part of a plan under these rules is complex, inherently factual in nature, and subject to a comprehensive analysis of the facts and circumstances of the particular case. We have entered into covenants not to engage in specified transactions for two years after the Share Distribution without Honeywell’s prior consent (which Honeywell may grant or withhold in its sole discretion), and have agreed to indemnify Honeywell for any costs that it may incur as a result of our failure to comply with those covenants. These obligations may limit our ability to pursue strategic transactions or engage in new business or other transactions, such as a share repurchase program, that may maximize the value of our business, and may discourage or delay a strategic transaction that our shareholders may consider favorable, including limiting our ability to use our equity to raise capital or fund acquisitions. Any payments required under these obligations could be significant and could materially adversely affect our business, financial condition, results of operations and cash flows. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Tax Matters Agreement.”

 

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We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility.

We intend to agree in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 of the Code and are intended to preserve the tax-free nature of the Spin-Off. These covenants will include certain restrictions on our activity for a period of two years following the Spin-Off, unless Honeywell gives its consent for us to take a restricted action, which Honeywell is permitted to grant or withhold at its sole discretion. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that our stockholders may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Tax Matters Agreement.”

Until the separation occurs, Honeywell has sole discretion to change the terms of the separation in ways that may be unfavorable to us.

Until the Spin-Off occurs, the Company will be a wholly-owned subsidiary of Honeywell. Accordingly, Honeywell will effectively have the sole and absolute discretion to determine and change the terms of the separation, including the establishment of the record date for the Share Distribution and the Share Distribution Date. These changes could be unfavorable to us. In addition, the separation and Share Distribution and related transactions are subject to the satisfaction or waiver by Honeywell in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met. Honeywell may also decide at any time not to proceed with the separation and Share Distribution.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent, publicly traded company, we will be able to, among other things, design and implement corporate strategies and policies that are better targeted to our business’s areas of strength and differentiation, better focus our financial and operational resources on those specific strategies, create effective incentives for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment with a more natural stockholder base and implement and maintain a capital structure designed to meet our specific needs. We may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all, for a variety of reasons, including: (i) the completion of the Spin-Off will require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business; (ii) following the Spin-Off, we may be more susceptible to market fluctuations and other adverse events than if it were still a part of Honeywell; and (iii) following the Spin-Off, our businesses will be less diversified than Honeywell’s businesses prior to the separation. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition, results of operations and cash flows could be adversely affected.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent, publicly traded company, and we may experience increased costs after the Spin-Off.

We have historically operated as part of Honeywell’s corporate organization, and Honeywell has provided us with various corporate functions. Following the Spin-Off, Honeywell will have no obligation to provide us with assistance other than the transition and other services described under “Certain Relationships and Related Party Transactions—Agreements with Honeywell .” These services do not include every service that we have received from Honeywell in the past, and Honeywell is only obligated to provide the transition services for limited periods following completion of the Spin-Off. The agreements relating to such transition services and to the Spin-Off more generally will be negotiated prior to the Spin-Off, at a time when our business will still be operated by Honeywell. In entering into these agreements the Company will not have an independent board of directors or a management team independent of Honeywell representing its interests while the agreements are

 

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being negotiated. It is possible that we might have been able to achieve more favorable terms if the circumstances differed. We will rely on Honeywell to satisfy its performance and payment obligations under any transition services agreements and other agreements related to the Spin-Off, and if Honeywell does not satisfy such obligations, we could incur operational difficulties or losses.

Following the Spin-Off and the cessation of any transition services agreements, we will need to provide internally or obtain from unaffiliated third parties the services we will no longer receive from Honeywell. These services include legal, accounting, information technology, software development, human resources, investor relations and other infrastructure support, the effective and appropriate performance of which are critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Honeywell. Because our business has historically operated as part of the wider Honeywell organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or may incur additional costs that could adversely affect our business. In particular, our ability to position and market ourselves as a provider of connected home technology could be adversely affected by our loss of access to Honeywell’s development platforms. If we fail to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, our business, financial condition, results of operations and cash flows may be adversely affected.

As we build our information technology infrastructure and transition our data to our own systems, we could incur substantial additional costs and experience temporary business interruptions, and our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Spin-Off.

Following the Spin-Off, we will install and implement information technology infrastructure to support certain of our business functions, including payment systems, ERP systems, accounting and reporting, manufacturing process control, customer service, inventory control and distribution. We may incur substantially higher costs than currently anticipated as we transition from the existing transactional and operational systems and data centers we currently use as part of Honeywell. Such transition must also comply with applicable personal data privacy laws. See “Risks Relating to Our Business—Risks associated with data privacy issues, including evolving laws and regulations and associated compliance efforts, could adversely affect our business, financial condition, results of operations and cash flows.” If we are unable to transition effectively, we may incur temporary interruptions in business operations. Any delay in implementing, or operational interruptions suffered while implementing, our new information technology infrastructure could disrupt our business and have an adverse effect on our business, financial condition, results of operations and cash flows.

In addition, if we are unable to replicate or transition certain systems, our ability to comply with regulatory requirements could be impaired. As a result of the Spin-Off, we will be directly subject to reporting and other obligations under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Beginning with our second required Annual Report on Form 10-K, we intend to comply with Section 404 of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes Oxley Act”), which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These reporting and other obligations may place significant demands on management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements, we may need to upgrade our systems, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. We expect to incur additional annual expenses for the purpose of addressing these, and other public-company reporting, requirements. If we are unable to upgrade our financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with financial reporting requirements and other rules that

 

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apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have an adverse effect on our business, financial condition, results of operations and cash flow. See “—Risks Relating to Our Common Stock and the Securities Market.”

We expect to incur new indebtedness concurrently with or prior to the Share Distribution, and the degree to which we will be leveraged following completion of the Share Distribution could adversely affect our business, financial condition and results of operations.

In connection with the Spin-Off, we expect to incur substantial indebtedness in an aggregate principal amount of approximately $1,225 million in the form of senior secured term loans and senior unsecured notes, the net proceeds of which will be received by Honeywell substantially concurrently with the consummation of the Spin-Off. We also intend to enter into a revolving credit facility to be available for our working capital and other cash needs from time to time in an aggregate committed amount of $350 million.

We have historically relied upon Honeywell to fund our working capital requirements and other cash requirements. After the Share Distribution, we will not be able to rely on the earnings, assets or cash flow of Honeywell, and Honeywell will not provide funds to finance our working capital or other cash requirements. As a result, after the Share Distribution, we will be responsible for servicing our own debt and obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements. After the Spin-Off, our access to and cost of debt financing will be different than it would have been as a part of Honeywell. Differences in access to and cost of debt financing may result in differences in the interest rate charged to us on financings, as well as the amount of indebtedness, types of financing structures and debt markets that may be available to us.

Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Spin-Off, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, as well as the risk factors set forth herein.

The terms of the new indebtedness we expect to incur concurrently in connection with the Share Distribution will restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.

We expect that the terms of the indebtedness we expect to incur in connection with the Share Distribution will include a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:

 

   

incur or guarantee additional indebtedness or sell disqualified or preferred stock;

 

   

pay dividends on, make distributions in respect of, repurchase or redeem capital stock;

 

   

make investments or acquisitions;

 

   

sell, transfer or otherwise dispose of certain assets;

 

   

create liens;

 

   

enter into sale/leaseback transactions;

 

   

enter into agreements restricting the ability to pay dividends or make other intercompany transfers;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;

 

   

enter into transactions with affiliates;

 

   

prepay, repurchase or redeem certain kinds of indebtedness;

 

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issue or sell stock of our subsidiaries; and/or

 

   

significantly change the nature of our business.

Furthermore, the lenders of this indebtedness may require that we pledge our assets as collateral as security for our repayment obligations or that we abide by certain financial or operational covenants. Our ability to comply with such covenants and restrictions may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. A breach of any of these covenants, if applicable, could result in an event of default under the terms of this indebtedness. If an event of default occurred, the lenders would have the right to accelerate the repayment of such debt, and the event of default or acceleration could result in the acceleration of the repayment of any other debt to which a cross-default or cross-acceleration provision applies. We might not have, or be able to obtain, sufficient funds to make these accelerated payments, and lenders could then proceed against any collateral. Any subsequent replacement of the agreements governing such indebtedness or any new indebtedness could have similar or greater restrictions. The occurrence and ramifications of an event of default could adversely affect our business, financial condition, results of operations and cash flows. Moreover, as a result of all of these restrictions, we may be limited in how we conduct our business and pursue our strategy, unable to raise additional debt financing to operate during general economic or business downturns or unable to compete effectively or to take advantage of new business opportunities.

The commercial and credit environment may adversely affect our access to capital.

Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets. These conditions may adversely affect our ability to obtain targeted credit ratings prior to and following the Spin-Off.

Our customers, prospective customers, suppliers or other companies with whom we conduct business may need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them.

Some of our customers, prospective customers, suppliers or other companies with whom we conduct business may need assurances that the Company’s financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them. Any failure of parties to be satisfied with our financial stability could have an adverse effect on our business, financial condition, results of operations and cash flows.

We may have potential business conflicts of interest with Honeywell with respect to our past and ongoing relationships.

Conflicts of interest may arise with Honeywell in a number of areas relating to our past and ongoing relationships, including:

 

   

labor, tax, employee benefit, indemnification and other matters arising from our separation from Honeywell;

 

   

intellectual property matters;

 

   

employee recruiting and retention; and

 

   

business combinations involving our Company.

 

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We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party

Following the Spin-Off, certain of our directors and employees may have actual or potential conflicts of interest because of their financial interests in Honeywell.

Because of their current or former positions with Honeywell, certain of our expected executive officers and directors, including the chairman of the Board, own equity interests in Honeywell. Continuing ownership of Honeywell shares and equity awards could create, or appear to create, potential conflicts of interest if the Company and Honeywell face decisions that could have implications for both the Company and Honeywell.

Risks Relating to Our Common Stock and the Securities Market

No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off our stock price may fluctuate significantly.

There is currently no public market for our common stock. Following the Spin-Off, we intend to list our common stock on a national securities exchange. We anticipate that before the Share Distribution Date, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue up to and including the Share Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for stockholders to sell our shares and could lead to our share price being depressed or volatile.

We cannot predict the prices at which our common stock may trade after the Spin-Off or whether the combined market value of a share of our common stock and a share of Honeywell’s common stock will be less than, equal to or greater than the market value of a share of Honeywell common stock prior to the Spin-Off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

   

actual or anticipated fluctuations in our results of operations due to factors related to our business;

 

   

success or failure of our business strategies;

 

   

competition and industry capacity;

 

   

changes in interest rates and other factors that affect earnings and cash flow;

 

   

our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed;

 

   

our indemnification obligations to Honeywell;

 

   

our ability to retain and recruit qualified personnel;

 

   

our quarterly or annual earnings, or those of other companies in our industry;

 

   

announcements by us or our competitors of significant acquisitions or dispositions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the failure of securities analysts to cover, or positively cover, our common stock after the Spin-Off;

 

   

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

   

the operating and stock price performance of other comparable companies;

 

   

investor perception of our Company and our industry;

 

   

overall market fluctuations unrelated to our operating performance;

 

   

results from any material litigation or government investigation;

 

   

changes in laws and regulations (including tax laws and regulations) affecting our business;

 

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changes in capital gains taxes and taxes on dividends affecting stockholders; and

 

   

general economic conditions and other external factors.

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Honeywell stockholders and, as a result, these Honeywell stockholders may sell their shares of our common stock after the Share Distribution. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Should the market price of our shares drop significantly, stockholders may institute securities class action lawsuits against the Company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.

Honeywell stockholders receiving shares of our common stock in the Share Distribution generally may sell those shares immediately in the public market. It is likely that some Honeywell stockholders, including some of its larger stockholders, will sell their shares of our common stock received in the Share Distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or, in the case of index funds, we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock or the perception in the market that such sales might occur may decrease the market price of our common stock.

Our ability to pay cash dividends to our stockholders is subject to the discretion of our Board and may be limited by the terms of our indebtedness and the Indemnification and Reimbursement Agreement; there is no guarantee we will initiate dividends, or that once initiated, that we will continue paying dividends.

Subject to the sole discretion of our Board and the considerations discussed below, once the Spin-Off is effective, we anticipate paying cash dividends on our common stock. However, our Board may in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. The Board’s decisions regarding the payment of dividends will depend on consideration of many factors, such as our financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, obligations under the Indemnification and Reimbursement Agreement, legal requirements, regulatory constraints and other factors that the Board deems relevant. Additionally, the terms of the indebtedness we intend to incur in connection with the Spin-Off, obligations under the Indemnification and Reimbursement Agreement and other amounts owed to Honeywell under the Transition Services, Tax Matters, Employee Matters, Trademark License and Patent Cross-License Agreements, will limit our ability to pay cash dividends. As a consequence, there is no guarantee that any dividends will be declared on our common stock by our Board, or if so declared, will be continued in the future. For more information, see “Dividend Policy.”

Your percentage ownership in the Company may be diluted in the future.

Your percentage ownership in the Company may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and other employees. We expect to have one or more equity compensation plans that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. In particular, prior to the Spin-Off, we expect our Board to adopt, and Honeywell, as our sole

 

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shareholder, to approve, the 2018 Stock Incentive Plan of SpinCo and its Affiliates (the “Equity Plan”) for the benefit of certain of our current and future employees and other service providers, as well as an equity plan for our non-employee directors.

In addition, our Amended and Restated Certificate of Incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock with respect to dividends and distributions, as our Board may generally determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of the members of our Board in all events or upon the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of our common stock. See “Description of Our Capital Stock.”

From time-to-time, SpinCo may opportunistically evaluate and pursue acquisition opportunities, including acquisitions for which the consideration thereof may consist partially or entirely of newly-issued shares of SpinCo common stock and, therefore, such transactions, if consummated, would dilute the voting power and/or reduce the value of our common stock. We intend to issue debt securities in connection with the Spin-Off that will not be convertible into equity securities of SpinCo and therefore will not have a dilutive effect on SpinCo common stockholders’ percentage ownership in SpinCo.

The rights associated with the Company’s common stock will differ from the rights associated with Honeywell common stock.

Upon completion of the Share Distribution, the rights of Honeywell stockholders who become Company stockholders will be governed by the Amended and Restated Certificate of Incorporation of the Company and by Delaware law. The rights associated with Honeywell shares are different from the rights associated with Company shares. Material differences between the rights of stockholders of Honeywell and the rights of stockholders of the Company include differences with respect to, among other things, the removal of directors, the convening of annual meetings of stockholders and special stockholder meetings, stockholder approval of certain transactions, anti-takeover measures and provisions relating to the ability to amend the certificate of incorporation. See “Description of Our Capital Stock—Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws” for more information.

Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and Delaware law may discourage takeovers.

Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent a merger or acquisition. These include, among others, provisions that:

 

   

provide for staggered terms for directors on our board for a period following the Spin-Off;

 

   

do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders, in each case except as such rights may otherwise be provided to holders of preferred stock;

 

   

establish advance notice requirements for stockholder nominations and proposals;

 

   

limit the persons who may call special meetings of stockholders; and

 

   

limit our ability to enter into business combination transactions.

These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent certain types of transactions involving an

 

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actual or a threatened acquisition or change in control of the Company, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock” for more information.

Our Amended and Restated Certificate of Incorporation will designate the courts of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Amended and Restated Certificate of Incorporation will provide that, in all cases to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, the Court of Chancery located within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of the Company, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or stockholder of the Company to the Company or the Company’s stockholders, any action asserting a claim arising pursuant to the Delaware General Corporate Law (“DGCL”) or as to which the DGCL confers jurisdiction on the Court of Chancery located in the State of Delaware or any action asserting a claim governed by the internal affairs doctrine or any other action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. However, if the Court of Chancery within the State of Delaware does not have jurisdiction, the action may be brought in any other state or federal court located within the State of Delaware. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our Amended and Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls, beginning with our second required annual report on Form 10-K. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of shares of common stock could decline and we could be subject to sanctions or investigations by the U.S. Securities and Exchange Commission (the “SEC”) or other regulatory authorities, which would require additional financial and management resources.

Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer, and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting might not prevent or detect fraud or

 

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misstatements. This, in turn, could have an adverse impact on trading prices for our shares of common stock, and could adversely affect our ability to access the capital markets. See “—Risks Relating to the Spin-Off—As we build our information technology infrastructure and transition our data to our own systems, we could incur substantial additional costs and experience temporary business interruptions, and our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Spin-Off.”

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement contains “forward-looking statements” that involve risks and uncertainties. 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 industry 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 Information Statement 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:

 

   

lack of operating history as an independent, publicly traded company and unreliability of historical combined financial information as an indicator of our future results;

 

   

the level of competition from other companies;

 

   

ability to successfully develop new technologies and introduce new products;

 

   

changes in prevailing global and regional economic conditions;

 

   

natural disasters or inclement or hazardous weather conditions, including, but not limited to cold weather, flooding, tornadoes and the physical impacts of climate change;

 

   

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

 

   

ability to operate as an independent publicly traded company without certain benefits available to us as a part of Honeywell;

 

   

dependence upon investment in information technology;

 

   

failure or inability to comply with the GDPR;

 

   

technical difficulties or failures;

 

   

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

 

   

economic, political, regulatory, foreign exchange and other risks of international operations;

 

   

changes in legislation or government regulations or policies;

 

   

our growth strategy is dependent on expanding our distribution business;

 

   

inability to obtain necessary production equipment or replacement parts;

 

   

the significant failure or inability to comply with the specifications and manufacturing requirements of our OEM customers or by increases or decreases to the inventory levels maintained by our customers;

 

   

difficulty collecting receivables;

 

   

the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

 

   

our inability to maintain intellectual property agreements;

 

   

the failure to increase productivity through sustainable operational improvements;

 

   

inability to grow successfully through future acquisitions;

 

   

inability to recruit and retain qualified personnel;

 

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the operational constraints and financial distress of third parties;

 

   

changes in the price and availability of raw materials that we use to produce our products;

 

   

labor disputes;

 

   

our ability to borrow funds and access capital markets;

 

   

the amount of our obligations pursuant to the Indemnification and Reimbursement Agreement;

 

   

potential material environmental liabilities;

 

   

potential material losses and costs as a result of warranty 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;

 

   

U.S. federal income tax reform;

 

   

the potential suspension in the future of our dividend program; and

 

   

certain factors discussed elsewhere in this Information Statement.

These and other factors are more fully discussed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this Information Statement. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Information Statement. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Information Statement, those results or developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements made by us in this Information Statement 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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THE SPIN-OFF

Background

On October 10, 2017, Honeywell announced plans for the complete legal and structural separation of the Business from Honeywell. To effect the separation, Honeywell is undertaking the Reorganization Transactions described under “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Separation and Distribution Agreement.”

Following the Reorganization Transactions, Honeywell will distribute all of its equity interest in us, consisting of all of the outstanding shares of our common stock, to holders of Honeywell’s common stock on a pro rata basis. Following the Spin-Off, Honeywell will not own any equity interest in us, and we will operate independently from Honeywell. No approval of Honeywell’s stockholders is required in connection with the Spin-Off, and Honeywell’s stockholders will not have any appraisal rights in connection with the Spin-Off.

Completion of the Spin-Off is subject to the satisfaction, or the Honeywell Board’s waiver, to the extent permitted by law, of a number of conditions. In addition, Honeywell may at any time until the Share Distribution decide to abandon the Share Distribution or modify or change the terms of the Share Distribution. For a more detailed discussion, see “The Spin-Off —Conditions to the Spin-Off.”

Aspects of the Spin-Off may increase the risks associated with ownership of shares of SpinCo. In connection with the Spin-Off, we expect to incur substantial indebtedness in an aggregate principal amount of approximately $1,225 million in the form of senior secured term loans and senior unsecured notes, the net proceeds of which will be received by Honeywell substantially concurrently with the consummation of the Spin-Off. We also intend to enter into a revolving credit facility to be available for our working capital and other cash needs from time to time in an aggregate committed amount of $350 million. In addition, we intend to enter into an Indemnification and Reimbursement Agreement, pursuant to which we will have an obligation to make cash payments to Honeywell related to certain of Honeywell’s environmental-related liabilities. Furthermore, as an independent entity we may lose some of the benefits of purchasing power, borrowing leverage and available capital for investments associated with being part of a larger entity. See “Risk Factors” in this Information Statement.

Reasons for the Spin-Off

In 2017, the Honeywell Board authorized a review of Honeywell’s business portfolio and capital allocation options, with the goal of enhancing stockholder value. As part of its review process, Honeywell evaluated a range of potential structural alternatives in addition to the Spin-Off, including opportunities for dispositions, acquisitions, business combinations and separations. Honeywell considered a number of factors, including the strategic clarity and flexibility for Honeywell and SpinCo after the Spin-Off, the ability of SpinCo to compete and operate efficiently and effectively (including SpinCo’s ability to retain and attract management talent) after the Spin-Off, the financial profile of SpinCo and the potential reaction of investors. As a result of this review, Honeywell identified differences in operations, strategic focus and growth drivers of Honeywell’s business and the Business, including that the Business would not fully utilize synergies across the Honeywell portfolio in areas such as shared technology platforms, operational levers and Honeywell business and corporate synergies. In addition, a number of the characteristics of the SpinCo businesses differ significantly from those of the remaining Honeywell operations. Products is one of the few businesses within Honeywell focused on individual consumer markets and primarily serves the residential market, while Distribution is the only business in Honeywell entirely focused on distribution. As a result of the focus on these end markets, SpinCo utilizes a different business model than Honeywell, which includes targeted investments in consumer marketing for the Products segment and investments in expanding product categories and geographies in the Distribution business. In reaching the decision to separate the Business, the Honeywell Board concluded that the separation of the Business from the remainder of Honeywell as a stand-alone, public company is the most attractive alternative for enhancing stockholder value.

 

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As a result of this evaluation, Honeywell determined that proceeding with the Spin-Off would be in the best interests of Honeywell and its stockholders. Honeywell considered the following potential benefits of this approach:

 

   

Enhanced Strategic and Operational Focus. Following the Spin-Off, Honeywell and SpinCo will each have a more focused business and be better able to dedicate financial, management and other resources to leverage their respective areas of strength and differentiation. Each company will pursue appropriate growth opportunities and execute strategic plans best suited to address the distinct market trends and opportunities for its business. SpinCo plans to focus on leadership in attractive products invest selectively in growth areas, ensure continued operational discipline and capture transformative productivity.

 

   

Simplified Organizational Structure and Resources. The Spin-Off will allow the management of each of Honeywell and SpinCo to devote their time and attention to the development and implementation of corporate strategies and policies that are based primarily on the specific business characteristics of their respective companies. Each company will be able to adapt faster to clients’ changing needs, address specific market dynamics, target innovation and investments in select growth areas and accelerate decision-making processes.

 

   

Distinct and Clear Financial Profiles and Compelling Investment Cases. Investment in one company or the other may appeal to investors with different goals, interests and concerns. The Spin-Off will allow investors to make independent investment decisions with respect to Honeywell and SpinCo and may result in greater alignment between the interests of SpinCo’s stockholder base and the characteristics of SpinCo’s business, capital structure and financial results.

 

   

Performance Incentives. We believe that the Spin-Off will enable SpinCo to create incentives for its management and employees that are more closely tied to its business performance and stockholder expectations. SpinCo’s equity-based compensation arrangements will more closely align the interests of SpinCo’s management and employees with the interests of its stockholders and should increase SpinCo’s ability to attract and retain personnel.

 

   

Capital Structure. The Spin-Off will enable each of Honeywell and SpinCo to leverage its distinct growth profile and cash flow characteristics to optimize its capital structure and capital allocation strategy.

In determining whether to effect the Spin-Off, Honeywell considered the costs and risks associated with the transaction, including the costs associated with preparing SpinCo to become an independent, publicly traded company, the risk of volatility in our stock price immediately following the Spin-Off due to sales by Honeywell’s stockholders whose investment objectives may not be met by our common stock, the time it may take for us to attract our optimal stockholder base, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Honeywell’s common stock after the Spin-Off may drop below the trading price of Honeywell’s common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, Honeywell determined that the Spin-Off provided the best opportunity to achieve the above benefits and enhance stockholder value. Except with respect to taxes, which will be addressed by the Tax Matters Agreement, Honeywell will pay substantially all of the third party fees, costs and expenses associated with the Spin-Off incurred before and in connection with the consummation of the Spin-Off, and each of Honeywell and the Company generally will bear its own third party fees, costs and expenses associated with the Spin-Off incurred after the consummation of the Spin-Off.

Also as a result of this evaluation, Honeywell determined that proceeding with the Garrett Spin-Off would be in the best interests of Honeywell and its stockholders. The Garrett Spin-Off is being undertaken independently from the Spin-Off of our Company and you should receive a separate Information Statement with respect to the Garrett Spin-Off. The Garrett Spin-Off is separate from the Spin-Off of our Company and neither spin-off is conditioned upon completion of the other.

 

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When and How You Will Receive SpinCo Shares

Honeywell will distribute to its stockholders, as a pro rata dividend, one share of our common stock for every six shares of Honeywell common stock outstanding as of October 16, 2018, the Record Date of the Share Distribution.

Prior to the Share Distribution, Honeywell will deliver all of the issued and outstanding shares of our common stock to the distribution agent. Equiniti Trust Company will serve as distribution agent in connection with the Share Distribution and as transfer agent and registrar for our common stock.

If you own Honeywell common stock as of the close of business on October 16, 2018, the shares of our common stock that you are entitled to receive in the Share Distribution will be issued to your account as follows:

 

   

Registered stockholders. If you own your shares of Honeywell common stock directly through Honeywell’s transfer agent, you are a registered stockholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Share Distribution by way of direct registration in book-entry form to a new account with our transfer agent. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to stockholders, as is the case in the Share Distribution. You will be able to access information regarding your book-entry account for SpinCo shares at www.shareowneronline.com or by calling Equiniti Trust Company at 1-800-468-9716.

Commencing on or shortly after the Share Distribution Date, the distribution agent will mail to you an account statement that indicates the number of whole shares of our common stock that have been registered in book-entry form in your name. We expect it will take the distribution agent up to two weeks after the Share Distribution Date to complete the distribution of the shares of our common stock and mail statements of holding to all registered stockholders.

 

   

“Street name” or beneficial stockholders. If you own your shares of Honeywell common stock beneficially through a bank, broker or other nominee, the bank, broker or other nominee holds the shares in “street name” and records your ownership on its books. In this case, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Share Distribution on or shortly after the Share Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in “street name.”

If you sell any of your shares of Honeywell common stock on or before the Share Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock to be distributed in respect of the Honeywell shares you sold. See “The Spin-Off—Trading Prior to the Share Distribution Date” for more information.

We are not asking Honeywell stockholders to take any action in connection with the Spin-Off. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to make any payment or surrender or exchange any of your shares of Honeywell common stock for shares of our common stock. The number of outstanding shares of Honeywell common stock will not change as a result of the Spin-Off.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Honeywell stockholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees, transfer taxes and other costs, pro rata to these holders (net of any required withholding for taxes

 

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applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within two trading days following the Share Distribution Date. See “The Spin-Off—Trading Prior to the Share Distribution Date” for additional information regarding “when-issued” trading. The distribution agent will, in its sole discretion, without any influence by Honeywell or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Honeywell or us.

The distribution agent will send a check to each registered holder of Honeywell common stock entitled to a fractional share in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Share Distribution Date. We expect the distribution agent to take about two weeks after the Share Distribution Date to complete the distribution of cash in lieu of fractional shares to Honeywell stockholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of a fractional share. The cash you receive in lieu of a fractional share will generally be taxable to you for U.S. federal income tax purposes. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off” below for more information.

Material U.S. Federal Income Tax Consequences of the Spin-Off

Consequences to Holders of Honeywell common stock

The following is a summary of the material U.S. federal income tax consequences to holders of Honeywell common stock in connection with the Distribution. This summary is based on the Code, the Treasury Regulations promulgated under the Code and judicial and administrative interpretations of those laws, in each case as in effect and available as of the date of this Information Statement and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below.

This summary does not discuss all tax considerations that may be relevant to stockholders in light of their particular circumstances, nor does it address the consequences to stockholders subject to special treatment under the U.S. federal income tax laws, such as:

 

   

dealers or traders in securities or currencies;

 

   

tax-exempt entities;

 

   

banks, financial institutions or insurance companies;

 

   

real estate investment trusts, regulated investment companies or grantor trusts;

 

   

persons who acquired Honeywell common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

   

stockholders who own, or are deemed to own, 10% or more, by voting power or value, of Honeywell equity;

 

   

stockholders owning Honeywell common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

   

certain former citizens or long-term residents of the United States;

 

   

stockholders who are subject to the alternative minimum tax;

 

   

persons who are subject to special accounting rules under Section 451(b) of the Code;

 

   

persons who own Honeywell common stock through partnerships or other pass-through entities; or

 

   

persons who hold Honeywell common stock through a tax-qualified retirement plan.

 

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This summary does not address any U.S. state or local or foreign tax consequences or any estate, gift or other non-income tax consequences.

If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Honeywell common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its own tax advisor as to its tax consequences.

YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES OF THE SHARE DISTRIBUTION.

General

Completion of the Spin-Off is conditioned upon Honeywell’s receipt of written opinions from Cleary Gottlieb Steen & Hamilton LLP and KPMG LLP to the effect that the Distribution will qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code. The opinions will be based on the assumption that, among other things, the representations made, and information submitted, in connection with it are accurate. If the Distribution qualifies for this treatment and subject to the qualifications and limitations set forth herein (including the discussion below relating to the receipt of cash in lieu of fractional shares), for U.S. federal income tax purposes:

 

   

no gain or loss will be recognized by, or be includible in the income of, a holder as a result of the Distribution, except with respect to any cash received in lieu of fractional shares;

 

   

the aggregate tax basis of the Honeywell common stock and our common stock held by each holder immediately after the Distribution will be the same as the aggregate tax basis of the Honeywell common stock held by that holder immediately before the Distribution, allocated between the Honeywell common stock and our common stock in proportion to their relative fair market values on the date of the Distribution (subject to reduction upon the deemed sale of any fractional shares, as described below); and

 

   

the holding period of our common stock received by each Holder will include the holding period of its Honeywell common stock.

The opinions will not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinions will assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents. In addition, the opinions will be based on certain representations as to factual matters from, and certain covenants by, Honeywell and us. The opinions cannot be relied on if any of the assumptions, representations or covenants is incorrect, incomplete or inaccurate or are violated in any material respect.

The opinions will not be binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. If the conclusions expressed in the opinions are challenged by the IRS, and if the IRS prevails in that challenge, the tax consequences of the Spin-Off could be materially less favorable. Honeywell has not requested, and does not intend to request, a ruling from the IRS regarding the U.S. federal income tax consequences of the Spin-Off.

If the Distribution were determined not to qualify for non-recognition of gain or loss, the above consequences would not apply and each holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in:

 

   

a taxable dividend to the extent of the holder’s pro rata share of Honeywell’s current or accumulated earnings and profits;

 

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a reduction in the holder’s basis (but not below zero) in Honeywell common stock to the extent the amount received exceeds the holder’s share of Honeywell’s earnings and profits; and

 

   

a taxable gain from the exchange of Honeywell common stock to the extent the amount received exceeds the sum of the holder’s share of Honeywell’s earnings and profits and its basis in its Honeywell common stock.

Cash in Lieu of Fractional Shares

If a holder receives cash in lieu of a fractional share of common stock as part of the Distribution, the holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash actually received. The holder generally will recognize capital gain or loss measured by the difference between the cash received for such fractional share and the holder’s tax basis in that fractional share, as determined above. Such capital gain or loss will be long-term capital gain or loss if the holder’s holding period for the Honeywell common stock is more than one year on the date of the Distribution.

Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to “backup withholding,” unless a holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding is not an additional tax, and it may be refunded or credited against a holder’s U.S. federal income tax liability if the required information is timely supplied to the IRS.

Consequences to Honeywell

The following is a summary of the material U.S. federal income tax consequences to Honeywell in connection with the Spin-Off that may be relevant to holders of Honeywell common stock.

As discussed above, completion of the Spin-Off is conditioned upon Honeywell’s receipt of written opinions from Cleary Gottlieb Steen & Hamilton LLP and KPMG LLP to the effect that the Distribution will qualify for nonrecognition of gain or loss under Section 355 and related provisions of the Code. If the Distribution qualifies for nonrecognition of gain or loss under Section 355 and related provisions of the Code, then Honeywell generally will not recognize gain or loss as a result of the Distribution. The opinions are subject to the qualifications and limitations as are set forth above under “—Consequences to U.S. Holders of Honeywell common stock.

If the Distribution were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, then Honeywell would recognize gain equal to the excess of the fair market value of our common stock distributed to Honeywell stockholders over Honeywell’s tax basis in our common stock.

Results of the Spin-Off

After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately 123,451,420 shares of our common stock outstanding, based on the number of Honeywell stockholders and shares of Honeywell common stock outstanding on September 18, 2018. The actual number of shares of our common stock Honeywell will distribute in the Spin-Off will depend on the actual number of shares of Honeywell common stock outstanding on the Record Date, which will reflect any issuance of new shares or exercises of outstanding options pursuant to Honeywell’s equity plans, and any repurchase of Honeywell shares by Honeywell under its common stock repurchase program, on or prior to the Record Date. Shares of Honeywell common stock held by Honeywell as treasury shares will not be considered outstanding for purposes of, and will not be entitled to participate in the Share Distribution. The Spin-Off will not

 

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affect the number of outstanding shares of Honeywell common stock or any rights of Honeywell stockholders. However, following the Share Distribution, the equity value of Honeywell will no longer reflect the value of the Business. There can be no assurance that the combined trading prices of the Honeywell common stock and our common stock will equal or exceed what the trading price of Honeywell common stock would have been in absence of the Spin-Off.

Before our separation from Honeywell, we intend to enter into a Separation and Distribution Agreement and several other agreements with Honeywell related to the Spin-Off. These agreements will govern the relationship between us and Honeywell up to and after completion of the Spin-Off and allocate between us and Honeywell various assets, liabilities, rights and obligations, including employee benefits, environmental, intellectual property and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships And Related Party Transactions—Agreements with Honeywell.”

Listing and Trading of Our Common Stock

As of the date of this Information Statement, we are a wholly owned subsidiary of Honeywell. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Share Distribution. See “The Spin-Off—Trading Prior to the Share Distribution Date” below for an explanation of a “when-issued” market. We intend to apply to list our shares of common stock on the New York Stock Exchange under the symbol “REZI.” Following the Spin-Off, Honeywell common stock will continue to trade on the New York Stock Exchange under the symbol “HON.”

Neither we nor Honeywell can assure you as to the trading price of Honeywell common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of our common stock and the Honeywell common stock after the Spin-Off will equal or exceed the trading prices of Honeywell common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off.

The shares of our common stock distributed to Honeywell stockholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(a)(1) of the Securities Act or Rule 144 thereunder.

Trading Prior to the Share Distribution Date

We expect a “when-issued” market in our common stock to develop as early as one trading day prior to the Record Date for the Share Distribution and continue up to and including the Share Distribution Date. “When-issued” trading refers to a sale or purchase made conditionally on or before the Share Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Honeywell common stock at the close of business on the Record Date, you will be entitled to receive shares of our common stock in the Share Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Honeywell common stock you own, on the “when-issued” market. We expect “when-issued” trades of our common stock to settle within two trading days after the Share Distribution Date. On the first trading day following the Share Distribution Date, we expect that “when-issued” trading of our common stock will end and “regular-way” trading will begin.

We also anticipate that, as early as one trading day prior to the Record Date and continuing up to and including the Share Distribution Date, there will be two markets in Honeywell common stock: a “regular-way” market and an “ex-distribution” market. Shares of Honeywell common stock that trade on the regular-way

 

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market will trade with an entitlement to receive shares of our common stock in the Share Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the Share Distribution. Therefore, if you sell shares of Honeywell common stock in the regular-way market up to and including the Share Distribution Date, you will be selling your right to receive shares of our common stock in the Share Distribution. However, if you own shares of Honeywell common stock at the close of business on the Record Date and sell those shares on the ex-distribution market up to and including the Share Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Share Distribution.

If “when-issued” trading occurs, the listing for our common stock is expected to be under a trading symbol different from our regular-way trading symbol. We will announce our “when-issued” trading symbol when and if it becomes available. If the Spin-Off does not occur, all “when-issued” trading will be null and void.

Conditions to the Spin-Off

We expect that the Spin-Off will be effective on the Share Distribution Date, provided that the following conditions shall have been satisfied or waived by Honeywell:

 

   

the Honeywell Board shall have approved the Reorganization Transactions and Share Distribution and not withdrawn such approval, and shall have declared the dividend of our common stock to Honeywell stockholders;

 

   

the ancillary agreements contemplated by the Separation and Distribution Agreement shall have been executed by each party to those agreements;

 

   

the SEC shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Exchange Act, and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for that purpose shall be pending before or threatened by the SEC;

 

   

our common stock shall have been accepted for listing on a national securities exchange approved by Honeywell, subject to official notice of issuance;

 

   

Honeywell shall have received the written opinion of Cleary Gottlieb Steen & Hamilton LLP, which shall remain in full force and effect, regarding the intended treatment of the Share Distribution under the Code;

 

   

Honeywell shall have received the written opinion of KPMG LLP, which shall remain in full force and effect, regarding the intended treatment of the Share Distribution under the Code;

 

   

the Reorganization Transactions shall have been completed (other than those steps that are expressly contemplated to occur at or after the Share Distribution);

 

   

no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Share Distribution shall be in effect, and no other event outside the control of Honeywell shall have occurred or failed to occur that prevents the consummation of the Share Distribution;

 

   

no other events or developments shall have occurred prior to the Share Distribution that, in the judgment of the Honeywell Board, would result in the Share Distribution having a material adverse effect on Honeywell or its stockholders;

 

   

prior to the Share Distribution Date, notice of Internet availability of this Information Statement or this Information Statement shall have been mailed to the holders of Honeywell common stock as of the Record Date; and

 

   

certain other conditions set forth in the Separation and Distribution Agreement.

 

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Any of the above conditions may be waived by the Honeywell Board to the extent such waiver is permitted by law. If the Honeywell Board waives any condition prior to the effectiveness of the Registration Statement on Form 10, of which this Information Statement Forms a part, and the result of such waiver is material to Honeywell stockholders, we will file an amendment to the Registration Statement on Form 10, of which this Information Statement forms a part, to revise the disclosure in the Information Statement accordingly. In the event that Honeywell waives a condition after this Registration Statement becomes effective and such waiver is material, we would communicate such change to Honeywell’s stockholders by filing a Form 8-K describing the change.

The fulfillment of the above conditions will not create any obligation on Honeywell’s part to complete the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Share Distribution. Honeywell may at any time until the Share Distribution decide to abandon the Share Distribution or modify or change the terms of the Share Distribution.

Reasons for Furnishing this Information Statement

We are furnishing this Information Statement solely to provide information to Honeywell’s stockholders who will receive shares of our common stock in the Share Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Honeywell. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor Honeywell undertakes any obligation to update the information except in the normal course of our and Honeywell’s public disclosure obligations and practices.

 

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DIVIDEND POLICY

Subject to the sole discretion of our Board and the considerations discussed below, once the Spin-Off is effective, we anticipate paying cash dividends on our common stock, in an amount yet to be determined. We expect, but do not guarantee, that we will be in a position to declare a dividend for the first time in 2019.

The Board’s decisions regarding the payment of dividends will depend on consideration of many factors, such as our financial condition, earnings, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, obligations under the Indemnification and Reimbursement Agreement, legal requirements, availability of surplus, regulatory constraints and other factors that the Board deems relevant. Additionally, the terms of the indebtedness we intend to incur in connection with the Spin-Off, obligations under the Indemnification and Reimbursement Agreement and other amounts owed to Honeywell under the Transition Services, Tax Matters, Employee Matters, Trademark License and Patent Cross-License Agreements, will limit our ability to pay cash dividends. As a consequence, there is no guarantee that any dividends will be declared on our common stock by our Board, or if so declared, will be continued in the future. See “Risk Factors—Our ability to pay cash dividends to our stockholders is subject to the discretion of our Board and may be limited by the terms of our indebtedness and the Indemnification and Reimbursement Agreement; there is no guarantee we will initiate dividends, or that once initiated, that we will continue paying dividends.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2018, on a historical basis and on an as adjusted basis to give effect to the Spin-Off and the transactions related to the Spin-Off, as if they occurred on June 30, 2018. You should review the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our historical Combined Financial Statements and the accompanying Notes thereto and our unaudited pro forma financial statements and the accompanying Notes thereto included elsewhere in this Information Statement. For information on how each adjustment in the following table was computed, including a discussion of significant assumptions and estimates used to arrive at such adjustments, refer to the indicated note in the notes accompanying our pro forma combined financial statements included elsewhere in this Information Statement. See “Unaudited Pro Forma Combined Financial Statements.”

 

     As of June 30, 2018  
     Historical
as Reported
     Notes      As Adjusted  
     (Dollars in millions)  

Cash and cash equivalents

   $ 93        (c,e,f)       $ 75  
  

 

 

       

 

 

 

Capitalization

        

Indebtedness:

        

Term loans(1)

   $ —          (c)       $ 825  

Senior unsecured notes(2)

     —          (c)         400  
  

 

 

       

 

 

 

Total indebtedness(3)

     —             1,225  

Equity:

        

Invested equity

   $ 2,599        (b,d,f,g,h)       $ —    

Common Stock, par value $0.001

     —          (h)      

Additional paid in capital

     —          (h)         1,380  

Accumulated other comprehensive income

     (119         (119
  

 

 

       

 

 

 

Total equity

     2,480           1,261  
  

 

 

       

 

 

 

Total capitalization

   $ 2,480         $ 2,486  
  

 

 

       

 

 

 

 

  (1)

We expect to enter into senior secured term loans of $825 million aggregate principal amount outstanding without giving effect to financing fees of approximately $17.7 million. Term loans are expected to be secured by certain assets of the borrower and the guarantors, including a perfected first-priority pledge of all of the equity securities of the borrower and each wholly-owned subsidiary of SpinCo held by any loan party, subject to certain customary exceptions and limitations.

  (2)

We expect to enter into senior unsecured notes of $400 million aggregate principal amount outstanding without giving effect to financing fees of approximately $7.8 million.

  (3)

We expect to enter into secured revolving credit facility in a committed amount of $350 million for which we expect to pay $4.7 million of financing fees.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following tables present certain selected historical combined financial information as of and for each of the years in the five-year period ended December 31, 2017 and as of June 30, 2018 and for the three months ended June 30, 2018 and 2017 and six months ended June 30, 2018 and 2017. The selected historical combined financial data as of December 31, 2017 and 2016, and for each of the years in the three-year period ended December 31, 2017, are derived from our historical audited Combined Financial Statements included elsewhere in this Information Statement. The selected historical combined financial data as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013 are derived from our unaudited combined financial information that is not included in this Information Statement. The selected historical combined financial data as of June 30, 2018 and for the three months ended June 30, 2018 and 2017 and six months ended June 30, 2018 and 2017 are derived from our unaudited Combined Financial Statements included elsewhere in this Information Statement. The results of operations and cash flows for the three months ended June 30, 2018 and six months ended June 30, 2018 should not necessarily be taken as indicative of the entire year. The unaudited Combined Financial Statements have been prepared on the same basis as the audited Combined Financial Statements and, in the opinion of our management, include all adjustments, consisting of only ordinary recurring adjustments, necessary for a fair statement of the information set forth in this Information Statement.

The selected historical combined financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined Financial Statements and the accompanying Notes thereto included elsewhere in this Information Statement. For each of the periods presented, our business was wholly owned by Honeywell. The financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented. In addition, our historical combined financial information does not reflect changes that we expect to experience in the future as a result of our separation from Honeywell, including changes in the financing, operations, cost structure and personnel needs of our business. Further, the historical combined financial information includes allocations of certain Honeywell corporate expenses, as described in Note 3. Related Party Transactions with Honeywell to the historical Combined Financial Statements. We believe the assumptions and methodologies underlying the allocation of these expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that we would have incurred if we had operated as an independent, publicly traded company or of the costs expected to be incurred in the future.

 

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The following tables also present certain unaudited pro forma combined financial information of SpinCo for the six months ended June 30, 2018 and the year ended December 31, 2017 and an unaudited pro forma combined balance sheet as of June 30, 2018. The unaudited pro forma combined financial statements are derived from our historical Combined Financial Statements included elsewhere in this Information Statement, and are not intended to be a complete presentation of our financial position or results of operations had the transactions contemplated by the Separation and Distribution Agreement and related agreements occurred as of the dates indicated. The unaudited pro forma combined financial statements should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined Financial Statements and the accompanying Notes included elsewhere in this Information Statement. The unaudited pro forma combined statements of operations for the six months ended June 30, 2018 and the year ended December 31, 2017 reflect our results as if the Spin-Off and related transactions had occurred as of January 1, 2017. The unaudited pro forma combined balance sheet as of June 30, 2018 reflects our results as if the Spin-Off and related transactions had occurred as of such date. Refer to the “Unaudited Pro Forma Combined Financial Statements” for further information about the Spin-Off transactions.

 

    Three Months
Ended June 30,
    Pro Forma
Six Months
Ended
June 30,
    Six Months
Ended June 30,
    Pro Forma
Year Ended
December 31,
    Year Ended December 31,  
    2018     2017     2018     2018     2017     2017     2017     2016     2015     2014     2013  
    (Dollars in millions)  

Selected Statement of Operations Information:

                     

Net sales

  $ 1,196     $ 1,096     $ 2,361     $ 2,361     $ 2,158     $ 4,519     $ 4,519     $ 4,455     $ 4,154     $ 4,125     $ 3,910  

Net income (loss)

  $ 33     $ 16     $ 58     $ 78     $ 32     $ (425   $ (394   $ 177     $ 147     $ 112     $ 93  

Adjusted net income (Non-GAAP)(1)(2)

  $ 141     $ 84     $ 207     $ 247     $ 155     $ 322     $ 385     $ 388     $ 315      

Adjusted net income including environmental indemnification payments (Non-GAAP)(1)(2)

  $ 106     $ 49     $ 137     $ 177     $ 85     $ 182     $ 245     $ 248     $ 175      

EBITDA (Non-GAAP)(1)

  $ 20     $ 55     $ 122     $ 116     $ 117     $ 233     $ 230     $ 371     $ 314     $ 288     $ 246  

Adjusted EBITDA (Non-GAAP)(1)(2)

  $ 154     $ 132     $ 300     $ 314     $ 253     $ 554     $ 583     $ 599     $ 485      

Adjusted EBITDA including environmental indemnification payments (Non-GAAP)(1)(2)

  $ 119     $ 97     $ 230     $ 244     $ 183     $ 414     $ 443     $ 459     $ 345      

 

     Pro Forma
as of June 30,
     As of
June 30,
     As of December 31,  
     2018      2018      2017      2016      2015      2014      2013  
     (Dollars in millions)  

Selected Balance Sheet Information:

                    

Total assets

   $ 4,467      $ 4,507      $ 4,473      $ 4,294      $ 4,096      $ 3,922      $ 3,983  

Long-term obligations

   $ 2,088      $ 794      $ 723      $ 338      $ 335      $ 347      $ 360  

Total liabilities

   $ 3,206      $ 2,027      $ 1,870      $ 1,420      $ 1,377      $ 1,432      $ 1,483  

Total equity

   $ 1,261      $ 2,480      $ 2,603      $ 2,874      $ 2,719      $ 2,490      $ 2,500  

 

(1)

See below “—Net Income, EBITDA, Adjusted EBITDA and Further Adjusted EBITDA.”

(2)

This non-GAAP financial measure is being included only for the periods covered by the Combined Financial Statements included elsewhere in this Information Statement.

 

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Net Income, EBITDA, Adjusted EBITDA and Further Adjusted EBITDA(1)

It is management’s intent to provide non-GAAP financial information to enhance the understanding of our GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding most directly comparable GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies.

 

    Three Months
Ended

June 30,
    Pro Forma
Six Months
Ended
June 30,
    Six Months
Ended
June 30,
    Pro Forma
Year
Ended
December 31,
    Year
Ended December 31,
 
    2018     2017     2018     2018     2017     2017     2017     2016     2015  

Net income (loss) - GAAP

  $ 33     $ 16     $ 58     $ 78     $ 32     $ (425   $ (394   $ 177     $ 147  

Environmental expense (2)

    123       51       158       176       100       254       282       190       173  

Estimated stand-alone costs (3)

    2       1       4       4       4       24       24       (1     (23

Stock compensation expense (4)

    5       4       9       9       8       16       16       13       10  

Repositioning charges

    —         18       5       5       19       23       23       19       10  

Non-Operating (income) expense (5)

    2       1       (1     1       2       (3     1       —         (6

Income tax adjustment (6)

    (24     (7     (26     (26     (10     433       433       (10     4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (Non-GAAP)

  $ 141     $ 84     $ 207     $ 247     $ 155     $ 322     $ 385     $ 388     $ 315  

Assumed cash payments related to Indemnification and Reimbursement Agreement obligations (7)

    (35     (35     (70     (70     (70     (140     (140     (140     (140

Adjusted net income including environmental indemnification payments (Non-GAAP)

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 106     $ 49     $ 137     $ 177     $ 85     $ 182     $ 245     $ 248     $ 175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three
Months
Ended
June 30,
    Pro Forma
Six Months
Ended
June 30,
    Six Months
Ended
June 30,
    Pro Forma
Year
Ended
December 31
    Year
Ended December 31,
 
    2018     2017     2018     2018     2017     2017     2017     2016     2015  

Net income (loss) - GAAP

  $ 33     $ 16     $ 58     $ 78     $ 32     $ (425   $ (394   $ 177     $ 147  

Net interest (income) expense

    (1     (1     37       (1     (2     71       (3     (3     (1

Tax expense

    (28     23       (6     6       54       520       560       133       110  

Depreciation

    13       14       27       27       28       57       57       57       54  

Amortization

    3       3       6       6       5       10       10       7       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (Non-GAAP)

  $ 20     $ 55     $ 122     $ 116     $ 117     $ 233     $ 230     $ 371     $ 314  

Environmental expense (2)

    123       51       158       176       100       254       282       190       173  

Estimated stand-alone costs (8)

    4       3       7       7       7       31       31       6       (16

Stock compensation expense (4)

    5       4       9       9       8       16       16       13       10  

Non-Operating (income) expense (5)

    2       1       (1     1       2       (3     1       —         (6

Repositioning charges

    —         18       5       5       19       23       23       19       10  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (Non-GAAP)

  $ 154     $ 132     $ 300     $ 314     $ 253     $ 554     $ 583     $ 599     $ 485  

Assumed cash payments related to Indemnification and Reimbursement Agreement obligations (7)

    (35     (35     (70     (70     (70     (140     (140     (140     (140

Adjusted EBITDA including environmental indemnification payments (Non-GAAP)

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 119     $ 97     $ 230     $ 244     $ 183     $ 414     $ 443     $ 459     $ 345  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

We define “Adjusted net income” as Net income (loss) adjusted for environmental expense, the difference between our estimate of costs as a stand-alone company and historical allocated costs, stock compensation

 

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  expense, repositioning charges, non-operating (income) expense (which primarily consists of foreign transaction gains and losses and hedging gains and losses) and the tax effect of the pre-tax items. We define “Adjusted net income including environmental indemnification payments” as Adjusted net income less the assumed cash paid for environmental obligations subject to the cap of $140 million in respect of a year in accordance with the terms of the Indemnification and Reimbursement Agreement as described in pro forma notes (2) and (7) below (referred to in the captions in the above tables as “environmental indemnification payments”). We define “EBITDA” as our net income (loss) calculated in accordance with U.S. GAAP, plus the sum of net interest (income) expense, tax expense, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA adjusted for environmental expense, the difference between our estimate of costs as a stand-alone company and historical allocated costs, non-operating (income) expense (which primarily consists of foreign transaction gains and losses and hedging gains and losses), stock compensation expense and repositioning charges. We define “Adjusted EBITDA including environmental indemnification payments” as Adjusted EBITDA less the assumed cash paid for environmental obligations subject to the cap of $140 million in respect of a year in accordance with the terms of the Indemnification and Reimbursement Agreement as described in pro forma notes (2) and (7) below. We believe that Adjusted net income, Adjusted net income including environmental indemnification payments, EBITDA, Adjusted EBITDA, and Adjusted EBITDA including environmental indemnification payments are important indicators of operating performance because:

 

   

EBITDA, Adjusted EBITDA and Adjusted EBITDA including environmental indemnification payments exclude the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measure our operational performance;

 

   

we may use Adjusted EBITDA in setting performance incentive targets in order to align performance measurement with operational performance;

 

   

certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects comparability of our results; and

 

   

Adjusted net income, Adjusted net income including environmental indemnification payments, and Adjusted EBITDA including environmental indemnification payments are expected to be used as part of our calculations with respect to compliance with certain debt covenants expected to be included in our future credit agreements.

We may also utilize for analysis purposes an Adjusted EBITDA Margin, which is our Adjusted EBITDA divided by our net sales after intersegment eliminations, with the comparable GAAP measure being net income (loss) divided by our net sales after intersegment eliminations.

 

(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 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.

(4)

Stock compensation expense adjustment includes only non-cash expenses.

(5)

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

(6)

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. The year-ended December 31, 2017 and the Pro Forma year-ended December 31, 2017 amounts include a net charge of $454 million, respectively, recognized as a result of the Tax Act.

 

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(7)

On a going forward basis, pursuant to the Indemnification and Reimbursement Agreement, we expect to 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).

(8)

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.

Refer to the Unaudited Pro Forma Combined Financial Statements for additional information.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma combined financial statements of SpinCo consist of the unaudited pro forma combined statements of operations for the six months ended June 30, 2018 and the year ended December 31, 2017 and an unaudited pro forma combined balance sheet as of June 30, 2018. The unaudited pro forma combined financial statements are derived from our historical Combined Financial Statements included elsewhere in this Information Statement, and are not intended to be a complete presentation of our financial position or results of operations had the transactions contemplated by the Separation and Distribution Agreement and related agreements occurred as of the dates indicated. The unaudited pro forma combined financial statements should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined Financial Statements and the accompanying Notes included elsewhere in this Information Statement.

The unaudited pro forma combined statements of operations for the six months ended June 30, 2018 and the year ended December 31, 2017 reflect our results as if the Spin-Off and related transactions described below had occurred as of January 1, 2017. The unaudited pro forma combined balance sheet as of June 30, 2018 reflects our results as if the Spin-Off and related transactions described below had occurred as of such date.

The unaudited pro forma combined financial statements will give effect to the following:

 

   

the contribution by Honeywell to us of all the assets and liabilities that comprise our business pursuant to the Separation and Distribution Agreement;

 

   

the anticipated post-Distribution capital structure, including: (i) the incurrence of indebtedness and the making of a cash transfer to Honeywell; and (ii) the issuance of our common stock to holders of Honeywell common stock;

 

   

the impact of certain pension liabilities related to certain of our employees that we will assume after the Spin-Off and which will be paid by us at a future date; and

 

   

the impact of, and transactions contemplated by, the Separation and Distribution Agreement, Trademark License Agreement, Employee Matters Agreement, the Indemnification and Reimbursement Agreement and other agreements related to the Distribution between us and Honeywell and the provisions contained therein.

The unaudited pro forma combined financial statements are subject to the assumptions and adjustments described in the accompanying Notes that reflect the expected impacts of events directly attributable to the Spin-Off and that are factually supportable and, for purposes of statements of operations, are expected to have a continuing impact on us. However, these adjustments are subject to change as we and Honeywell finalize the terms of the Separation and Distribution Agreement and the other agreements related to the Share Distribution. The unaudited pro forma combined financial statements are provided for illustrative and informational purposes only and are not necessarily indicative of our future results of operations or financial condition as an independent, publicly traded company.

The operating expenses reported in our historical combined statements of operations include allocations of certain Honeywell costs. These costs include the allocation of all Honeywell corporate costs, shared services and other related costs that benefit us.

As a stand-alone public company, we expect to incur additional recurring costs of being a stand-alone public company. The significant assumptions involved in determining our estimates of recurring costs of being a stand-alone public company include:

 

   

costs to perform financial reporting, tax, regulatory compliance, corporate governance, treasury, legal, internal audit and investor relations activities;

 

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insurance premiums;

 

   

changes in our overall facility costs;

 

   

depreciation and amortization related to information technology infrastructure investments; and

 

   

the type and level of other costs expected to be incurred.

The preliminary estimates at this time for the costs on a stand-alone basis would be approximately $265 million on an annual basis, which differs from the historical allocations on a carve-out basis of presentation. The pro forma impact of such costs has not been reflected herein as many of the costs expected to comprise these amounts are estimates. Actual expenses could vary from this range estimate and such variations could be material.

We currently estimate that we will incur substantial non-recurring costs associated with becoming a stand-alone public company within 24 months of the Distribution. The accompanying unaudited pro forma combined statements of operations are not adjusted for these estimated expenses as they are also projected amounts based on estimates and would not be factually supportable. These expenses primarily relate to the following:

 

   

relocation costs;

 

   

recruiting and relocation costs associated with hiring key senior management personnel new to our company;

 

   

costs related to establishing our new brand in the marketplace;

 

   

costs to separate information systems; and

 

   

costs of retention bonuses.

Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and the timing of incurrence could change.

The accompanying pro forma combined statements of operations are also not adjusted for any potential dividends SpinCo may pay in the future should the Board determine to declare any such dividends.

 

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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(Dollars in millions, except per share data)

 

     Historical As
Reported
     Pro Forma
Adjustments(1)
    Notes     As Adjusted  

Net sales

   $ 2,361      $ —         $ 2,361  

Costs of goods sold

     1,672        —           1,672  
  

 

 

    

 

 

     

 

 

 

Gross profit

     689        —           689  

Selling, general and administrative expenses

     429        14       (a)        443  

Other expense

     176        (18     (b)        158  

Interest and other charges, net

     —          36       (c,e,g)        36  
  

 

 

    

 

 

     

 

 

 

Income before taxes

     84        (32       52  
  

 

 

    

 

 

     

 

 

 

Tax expense (income)

     6        (12     (d)        (6
  

 

 

    

 

 

     

 

 

 

Net income

   $ 78      $ (20     $ 58  
  

 

 

    

 

 

     

 

 

 

Unaudited Pro Forma Earnings Per Share

         

Basic

          (i)      $ 0.47  

Diluted

          (j)      $ 0.47  

Weighted-average number of shares outstanding

          (i)     

Basic

          (j)        124.7  

Diluted

            124.7  

 

(1)

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

See accompanying Notes to the unaudited pro forma combined financial statements.

 

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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

(Dollars in millions, except per share data)

 

     Historical As
Reported
    Pro Forma
Adjustments(1)
    Notes      As Adjusted  

Net sales

   $ 4,519     $ —          $ 4,519  

Costs of goods sold

     3,203       —            3,203  
  

 

 

   

 

 

      

 

 

 

Gross profit

     1,316       —            1,316  

Selling, general and administrative expenses

     871       29       (a)         900  

Other expense

     281       (28     (b)         253  

Interest and other charges, net

     (2     70       (c,g)         68  
  

 

 

   

 

 

      

 

 

 

Income before taxes

     166       (71        95  
  

 

 

   

 

 

      

 

 

 

Tax expense (income)

     560       (40     (d)         520  
  

 

 

   

 

 

      

 

 

 

Net (loss) income

   $ (394   $ (31      $ (425
  

 

 

   

 

 

      

 

 

 

Unaudited Pro Forma Earnings Per Share

         

Basic

         (i)       $ (3.35

Diluted

         (j)       $ (3.35

Weighted-average number of shares outstanding

         

Basic

         (i)         127.0  

Diluted

         (j)         127.0  

 

(1)

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

See accompanying Notes to the unaudited pro forma combined financial statements.

 

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UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF JUNE 30, 2018

(Dollars in millions)

 

     Historical As
Reported
    Pro Forma
Adjustments(1)
   

Notes

   As
Adjusted
 

ASSETS

         

Current assets:

         

Cash and cash equivalents

   $ 93     $ (18   (f)     $ 75  

Due from related parties, current

     20       (20   (e)       —    

Accounts, notes and other receivables—net

     746       6     (e)       752  

Inventories

     523       —            523  

Other current assets

     74       —            74  
  

 

 

   

 

 

      

 

 

 

Total current assets

     1,456       (32        1,424  

Property, plant and equipment—net

     264       —            264  

Goodwill

     2,637       —            2,637  

Other intangible assets—net

     129       —            129  

Deferred income taxes

     4       —            4  

Other assets

     17       (8   (b,c)       9  
  

 

 

   

 

 

      

 

 

 

Total assets

   $ 4,507     $ (40      $ 4,467  
  

 

 

   

 

 

      

 

 

 

LIABILITIES

         

Current liabilities:

         

Accounts payable

   $ 774     $ 14     (b,e)     $ 788  

Due to related parties, current

     64       (64   (e)       —    

Accrued liabilities

     395       (205   (b)       190  

Obligations payable to Honeywell, current

     —         140     (b)       140  
  

 

 

   

 

 

      

 

 

 

Total current liabilities

     1,233       (115        1,118  

Long-term debt

     —         1,200     (c)       1,200  

Deferred income taxes

     351       (23   (d,g)       328  

Obligations payable to Honeywell

     —         467     (b)       467  

Other liabilities

     443       (350   (b,g)       93  
  

 

 

   

 

 

      

 

 

 

Total liabilities

     2,027       1,179          3,206  
  

 

 

   

 

 

      

 

 

 

COMMITMENTS AND CONTINGENCIES

         

EQUITY

         

Common Stock, par value $0.001

     —         —       (h)       —    

Additional paid in capital

     —         1,380     (h)       1,380  

Invested Equity

     2,599       (2,599   (b,d,f,g,h)       —    

Accumulated other comprehensive income

     (119     —            (119
  

 

 

   

 

 

      

 

 

 

Total equity

     2,480       (1,219        1,261  
  

 

 

   

 

 

      

 

 

 

Total liabilities and equity

   $ 4,507     $ (40      $ 4,467  
  

 

 

   

 

 

      

 

 

 

 

(1)

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

See accompanying Notes to the unaudited pro forma combined financial statements.

 

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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

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). See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement.”

As of June 30, 2018, SpinCo would have a $588 million liability under the Indemnification and Reimbursement Agreement, calculated as 90% of the historical amounts reported for environmental liabilities. Such obligations payable to Honeywell have been presented as current and non-current liabilities based on the proportionate classifications of the historical amounts reported. Accordingly, the following historical amounts reported will be reversed and replaced by the obligations payable to Honeywell as follows as of June 30, 2018:

 

     As of June 30, 2018  
     As Reported      As Adjusted  
     (Dollars in millions)  

Other assets

   $ 13      $ —    

Accounts payable

   $ 30      $ —    

Accrued liabilities

   $ 206      $ 1  

Other liabilities

   $ 434      $ 3  

Obligations payable to Honeywell, current

   $ —        $ 140  

Obligations payable to Honeywell

   $ —        $ 448  

In addition, Other expense, net will decrease $18 million and $28 million for six months ended June 30, 2018 and year ended December 31, 2017, respectively, 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 SpinCo 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 that we expect will be incurred by us in connection with the consummation of the Spin-Off and that will be used primarily to repay an obligation incurred as part of the separation from Honeywell or a subsidiary of Honeywell. The adjustments assume that the indebtedness will comprise one or more senior secured term loan facilities in an aggregate principal amount of $825 million and senior unsecured notes in an aggregate principal amount of $400 million. The terms of such indebtedness are subject to change and will be finalized prior to the closing of the Spin-Off, and the pro forma adjustments may change accordingly. The adjustments also assume that we will enter into a secured revolving credit facility in an aggregate committed amount of $350 million. The terms of the revolving credit facility are subject to change and will be finalized prior to the closing of the Spin-Off, and the pro forma adjustments may change accordingly.

 

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     For the Six
Months Ended
June 30, 2018
     For the
Year Ended
December 31, 2017
 
     (Dollars in millions)  

Interest expense and commitment fees on our total assumed indebtedness with an estimated weighted average interest rate of 6.04%

   $ 37      $ 73  

Amortization of debt issuance costs

     —          1  
  

 

 

    

 

 

 

Total pro forma adjustment to interest expense

   $ 37      $ 74  
  

 

 

    

 

 

 

A 1/8% variance in the assumed interest rate on the debt incurrence would change the annual interest expense by $1 million.

 

d)

For six months ended June 30, 2018 and year ended December 31, 2017 income tax expense decreased by $12 million and $40 million, respectively, as a result of the income tax effects on adjustments included in pro forma notes a), c), e) and g).

Pursuant to the Tax Matters Agreement, we have agreed to make payments to a subsidiary of Honeywell in case of any adjustment pursuant to a Determination (as defined in the Tax Matters Agreement) with respect to any tax return filed by Honeywell attributable to the SpinCo group or other tax costs incurred by Honeywell in connection with transactions undertaken in anticipation of the Spin-Off as determined by Honeywell. For purposes of the pro forma financial statements, we assume the payments will be $19 million. The associated liability for these payments has been included in Obligations payable to Honeywell as of June 30, 2018. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Tax Matters Agreement.”

 

e)

Reflects the impact of the settlement of cash pooling and short-term notes receivables and payables. In connection with the Spin-Off, we will settle or reclassify the following related party transactions in the unaudited pro forma Combined Balance Sheet as of June 30, 2018.

Due from related parties, current:

 

(Dollars in millions)    As of
June 30,
2018
 

Cash pooling and short-term notes receivables (settled)

   $ 14  

Receivables from related parties (reclassified to accounts receivable)

     6  
  

 

 

 
   $ 20  
  

 

 

 

Due to related parties, current:

 

(Dollars in millions)

   As of
June 30,
2018
 

Cash pooling and short-term notes payables (settled)

   $ 19  

Related party notes payables, current (settled)

     1  

Payables to related parties (reclassified to accounts payable)

     44  
  

 

 

 
   $ 64  
  

 

 

 

 

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In connection with the Spin-Off, we will reclassify the following related party transactions to third-party accounts payable and accounts receivables, as reflected in the unaudited pro forma Combined Balance Sheet as of June 30, 2018:

 

     As of
June 30,

2018
 

Accounts Receivable

   $ 6  

Accounts Payable

   $ 44  

 

f)

Represents adjustments to cash as follows:

 

    

(Dollars

in millions)

 

Cash received from incurrence of term loans

   $ 825  

Cash received from incurrence of senior unsecured notes

     400  

Cash payment to Honeywell at Spin distribution

     (1,195

Cash distribution to Honeywell prior to Spin distribution

     (12

Cash paid for debt issuance costs

     (25

Cash paid for deferred financing fees

     (5

Cash paid for net settlement of due from (to) related parties

     (6
  

 

 

 

Total pro forma adjustments to cash

   $ (18
  

 

 

 

 

g)

Reflects the impact of our assumption of certain pension assets and liabilities for employees who are eligible for benefits under defined benefit pension plans that are currently sponsored by Honeywell. For these employees we intend to sponsor a defined benefit pension plan after the Spin-Off with terms and benefits consistent with the existing Honeywell plans. The annual expense related to our employees for these defined benefit pension plans was allocated to us by Honeywell and such allocation is reflected in our historical Combined Financial Statements. As of June 30, 2018, the total pension assets to be contributed to us amounted to $303 million and total projected benefit obligation amounted to $384 million. We recorded a net pension plan liability as of June 30, 2018 as follows: $(74) million in Germany, $(3) million in Switzerland, $(2) million in Austria, $(1) million in Belgium, $(1) million in Netherlands, and nil in United States. The unaudited pro forma financial statements reflect an estimate of interest costs and expected return on plan assets for the defined benefit pension plans of $(2) million and $(4) million for the six months ended June 30, 2018 and year ended December 31, 2017, respectively.

 

h)

Reflects the reclassification of Honeywell’s net investment in us, which was recorded in invested equity, into additional paid-in-capital and common stock to reflect the assumed issuance of 123.8 million shares of our common stock at a par value of $0.001 per share pursuant to the Separation and Distribution Agreement immediately prior to the Spin-Off. We have assumed the number of outstanding shares of our common stock based on the number of shares of Honeywell common stock outstanding on June 30, 2018 and a distribution ratio of one share of our common stock for every six shares of Honeywell common stock.

 

i)

Pro forma basic earnings per share (“EPS”) and pro forma weighted-average basic number of shares outstanding are based on the number of Honeywell basic weighted-average shares outstanding for the six months ended June 30, 2018 and for the year ended December 31, 2017, respectively, adjusted for a distribution ratio of one share of the Company’s common stock for every six shares of Honeywell common stock outstanding.

 

j)

Pro forma diluted EPS and pro forma weighted-average diluted shares outstanding are based on the number of basic shares of our common stock as described in Note (i) above. The actual dilutive effect following the completion of the Spin-Off will depend on various factors, including employees who may change employment between the Company and Honeywell. We cannot fully estimate the dilutive effects at this time.

 

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BUSINESS

Our Company

We are a leading global provider of critical comfort and security solutions primarily in residential environments, with a presence in over 150 million homes globally. Our products, which benefit from the trusted, well-established Honeywell brand, are installed in over 15 million homes annually, allowing SpinCo to launch innovative technologies and services at scale. After the Spin-Off, these products will be marketed and sold under the Honeywell Home brand pursuant to a 40 year license agreement with Honeywell. We have a long-standing leadership position in the traditional/non-connected products space that contributes significantly to our net sales. Our growing portfolio of connected home solutions is one of the largest and most comprehensive in the market. Our connected solutions are supported by software platforms (which we expect to consolidate in a single platform and mobile application) that allow consumers and channel partners to easily install, use and maintain our solutions and third party devices. These platforms interact with other ecosystems to control SpinCo’s and others’ home automation devices. Over 4.7 million of our customers are connected, providing access to control, monitoring and alerts, and we have approximately 30 million installed sensors generating more than 250 billion data transmissions annually. Our broad portfolio of innovative products is supported by approximately 3,000 worldwide active and pending patents, delivered through a comprehensive network of over 110,000 professional contractors, more than 3,000 distributors and over 1,200 original equipment manufacturers (“OEMs”), as well as major retailers and online merchants.

ADI is the leading wholesale distributor of security products, and is independently recognized for superior customer service. Through over 200 stocking locations in 17 countries, ADI distributes more than 350,000 products from over 1,000 manufacturers to a customer base of over 100,000 contractors. We believe this global footprint gives us distinct scale and network advantages in our core products over our competitors. Further, we believe our customers derive great value from the advice and recommendations of our knowledgeable design specialists allowing our customers to better meet the technical and systems integration expertise requirements to install and service professional security systems. We continue to transform the industry with value-added services such as presales system design and 24/7 order pick-up, and the selective introduction of new product categories such as professional audio visual. Additionally, ADI has long been an important channel to market for our security products, providing a level of end-customer intimacy that drives our ability to develop successful new products at an accelerated rate and insights into current market trends that help us quickly adapt our product portfolio to meet evolving customer needs. Similarly, ADI is an important channel to market for third party manufacturers, whose products represent a significant majority of ADI’s net sales.

We intend to expand and market our extensive portfolio and distribution base in several ways. We view our long-standing, mutually beneficial relationships with professional contractors and OEM channels as a key differentiator in our Products segment and plan to continue to invest in and grow with these channel partners. We believe the global connected home market is in the early stages of broad consumer adoption, with Gartner projecting the installed base of “connected things” in the consumer segment to grow from approximately four billion in 2016 to more than 12 billion in 2020 and we intend to expand our connected solutions and services offerings to capitalize on this trend. We also intend to expand ADI’s geographic footprint, product categories and services to drive overall sales, including SpinCo’s security products business.

Segments

We manage our business operations through two segments, Products and Distribution, which contributed 49% and 51%, respectively, of our net sales before intersegment eliminations for the year ended December 31, 2017.

Products

Our Products segment had net sales before intersegment eliminations of $2,379 million for the year ended December 31, 2017, of which $337 million were sold to ADI. Management estimates that net sales generated

 

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from our Products segment are primarily from residential end-markets. Included in our Products segment are 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. Products consist of solutions in the following Comfort & Care and Security & Safety categories:

 

   

Comfort & Care: Our Comfort & Care solutions have historically been marketed and sold primarily under the Honeywell brand, and after the Spin-Off, these products and solutions will be marketed and sold under the Honeywell Home brand pursuant to a 40 year license agreement with Honeywell. These solutions include home products, services and technologies including:

 

   

Temperature and Humidity Control Solutions: Devices to control air conditioners and heating equipment, thermostats and zoning devices, control panels, dampers and actuators, through brands and product families such as Lyric, Prestige, RedLINK, T-Series, TrueZone, FocusPro and VisionPro.

 

   

Thermal Solutions: Devices to control heating and cooling equipment, such as water heaters, boilers, furnaces, heat pumps and air heaters and combustion critical components such as electronic controls, actuators, gas valves and ignition controls, through brands and product families such as SCOT and Ermaf.

 

   

Water Solutions: Devices to control hydronic heating, cooling, and potable water solutions, including control panels, zone valves, balancing valves, thermostatic radiator valves, temperature valves, floor temperature sensors and accessories, pressure regulators, backflow preventers and potable water care products to filter, clean and soften water, through brands and product families such as SmartT and Aquatrol.

 

   

Air Solutions: Devices to control air quality, such as whole home humidifiers and dehumidifiers, air filters, air purification and odor control solutions and ventilation systems and controls, through brands and product families such as TrueEASE, Micro Defense and TrueDRY.

 

   

Remote Patient Monitoring Software Solutions (telehealth): Systems that record, organize and transmit patient health data to health service providers to monitor patient well-being, helping patients continue treatment and recovery in their homes under remote supervision, through brands and product families such as Life Stream and Life Care Solutions.

 

   

Software Solutions: Global software platforms and mobile applications that provide contractors and consumers with access to services such as demand response, energy management, auto-replenishment services and predictive appliance diagnostics, through brands and product families such as Lyric and Total Connect Comfort.

 

   

Security & Safety: Our Security & Safety solutions have historically been marketed and sold primarily under the Honeywell brand and after the Spin-Off will be sold under the Honeywell brand. They include professionally-installed and monitored intrusion and life safety detection and alarm systems, as well as self-installed and self-monitored awareness solutions including:

 

   

Security Panels: Control devices that communicate with sensors that receive event or condition signals and send those signals to a monitoring station and cloud infrastructure, through brands and product families such as Vista, Lyric and Lynx.

 

   

Sensors: Devices that detect intrusion (for example, motion, opening of doors and windows and breaking of glass), smoke, carbon monoxide and water and transmit a signal to a security panel, through brands and product families such as 5800 and SiX.

 

   

Peripherals: Accessories that interact with security systems, such as keypads and key-fobs, through brands and product families such as 5800 and Videofied.

 

   

Wire and Cable: Low voltage electrical wiring and category cable, through brands and product families such as Genesis Series.

 

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Software Solutions: Global software platforms and mobile applications that provide contractors and consumers with access to services such as alarm monitoring, communication, automation and video services. In addition, we provide our contractors with data analytics tools, through our AlarmNet 360 software suite. These solutions are sold through brands and product families such as Total Connect 2.0 and AlarmNet 360.

 

   

Communication Devices: Devices that transmit notifications and security information from security systems to monitoring stations, such as cellular radios and internet and telephone line communicators, through brands and product families such as LTE radio.

 

   

Video Cameras: Battery-operated indoor and outdoor video motion viewers that detect motion and enable live “look-in” remotely, and Wi-Fi cameras for indoor and outdoor use, through brands and product families such as Videofied and Total Connect cameras.

 

   

Awareness Solutions: Self-installed and self-monitored systems that include a home gateway/hub, cameras and awareness sensors to detect motion and sounds, opening and closing of doors, entry and exit of known users of the system (facial recognition) and provide alerts to the user via a mobile app, through brands and product families such as Honeywell Smart Home System and Lyric.

 

   

Cloud Infrastructure: Network operating center that routes signals between home and monitoring station and enables secured, remote data transmissions, through brands and product families such as AlarmNet and Total Connect.

 

   

Installation and Maintenance Tools: Software tools and applications to enable security contractors to install, program and maintain security systems, through brands and product families such as AlarmNet 360 and Compass.

 

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Eleven of the top twelve most appealing smart home use cases reported by Parks Associates concern comfort, security and safety solutions that are directly addressed by our product offerings and a number of our end-to-end solutions have applications across Comfort & Care and Security & Safety products. We are strongly positioned to provide products that enhance consumers’ comfort, convenience and sense of security and work together to contribute to a connected home ecosystem. Certain of these cross-product offerings include:

Home Comfort: Total Connect Comfort App and RedLINK Wireless Products

From the WiFi 8000 Thermostat to the RedLINK Prestige IAQ suite of products, the Total Connect Comfort (“TCC”) platform offers global solutions for comfort with a large portfolio of products for both professional installers and DIYers.

 

LOGO

 

RedLINK Technology uses a proprietary wireless system to help professional contractors solve home comfort challenges wirelessly. Beyond just thermostats, RedLINK includes a wide variety of wireless accessories like the remote temperature monitor, ventilation boost and the Residential Internet Gateway.

 

The TCC app can be managed through the TCC experience, which can be found on the iOS and Android app stores as well as through a web portal and enables users to:

 

•  View and change their Comfort & Care system settings (Heat, Cool, Off, Fan, Auto, Emergency/Back-Up Heat, Dehumidifier, Humidifier).

LOGO

 

•  View and change their Comfort & Care system settings (Heat, Cool, Off, Fan, Auto, Emergency/Back-Up Heat, Dehumidifier, Humidifier).

 

•  View and set the temperature.

 

•  View indoor humidity.

 

•  View outdoor temperature and humidity.

 

•  Access multiple thermostats if the system is zoned.

 

•  Access multiple locations if more than one system is connected.

 

•  Receive temperature and humidity alerts via e-mail.

 

•  Access over 90 system alerts via the web.

 

•  Get automatic upgrades as new features are available

 

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Home Security: Total Connect Remote Services

 

LOGO    LOGO    LOGO    LOGO    LOGO

Total Connect 2.0 is an interactive security solution for home and business that provides a user control of a security system, the ability to receive push notifications, email, SMS/text and video alerts, the ability to view live video and control such features as video doorbell activity, view events, control thermostats, lighting and locks. This solution works with AlarmNet’s Cloud Infrastructure to offer 24/7 emergency response through monitoring centers. The capabilities associated with this solution include:

 

   

Mobile Control: Remote security system management and control through the web, iOS or Android mobile apps for users.

 

   

Real-Time Awareness: Geofence alert and real-time status of events through push notifications, emails, SMS/text messaging and video alerts. Users may view past events and search for specific occurrences.

 

   

Event History: System event notifications with 90-day history and 7 or 30-day video storage plans.

 

   

Multi-Site and Enhanced User Management: View 100+ locations with a single login, add multiple users and assign access rights, customize settings and notification preferences.

 

   

Secure Platform: Personal data encryption, secure password rules, arming and disarming with user codes, fingerprint biometric login on iOS and Android devices.

 

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Automation and Energy Management Solutions

 

LOGO

 

LOGO

 

Remote control of Z-Wave® or Wi-Fi automation devices such as thermostats, locks, lights, shades, garage doors, water, leak detectors and video doorbells, bringing all connected home and business solutions into one platform.

 

•  Smart Scenes: Highly flexible rules, triggers and schedules allow customization and personalization of all the connected devices in the home or business. Users may create automation rules by device, user, time of day and day of week to fit any schedule or lifestyle.

 

•  Energy Savings: Maximize comfort, save money on energy and utility bills, conserve resources by creating smart heating, cooling, shades and lighting schedules.

 

•  Mobile Control: Remotely control doors, locks, temperature, garage door, lights for security and convenience.

Video Solutions: Remotely view high definition live and recorded video events

 

LOGO

 

•  Live Streaming: Access live video through the mobile apps.

 

•  HD Cameras: Include up to eight cameras per location, indoor or outdoor.

 

•  Video Doorbell Service: Control video doorbell activity on the Total Connect 2.0 iOS app and Android app.

 

LOGO

 

•  Video Notifications: Receive video notifications via email, SMS/text messaging or push notifications based on security system events, motion detection or time of day.

 

•  Cloud Storage: 7-day storage plan or 30-day storage plans.

 

•  Recorded Events: 30-second video clips with no gaps between video clips.

 

•  Video Alarm Verification: Cloud-based central station video interface that allows monitoring personnel to view video clips and see what caused an alarm.

 

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Monitoring Stations and Security Dealers Solutions with AlarmNet 360

AlarmNet 360 is a business management cloud platform that helps improve monitoring stations and security dealers operational customer service and account creation efforts through programming security and software accounts, remote knowledge of hardware and software diagnostics and detailed data analytics.

Business Management

 

LOGO

 

Our programming, support tools and apps help our service providers more efficiently install and service their connected home and business customers.

 

•  Cloud-Based: Remotely access AlarmNet 360 from any PC or mobile device, onsite or remotely.

 

•  Programming: Quick total account creation for software and hardware accounts.

 

•  Control Employee Access: Manage and control employee access rights to secure who accesses customer accounts.

 

•  Customer Service: Easily support all customer accounts from a single user interface with account maintenance, system health checks and remote updates.

Business Analytics

 

LOGO

 

•  Interactive: Dashboard that offers insight into customer behavior to improve operational efficiency, grow business, find complementary services and generate more recurring monthly revenue.

 

•  Filter Data: Pinpoint critical issues and service customers quickly and efficiently. Easily sort data by account age and period of time and export it to a spreadsheet.

 

•  Map View: Interactive map provides account status and location making service calls and sales more efficient.

 

•  Engagement: Analyze customer account engagement to learn customer behaviors. Use these metrics to improve customer retention and reduce attrition.

 

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Products Segment: Net Sales for the year ended December 31, 2017(1)

 

By Geography(2)

 

  

By Traditional/Connected

Status(3)

 

  

By Product Category

 

   
LOGO    LOGO   

LOGO

 

           
(1)

Includes external and intercompany sales.

(2)

Americas represents North and South America. EMEA represents Europe, the Middle East and Africa. Other principally represents Australia, China, New Zealand and South Korea.

(3)

Connected is defined as any device with the capability to be monitored or controlled from a remote location by an end-user or service provider.

Distribution

ADI, our Distribution segment, is the leading wholesale distributor of security and low voltage electronics products, which include security, safety and audio visual products and related accessories. These products, which are commonly referred to as “low voltage”, are traditionally defined as products operating at or below 24 volts. According to IHS data, ADI has the leading global market share in security equipment distribution. ADI operates through a distribution network of over 200 stocking locations throughout the world, delivering to over 100,000 contractors. The Distribution segment had net sales of $2,477 million for the year ended December 31, 2017.

ADI distributes a broad selection of SpinCo and third party products to meet customer needs, including:

 

   

Security products

 

   

Video Surveillance: IP and high-definition analog cameras, recording and storage devices, video management and analytics software, and related system accessories.

 

   

Intrusion: Residential and commercial alarm systems, keypads, detection and sensing devices, alarm communication equipment, and related systems accessories.

 

   

Access Control: Access control panels and software, readers, credentials, locking hardware, gate control, intercoms and related system accessories.

 

   

Other products

 

   

Fire and Life Safety: Fire alarm control panels, fire detection equipment, fire notification equipment, manual call points/stations and related system accessories.

 

   

Wire, networking and professional audio visual systems.

In addition to our own Security & Safety products, ADI distributes products from industry-leading manufacturers including Assa Abloy, Axis Communications, Honeywell and Nortek Security & Control, and ADI also carries a line of private label products. ADI sells these products to contractors that service non-residential and residential end-users. Management estimates that in 2017 approximately two-thirds of ADI net sales were attributed to non-residential end markets and one-third to residential end markets.

 

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Distribution Segment: Net Sales for the year ended December 31, 2017

 

   

By Geography

 

  

By Product Category

 

 

LOGO

 

 

  

LOGO

 

(1)

Americas represents North and South America. EMEA represents Europe, the Middle East and Africa. Other principally represents India.

(2)

Other includes fire and life safety, wire, networking and professional audio visual systems.

History of Innovation

We have a long history of innovation and industry firsts in our Comfort & Care and Security & Safety markets and have a reputation for providing trusted, tested and proven products and solutions. We trace some of our innovations as far back as the 1880s when we invented the predecessor to the modern thermostat. From the first clock thermostats to the world’s first gas burner control, we have consistently driven progress and innovation in home comfort and security, including the introduction of the iconic T-86 “Round” thermostat in 1952. In 2000, we acquired the ADEMCO business, a leader in monitored burglary and fire alarm systems with roots back to 1929 and the early days of wired burglar alarms, expanding our presence in fire and security systems.

In the 1980s, ADEMCO developed the first reliable wireless security system and sensor and the AlarmNet radio technology that served as the first affordable back-up and alternative to alarm transmission over telephone lines. Through ADI, we introduced large-scale wholesale security products distribution, and now contractors of all sizes count on ADI for convenient access to low voltage security products, local inventory, e-commerce ordering, as well as product training and the extension of credit.

SpinCo was the first company to introduce professionally-monitored residential smoke and carbon monoxide detection systems. We also invented the popular Dual Tech detector to detect both motion and heat from an intruder, and we were the first to widely deploy an alarm platform with cloud services to consumers and a mobile app for home security monitoring. As the world becomes more connected and mobile, we believe we are well positioned to extend our track record of delivering leading solutions for the home, combining our experience and expertise in hardware and sensor technology with a focus on world-class excellence in software.

Our Strengths

We believe we benefit from the following competitive strengths:

 

I.

Global Leader with Iconic Brand and Unparalleled Presence in the Home

Our iconic Honeywell brand is globally recognized for quality, innovation, security and reliability. Our products and solutions are present in over 150 million homes worldwide and we believe, based on management

 

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estimates, that we have the leading global market position in thermostats and residential security products and in security products distribution. Our solutions are installed in more than 15 million homes annually, allowing SpinCo to launch innovative technologies and services at scale. Our leading position extends to our connected platform, where we currently have over 4.7 million connected customers and 30 million sensors generating over 250 billion data transmissions annually.

The brand recognition associated with our installed base provides an additional opportunity for expansion with new connected products and solutions, and after the Spin-Off, we will retain the right to market and sell these products under the Honeywell Home brand pursuant to a 40 year license agreement with Honeywell. We are actively facilitating the transition of our customers and end-users from traditional to connected products by transforming our product portfolio, educating professional installers, creating value for OEMs and engaging consumers. Through these efforts, we have increased the portion of our product sales generated by connected solutions to approximately 37% in 2017. Gartner projects the connected things consumer segment will grow from approximately four billion in 2016 to more than 12 billion in 2020.

 

II.

Broadest Portfolio Providing Innovative End-to-End Solutions Across Comfort & Care and Security & Safety with Domain and Regulatory Standards Expertise and Differentiated Technology

Our comprehensive Products portfolio provides end-to-end solutions that focus on critical needs within the home, where product reliability and ease of use are of utmost importance. This portfolio is comprised of traditional product offerings as well as a growing connected offering. Our deep domain expertise allows us to consistently provide trusted, tested and proven solutions that meet robust standards for cybersecurity and regulatory, as well as certification standards for devices addressing critical life safety needs. Our portfolio distinguishes us from our competitors, most of whom focus on niche solutions within the home. We provide solutions that address multiple consumer connected home needs under a common platform. As new devices and use-cases emerge, we believe the continuing development of our common platform across devices and all levels of connectivity (device, software, cloud, analytics and consumer interface) will become vital to ensure a seamless and reliable experience. Our broad portfolio also enables us to achieve profitable economies of scale in production, distribution and speed to market while making us a “go to” partner in the smart home ecosystem. However, after the Spin-Off our economies of scale with respect to the Products segment may be diminished with respect to certain purchasing activities, such as IT infrastructure and other support services, as compared to when we were a part of Honeywell.

Our innovation is supported by the SpinCo User Experience design group, which creates value by understanding and translating the needs of consumers and channel partners to develop intuitive, desirable and brand differentiated end-to-end experiences. Our products are regularly recognized in professionally judged international design competitions, winning the highly coveted iF Design Award, Red Dot Design Award and the IDEA Design Award over a dozen times since 2015.

We believe our product quality philosophy, which combines rigorous internal testing with external certification of our products, gives us a competitive advantage. Our laboratories are certified for testing to meet various industry standards, such as UL, CSA Group and Intertek, combining SpinCo’s internal testing resources with these agencies’ global recognition to substantially reduce time-to-market for new solutions and to help ensure quality and reliability.

Our Secure Software Development Lifecycle initiative sets a robust protocol for establishing and enhancing product and system cybersecurity at the outset of, and throughout, product development and for responding to potential vulnerabilities in existing products.

We have over 1,300 engineers creating innovative solutions in dedicated software centers of excellence located in Atlanta, Georgia, Bengaluru and Madurai, India and other locations. Our deep domain expertise, proprietary technology and brands are protected by a combination of patents, trademarks, copyrights, trade

 

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secrets, non-disclosure agreements and contractual provisions. We own approximately 3,000 proprietary worldwide active patents and pending patent applications.

 

III.

Major Player in the Connected Home, Providing Solutions that Seamlessly Integrate with Leading Smart Home Players

Our broad suite of connected solutions allows end customers to use mobile apps to control their thermostats, security systems, cameras and home automation devices such as electronic locks, lights and garage doors. We currently service over 4.7 million connected customers and transmit over 40 million consumer notifications, including more than two million security panel signals, every day. Adoption rates of our connected home solutions in the future will depend on a number of factors, including development of competitive and attractive products and the cost to customers of installation of new solutions or upgrade or renovation from older connected platforms or products. We are well positioned to leverage the growing demand for connected home solutions with our innovative products that are easy to purchase, install and deploy within the broader smart home ecosystem including our thermostats portfolio. We expect to benefit from the over 17% CAGR projected by IDC for connected thermostats over the next five years. Beyond that, our expanding portfolio of self-installed and self-monitored solutions such as the Smart Home Security System and Lyric Cameras are well positioned to participate in the growth of DIY solutions unit sales which according to IHS are expected to grow at a rate of over 20% per year from 2015 through 2020. In security, we continue to see strong support for our professionally-installed and monitored solutions.

Our systems integrate easily with the most widely used home automation systems, including Amazon Alexa®, Apple HomeKit®, Google Home® and Samsung SmartThings®. We have one of the widest portfolios of Apple HomeKit enabled connected products and were the first company whose security system communicated with the Apple HomeKit ecosystem. We plan to continue to expand the range of our ecosystem partners through, among other things, the “Works with Honeywell” program which currently has 3,000 third party developers creating mobile apps that integrate with our solutions. Approximately one in six of our users already connect their systems to partner APIs (application programming interfaces) or solutions from other manufacturers through this program, and we believe that the openness of our architecture and adaptability of our products reduce contractor training and installation time, which further enhances end-user demand for our products.

 

IV.

Well Positioned to Serve Professional, OEM and Consumer Channels

We have a multi-channel strategy to serve end-users through our professional contractors, OEMs, retail and e-commerce partners that allow end-users and consumers to purchase our products in ways that suit their needs, whether directly for DIY or through a professional installer.

Our security and Comfort & Care solutions are generally installed professionally, and our channel partners rely on our high-quality OEM parts for repair and remodel services to meet their customers’ needs. We have deep and long-standing relationships, many of which extend over 20 years, with our global contractor base and we continually strengthen and renew these relationships through various channel management and training programs. For example, Contractor Pro (loyalty program) has over 29,000 participants and has been a leading industry program for 14 years. Our training programs include Homes University (technical training) and S.T.E.P.S. (sales training). In 2017, through our trainings, we educated more than 31,000 contractors and distributors.

 

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Some of these training offerings include:

 

Selected Programs   Description
LOGO   CONNECT is the largest independent dealer event in the security market. For more than 25 years, we have hosted this event to bring together independent dealers from around the Americas to take part in education, networking and celebration. With hundreds of customers in attendance, CONNECT is an important annual dealer event. Our Authorized Dealers look forward to this event each year and depend on it to keep them informed of the latest trends in our industry, solutions and best practices from security companies from around the country.
LOGO   LiveWell is an indoor air quality training program for Comfort & Care contractors. The program, focused on indoor air quality thought leadership, is designed to train contractors not only on indoor air quality (“IAQ”) but also deliver comfort for the whole home using our products and services. The program includes on-line training courses, videos, demonstrations and eLearning, designed to enable contractors to provide expert advice and solutions to customers to improve IAQ and comfort in the home, ultimately driving better engagement with customers and growing their business.
LOGO   The Honeywell Authorized Dealer (“HAD”) program is the largest independent network of security and fire dealers, with over 300 member companies across the U.S., Canada and Latin America. Structured with a tiered reward program, HAD rewards dealers based on their commitment to the program and our portfolio of products. From the power of the Honeywell brand, to specially designed training, networking events, co-op advertising, and marketing development funds, members receive extensive support and the opportunity to network with the foremost independent security dealers.
LOGO   Now in its twenty-fifth year, the ADI Expo program is the industry’s largest one-day educational and sales event dedicated to providing ADI customers with the tools, education and resources they need to grow their business. Free of charge to all industry professionals, ADI Expos provide the opportunity for our customers to meet and learn from a broad range of industry vendors, attend seminars, and earn continuing education credits. In 2017, ADI held over 80 Expos, providing a full day of educational seminars, product exhibits, networking opportunities and Expo day-only specials on technology from leading industry manufacturers.

S.T.E.P.S. to Success

Sales Training

Program

  S.T.E.P.S. is a sales-focused program designed to teach residential and light commercial contractor professionals how to engage their customer base by providing customized product and service offerings that their customers want, need and will pay for. The objective of the S.T.E.P.S. to Success Program is increased accessory sales, higher-end system installations and more service enhancements, as well as to assist contractors that attend the program with generating more business, increasing their average ticket price and securing long-lasting customer relationships.

 

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LOGO   Contractor Pro is a loyalty program for contractors. Members of Contractor PRO earn rebate points on every qualifying SpinCo product purchase. With Contractor PRO, contractors enjoy a variety of benefits including: exclusive tech support, online referrals, free sales literature, personal use product discounts, regular communications about promotions and account upgrades. This program is designed to enable contractors to drive engagement and generate more revenue.
Homes University   Homes University is a three day, hands-on training course designed to show contractors and distributors the benefits of our products. The course educates managers, sales representatives, counter staff, and installers about selling the appropriate product features and benefits, install and wire product solutions, and identify opportunities to meet the needs of consumers. The course is taught by experienced instructors including our technical product specialists and Comfort & Care industry experts and consists of lecture-discussion, hands-on lab exercises and advanced multimedia presentations for maximum learning effectiveness.

We also have long-standing relationships with important OEMs and service providers such as ADT Security Services, United Technologies and A.O. Smith Corporation. A number of these relationships extend more than 25 years, including some spanning over 40 years. These deep partnerships are possible because OEMs value our design capabilities, innovation, domain expertise, supply chain capabilities and product quality.

Our DIY and self-install products are sold through retail channels including direct-to-consumer, e-commerce and brick and mortar locations, such as The Home Depot, Lowe’s, Amazon.com, Walmart and Kingfisher. Our award-winning, best-selling thermostats are our most recognizable products and we market certain models directly to end consumers. Growth of the retail market, including the self-installed or do-it-yourself and e-commerce markets could affect our business by attracting new competitors. In addition, growth of these retail markets relative to the professional installation markets may negatively impact our margins.

 

V.

Pre-eminent Global Distributor of Security, Safety and Other Low Voltage Products

According to IHS, ADI has the leading global market share in security equipment distribution. ADI distributes a wide offering of low voltage product categories comprised of over 350,000 products from over 1,000 manufacturers, all supported by a disciplined category management process to ensure our offerings are comprehensive and meet the needs of important customer segments. ADI’s sizable market share, coupled with its breadth of inventory, creates opportunities for security contractors in particular to identify and purchase complementary ADI product offerings. ADI has over 200 stocking locations across 17 countries, supplemented by a customer friendly e-commerce platform that serves a customer base of over 100,000 contractors. Our extensive global footprint, combined with our strategic supplier relationships and focus on customer service, enables ADI to effectively serve both local and national customers with a range of product and service solutions. Additionally, we believe being the largest distributor of security equipment results in meaningful procurement efficiencies and that ADI’s offering of a line of private label products further enhances our margin profile. However, after the Spin-Off our economies of scale with respect to the ADI business may be diminished with respect to certain purchasing activities, such as IT infrastructure and other support services, as compared to when we were a part of Honeywell.

Manufacturers/Suppliers

ADI is an important channel to market for third party manufacturers, whose products represent a significant majority of ADI’s net sales. Through our global network of branches, inventory stocking programs and over

 

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1,000 sales representatives, each of whom are highly trained in the brands and products that we distribute, we help manufacturers grow their business by facilitating direct and relevant engagement with our customers. We provide manufacturers the ability to offer in-store selling tools, such as interactive product displays and demonstration equipment, that help contractors evaluate products before purchase. We also offer branch stocking programs, which manufacturers use to make their products available in local markets, and provide local market inventory to serve contractors who require same day fulfillment. We believe this strong value proposition supports our position as a preferred channel to the market for leading industry manufacturers.

Contractors/Customers

ADI’s global presence enables the delivery of supply chain services that help contractors reduce their procurement costs, better manage working capital through the advancement of credit, and operate more efficiently. For example, we offer services such as job kitting and staging, IP device programming, 24/7 pick-up anytime lockers and one-hour pick up service at ADI branches for online orders. We also offer convenient electronic ordering options, which accounted for approximately 17% of our ADI net sales for the fiscal year ended December 31, 2017.

These services and convenient ordering options, combined with our global presence of more than 200 stocking locations, allow us to serve a range of customers across geographies and be a single source of supply for contractors in the industry. We also help our customers grow their businesses through services such as pre-sales technical support, product certifications and trainings, project support and knowledgeable sales specialists including third party certified systems design specialists. In 2017, we offered more than 1,500 manufacturer and industry association led training opportunities. Many of our trainings were conducted at ADI Expos, which are the largest series of one-day product showcase and training events in the security industry where manufacturers present the latest technology to our customers. In 2017, we held more than 80 ADI Expos globally, delivering more than 300 Continuing Education Unit accredited programs.

Inside an ADI Branch

 

LOGO

 

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VI.

Consistent Revenue Growth and Strong Segment Performance Supported by Best-in-Class Honeywell Operating System (“HOS”)

We believe we have an attractive financial profile highlighted by our diversified revenue streams, strong segment profits and limited capital expenditure needs. We have delivered strong net sales growth over the period from 2013 to 2017, during which our net sales grew at a CAGR of 3.7%. In addition, the overall nature of our business is not capital intensive. For the years 2015 to 2017, our capital expenditures averaged 1.3% of our net sales.

Our financial performance is underpinned by the foundation of the Honeywell Operating System (“HOS”). HOS is ingrained in our organization and was founded on the lean and six sigma principles of continuous improvement in quality, delivery, cost, growth and innovation, and we plan to continue the HOS model after the Spin-Off. Our commitment to HOS has resulted in improved manufacturing productivity, more rapid product innovation and increased cost efficiencies. Important parts of our supply chain are strategically positioned in low cost regions that are located in or near key markets, consistent with a strategy of optimizing our supply chain and reducing delivery times. We have extended HOS concepts beyond lean manufacturing to our Distribution business, customer service and product development areas. We are applying these practices to develop global platforms to drive standardization for scale and cost efficiency, while at the same time incorporating key technologies and functionalities to drive speed and faster innovation for customers.

The Company’s future growth may be limited due to the substantial indebtedness we expect to incur in connection with the Spin-Off and our payments under and the terms of the Indemnification and Reimbursement Agreement, as well as other risks which we may be presently unable to predict. See “Risk Factors.”

Our Growth Strategies

 

I.

Continue to Develop Innovative New Products and Solutions

We are developing new, innovative products and solutions across Comfort & Care and Security & Safety to grow our core business and differentiate ourselves from our competitors. Over the past three years, we have launched over 200 new products such as the Lyric family of connected home solutions, which includes thermostats, water leak detectors and awareness cameras. Our next generation alarm systems are expected to launch in late 2018. We have also launched cloud service offerings such as AlarmNet 360 and Total Connect 2.0 that allow consumers to control their systems remotely and contractors to provide efficient installation, maintenance and support services. We plan to further expand our portfolio by bringing to market an extensive set of new solutions for everyday problems, including remote furnace and boiler monitoring, smart vents, shut-off valve solutions, battery-operated video motion cameras and a residential global intrusion system. While we believe we are well positioned to capitalize on future trends and opportunities for innovation, the constantly evolving needs of our customers make it difficult to predict the pace or scope of future technological developments and our business may be affected if our new products or upgrades are not adopted by consumers. We collaborate with consumer driven technology companies that have market-leading, complementary offerings such as August (door lock) to provide our customers with a seamless experience, which in turn supports customer acquisition and retention. Our systems are compatible with the most widely used home automation systems, including Amazon Alexa®, Apple HomeKit®, Google Home® and Samsung SmartThings®. Our compatibility with these platforms, some of which are owned by competitors and may compete with our solutions, has helped anchor our devices in millions of homes around the world, and we expect these relationships to continue to drive growth.

We employ Agile methods for software development, and are developing a single mobile application which, together with our global platforms, is designed to enable faster introduction of new products and implementation of new features while driving cost efficiencies through our global scale. At the same time, our Secure Software Development Lifecycle initiative sets a robust protocol for establishing and enhancing product and system cybersecurity at the outset of, and throughout, product development and for responding to potential vulnerabilities in existing products.

 

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II.

Continue to Invest in and Grow with Professional and OEM Channel Partners

Our professional channel partners are an integral part of our sales and go to market strategy, and we invest in their growth to help drive our product sales. While the DIY and e-commerce markets for our solutions continue to grow, the vast majority of our products are installed professionally through our contractor and OEM channels. We plan to continue to extend growth in these professional channels through channel partner marketing programs, designing solutions with simplified installation and maintenance, and by helping contractors provide better service to the end customer. We plan to continue investment in these programs, as well as to provide enhanced sales and technical training, hiring and talent development for our contractors. For example, we host the annual CONNECT national conference, the largest independent dealer event in the security industry which gives security contractor partners the opportunity to share best practices and participate in specialized trainings. In addition, our plan is to continue to develop new relationships with leading channel partners, using these strategies to expand our presence in the market in all regions. We plan to continue to collaborate with OEM channel partners to provide design services, bring to market new technologies and deliver innovative, connected solutions that increase the lifetime value of their equipment. For example, we plan to deliver remote diagnostic capabilities for furnaces and water heaters that will enable technicians to resolve problems quickly and improve equipment uptime.

 

III.

Leverage Connected Home Expertise to Grow Software and Services Revenue

We believe we are well positioned to benefit from the growing demand for connected solutions in homes due to our breadth of offerings, customer reach and strong brand. As consumer preferences drive increasing demand for connected home solutions, we believe our portfolio of end-to-end solutions will become increasingly important. Compelling connected home use cases require careful orchestration of multiple solutions to create an ecosystem that can be reliably accessed by consumers on a common platform. A seamless experience is a key differentiator relative to single-purpose product providers.

We plan to further enhance the customer value proposition by expanding remote functionality and real-time access to information and analytics that help the end-user control their home environment. We also intend to support this effort by extending our suite of proprietary service offerings as well as the range of options for controlling our devices in conjunction with third party systems. These innovations require that we navigate a complex and changing technological and regulatory landscape.

We have recently launched SaaS subscription services to consumers and intend to grow through services such as video storage, energy management and automated replenishment services. We also provide PaaS offerings such as AlarmNet and Total Connect as fee-based services to the professional channel to enable remote management, control and monitoring of security systems, and plan to provide Honeywell Home, a global cloud and application platform for use by consumers and professional channel partners. We intend to consolidate our service offerings under Honeywell Home to increase scale efficiencies and improve speed to market with new features and enhancements and to drive global expansion of connected offerings and services. This platform is expected to make it easier for partners to integrate with our solutions, and allow SpinCo to host third party connected products in our cloud as well as enable faster implementation of new connected device products and services such as demand response and security monitoring services, allowing them to use the ecosystem of their choice and providing customers with energy savings, security and peace of mind. This platform will enable meaningful new services for our professional channels, our connected consumers and third parties that value the insights derived from data. Connectivity also enables data analytics and DaaS, which allows service technicians to provide after-sales services in the form of remote diagnostics and preventive maintenance and also enables them to resolve more problems on the first service call. Furthermore, our LifeCare telehealth DaaS enables remote patient monitoring and assists hospitals in significantly reducing readmission rates. We believe analytics provide a growing service revenue opportunity.

 

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IV.

Expand Presence of Product Portfolio Through Alternative Channels and Geographies

According to IHS, DIY and self-installed solutions unit sales are expected to grow by over 20% per year from 2015 through 2020. We are increasing our presence in retail and e-commerce channels by expanding our range of partners and the breadth of products with self-install capabilities, such as Lyric Thermostats and Cameras and the Honeywell Smart Home Security System.

We are developing new relationships with utilities, insurance providers, telecom and cable companies, homebuilders and property managers for multifamily residences, all of which are looking to provide value-added services to their customer base. For example, utilities offer our connected thermostats for energy demand management and insurance companies offer water leak detectors for risk mitigation of property damage and to reduce claims. Our connected home solutions help property managers remotely manage heating and cooling to reduce energy costs and help homebuilders improve the commercial value of new homes.

We plan to expand our presence in certain HGRs as favorable macro trends such as urbanization, improving living standards and growing internet and smartphone usage support adoption of our solutions. As large, growing markets, China and India present near-term opportunities to grow with our professional and OEM channel partners. Local legislation, driven by safety and security concerns, should also provide an opportunity to expand our presence in the Middle East and Latin American regions. We expect to localize our portfolio in HGRs, primarily by investing in tailored solutions to be competitive in local markets. However, competition in HGRs is often intense, which may affect our ability to execute our strategy.

 

V.

Grow ADI by Expanding Geographic Footprint, Product Categories and Services

We intend to increase our geographic footprint for distribution by expanding our presence in markets where we already operate and entering selected new geographies within established distribution markets. We plan to implement this by opening new branches, deploying field sales and telesales teams, and taking advantage of e-commerce opportunities. For example, we have established a strong foundation in India, where according to IHS we already have a market share of approximately 18% and the distribution market is expected to grow at an approximate 11% CAGR from 2016 through 2021.

We intend to continue expanding our portfolio of core and adjacent products that are relevant and attractive to our customers to drive incremental sales across our existing footprint. In 2016, we added professional audio visual products, a growing and attractive product category to respond to customer demand and since then we have added many well-recognized brands to supplement our core product lines, including Kantech access control systems, Code Blue emergency communications, Seagate storage solutions, Sonos wireless audio, and LG professional displays. We have also added a line of new ADI private label products.

We intend to continue to introduce new value-added services and electronic ordering options to deepen relationships with our contractors. Recently, we launched a feature called “Shop My Branch”, which allows customers to shop and place orders for products that are specifically available in their local branch, along with a one-hour pick up service for orders placed online or through the ADI app. We also plan to continue to improve our capabilities in electronic data interchange (“EDI”) through our customized integration with SedonaOffice, a leading business management software for security companies, which allows contractors to establish electronic data transmission with ADI without requiring significant IT support.

 

VI.

Accelerate Growth Through Selective Strategic Acquisitions

We intend to selectively pursue acquisitions that will broaden our product portfolio, gain access to new technologies, expand our geographic footprint and enhance our position in strategic market segments. For example, our acquisition in 2016 of RSI Video Technologies, a company that manufactures battery-powered cameras, allowed us to offer security solutions that combine video clips and motion sensors to provide video

 

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alarm verification, which mitigates false alarms, a key differentiator in our security platform. The substantial indebtedness we expect to incur in connection with the Spin-Off and our payments under and the terms of the Indemnification and Reimbursement Agreement may limit our ability to successfully pursue certain transactions.

Industry Overview

Our Markets

Our business operations are conducted through two segments, Products and Distribution, serving multiple customer segments through multiple channels. We separate our Products segment into Comfort & Care and Security & Safety. Through ADI, we are a distributor of security and low voltage products such as video surveillance, intrusion, access control, and fire and life safety.

Trends and Drivers

We believe our addressable markets benefit from several favorable trends:

 

   

Growth in Residential Construction and R&R. Recent years in the U.S. have been characterized by rising new housing starts and an increase in investment in residential construction. According to the U.S. Census Bureau, new housing starts reached 1.2 million units in 2017, growing at a CAGR of approximately 10% since 2009. However, new housing starts remain significantly below the long term annual median of 1.5 million units since 1960, and we believe this represents significant growth potential over the next several years. The NAHB projects that new housing starts will grow at a CAGR of approximately 4% through 2019. Additionally, per the BEA, R&R spend, as measured by U.S. RPFI, has grown at a CAGR of approximately 8% since 2009 to reach approximately $748 million in 2017. U.S. RPFI as a percentage of U.S. GDP reached 3.9% in 2017, but remains below the long term median of 4.5% since 1960, which we believe represents significant growth potential over the next several years. Continued growth in residential housing spending has the potential to generate increased demand for home comfort and security products and services.

 

   

Energy Efficiency and Safety Megatrends. Higher energy efficiency standards, driven by legislation, industry and consumer preferences, are leading to faster adoption of advanced energy control devices for furnaces, boilers and cooling equipment. Similarly, legislation in the area of fire safety is driving greater use of smoke and carbon monoxide detection and monitoring.

 

   

IoT and Proliferation of Connected Devices. The connectivity driven by the Internet and various communication protocols and technologies, such as Wi-Fi, Bluetooth, Z-Wave and Zigbee, has led to a massive expansion in the number of connected devices and enables the expansion of DIY solutions available to homeowners. According to Statista, the IoT installed base worldwide is expected to grow from 20 billion connected devices in 2017 to over 75 billion connected devices in 2025. The desire to monitor and control devices remotely through cloud based applications is creating a growing market for connected solutions.

 

   

Mobile Lifestyle and Ubiquity of Broadband. The proliferation of smartphones, tablets, and high speed, high bandwidth data networks including 4G, LTE, next generation 5G and other wireless technologies have changed the way people communicate, use information and manage various applications in their lives. Consumers are increasingly expecting a similarly convenient and mobile experience to manage their homes and businesses.

 

   

Cloud and Connectivity Infrastructure. Advances in cloud technologies, software and wireless technologies have improved reliability and enabled efficient scale in a way that facilitates delivery of connected home services at an exponential rate. The ability to provide such services at an affordable price is helping grow the connected solution market.

 

   

Big Data and Data Analytics Capabilities. The increasing number of connected devices combined with the decreasing cost of connectivity, results in the generation of vast amounts of data related to

 

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equipment operation and consumer interaction with these devices. Synthesizing this information provides useful insight for manufacturers, contractors and service providers to diagnose and fix problems quickly, schedule preventive maintenance, and provide better customer service.

 

   

Need for Technical Expertise and Training. New technologies, fueled by the proliferation of connected devices, require greater technical know-how to design, install and maintain. Contractors, therefore, increasingly rely on distribution partners and manufacturers to provide design services, product and services consultation and training to support their business needs.

 

   

Demand for Same Day Order Fulfillment. Contractors are increasingly being asked to install complex inter-connected systems. As a result, they tend to place frequent orders across a broad range of low voltage technologies and depend on distributors and manufacturers to stock these products locally for immediate fulfillment.

 

   

Non-Residential Construction and Equipment Replacement. The majority of our distribution sales are to non-residential end markets, driven by investment in construction and equipment replacement. Adjusted for inflation, total non-residential construction remains 14% below peak levels. According to JP Morgan estimates, annual non-residential construction is expected to grow at a CAGR of approximately 3 to 4% through 2019. Sustained strength and further growth in new and replacement non-residential construction could lead to increased demand for low voltage products.

Addressable Markets

Products and Solutions

The elements of the addressable market for Comfort & Care products and solutions are analyzed by IHS, Navigant and BSRIA. Based on management analysis of these sources, we believe that the total addressable market is approximately $10 billion in annual sales for 2018, of which $0.6 billion is comprised of services associated with Comfort & Care solutions which includes demand management and telehealth.

The elements of the addressable market for Security & Safety products and solutions are analyzed by IHS and management estimates. Based on management analysis of this source, we believe that the total addressable market is approximately $4.5 billion in annual sales for 2018, of which $1.1 billion is comprised of services associated with Security & Safety solutions which includes security monitoring services and remote video services.

Distribution

Based on IHS, we estimate that the global total addressable market for the security and low voltage products (which includes video surveillance, intrusion, access control and fire and life safety) distribution market is approximately $20 billion in sales in 2018.

Materials and Suppliers

The most significant purchased materials used in the manufacture of our products are copper, steel, aluminum, plastics, printed circuit boards, semiconductors and passive electronics. Purchased materials cover a wide range of supplier value-add from raw materials and single components to subassemblies and complete finished goods, and there is considerable expenditure on both commercial off-the-shelf and make-to-print items. Although execution of material substitutions or supplier changes may be resource intensive, there are few instances of sole-source materials. Alternatives usually exist in the event that a supplier becomes unable to provide material. Unforeseen shortages and supply disruptions occur from time to time but are typically manageable such that adverse impact to customers can be avoided. At the same time, raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and could

 

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have an adverse effect on our business, financial condition, results of operations and cash flows. See “Risks Relating to Our Business—Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and cause us to incur significant liabilities.”

Inventory

Our inventory levels vary by distribution channel. We typically maintain approximately three to five weeks of inventory for retail distribution, one to two weeks of inventory for professional installer and distributors and two to four weeks of inventory for OEMs. In addition, ADI operates over 200 stocking locations globally and is contractually obligated to maintain four weeks of inventory for certain customers.

Customers

The end-users for our products are residential and commercial consumers throughout the world. We reach these end-users through sales to professional installers and OEMs, and through retail distribution including e-commerce. The global customer base for the Products segment includes over 150 million homes globally, with over 15 million installations annually. Our products and solutions are carried by major distributors in our relevant industries across North America and Western Europe, including our ADI business. Our retail products are carried by the top retailers in their respective markets, including, in the Americas, The Home Depot, Lowe’s and Amazon.com, and in EMEA, Kingfisher and Pflieger. We also have relationships with over 1,200 OEMs.

In the distribution segment, ADI has a customer base of over 100,000 contractors and covers a variety of product categories comprising of over 350,000 products from over 1,000 leading manufacturers.

Regulatory and Environmental Compliance

We are subject to various federal, state, local and foreign government requirements relating to the protection of the environment. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that our handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. However, mainly because of past operations and operations of predecessor companies, we, like other companies engaged in similar businesses, have incurred remedial response and voluntary cleanup costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future.

As of December 31, 2017, we have recorded a liability for environmental investigation and remediation of approximately $537 million. We do not currently possess sufficient information to reasonably estimate the amounts of environmental liabilities to be recorded upon future completion of studies, litigation or settlements, and we cannot determine either the timing or the amount of the ultimate costs associated with environmental matters, which could be material to our combined results of operations and operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, we do not expect that environmental matters will have a material adverse effect on our combined financial position.

Furthermore, we will be required 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. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement” for more information.

 

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Employees

We estimate that as of the effective date of the Spin-Off, we will have approximately 14,500 employees. As of December 31, 2017 approximately 12% of our employees were covered by collective bargaining agreements and represented worldwide by numerous unions and works councils. We believe that our relations with our employees and labor unions have generally been good.

Seasonality

Our business experiences a moderate level of seasonality. Sales activity is generally lowest during the first calendar quarter when it is winter in the majority of our geographical markets.

Properties

Our corporate headquarters will be located in Golden Valley, Minnesota.

We own or lease 18 manufacturing sites, 37 other sites, including offices, engineering and lab sites, 201 stocking locations and three warehouses. The following table shows the regional distribution of these sites:

 

     Americas      Asia
Pacific
     EMEA      India      Total  

Manufacturing

     8        1        8        1        18  

Other (Including Offices, Engineering and Labs)

     12        5        17        3        37  

Stocking Location

     115        —          71        15        201  

Warehouse

     1        —          2        —          3  

We also lease or sub-lease one manufacturing site, ten other sites, including offices, engineering, and lab sites and two warehouses from Honeywell. The following table shows the regional distribution of these sites:

 

     Americas      Asia
Pacific
     EMEA      India      Total  

Manufacturing

     —          —          1        —          1  

Other (Including Offices, Engineering and Labs)

     1        —          8        1        10  

Warehouse

     2        —          —          —          2  

We also contract with fourteen warehouses that are owned and operated by third parties. The following table shows the regional distribution of these sites:

 

 

     Americas      Asia
Pacific
     EMEA      India      Total  

Warehouse

     —          —          1        13        14  

In addition, Honeywell leases or subleases four manufacturing sites and three other sites, including offices and engineering sites, from us. The following table shows the regional distribution of these sites:

 

     Americas      Asia
Pacific
     EMEA      India      Total  

Manufacturing

     2             2               4  

Other (Including Offices and Engineering)

     2             1               3  

In addition, Honeywell is expected to use certain limited space in certain of our facilities under one or more services agreements.

 

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For information on the lease by our ADI business of an administrative office building in Melville, New York, see “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Other Arrangements.”

We believe our properties are adequate and suitable for our business as presently conducted and are adequately maintained.

Research and Development (“R&D”) and Intellectual Property

We have dedicated software centers of excellence in Atlanta, Georgia and Bengaluru and Madurai, India. In addition, our laboratories are certified to meet various industry standards, such as through UL, enabling us to test products internally. We also have a user experience design group, that consists of researchers and product and user experience designers across three studios in Golden Valley, Minnesota; Bracknell, United Kingdom; and Bengaluru, India. As of December 31, 2017, we employed over 1,300 engineers. Our total R&D expenses were approximately $120 million, $106 million and $110 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Our deep domain expertise, proprietary technology and brands are protected by a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and contractual provisions. We own approximately 3,000 worldwide active patents and pending patent applications to protect our R&D investments in new products and services. We have and will continue to protect our products and technology by asserting our intellectual property rights against third party infringers. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Agreements Governing Intellectual Property.”

Acquisitions

In March 2016, we completed the acquisition of RSI Video Technologies (“RSI”), a leading provider of wireless battery-powered motion detectors, for an aggregate price of $124 million in cash and $2 million in contingent consideration. RSI was acquired to enhance our ability to meet increasing global customer need for video verification and also provides a DIY offering combined with professional monitoring. RSI identifiable intangible assets are being amortized over their estimated lives ranging from 10 to 14 years using straight line and accelerated amortization methods. See Note 4. Acquisitions to our historical Combined Financial Statements.

In December 2015, Honeywell completed the acquisition of the Elster Division of Melrose Industries plc (“Elster”), a leading provider of thermal gas solutions for commercial, industrial and residential heating systems and gas, water and electricity meters, including smart meters and software and data analytics solutions for an aggregate value, net of cash acquired, of approximately $4,899 million. As part of this transaction, we acquired the residential thermal business of Elster for an aggregate value of $196 million in cash. See Note 4. Acquisitions to our historical Combined Financial Statements.

Competition

Our industries and markets are highly competitive. In our Products segment we compete with global, national, regional and local providers of our products, services and solutions, including established manufacturers, distributors and service providers, as well as new entrants in particular in connected home and smart products. In our Distribution segment we compete against manufacturer direct sales, other distributors and other sellers, including retail and e-commerce. The most significant competitive factors we face are product and service innovation, reputation of our Company and brands, sales and marketing programs, product performance, quality of product training and events, product availability, speed and accuracy of delivery, service and price, technical support, credit availability and product reliability and warranty.

In addition to current competitive factors, there may be new market entrants with non-traditional business and customer service models or disruptive technologies and products, resulting in increased competition and

 

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changing industry dynamics. See “Risk Factors—Risks Relating to Our Business—The market for connected home solutions is fragmented, highly competitive, continually evolving and subject to disruptive technologies.”

Legal Proceedings

We are subject to various lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. We do not currently believe that such matters are material to our results of operations.

Additionally, in connection with our entry into the Indemnification and Reimbursement Agreement, we will be required to make payments to 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. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement” for more information.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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 the Business for the three and six months ended June 30, 2018 and 2017 and for the three years ended December 31, 2017.

Overview and Business Trends

We are a leading global provider of critical comfort and security solutions primarily in residential environments. Our products consist of solutions in Comfort & Care and Security & Safety categories and include temperature and humidity control, thermal, water and air solutions and remote patient monitoring software 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 security and low voltage electronic products which include video surveillance, intrusion, access control, fire and life safety, wire, networking and professional audio visual systems. We manage our business operations through two segments, Products and Distribution. The Products segment offerings include our Comfort & Care and Security & Safety products, which, consistent with our industry, has a higher margin profile in comparison to the Distribution segment.

Our financial performance over the last three years has been supported by several macro trends. Steady growth in residential and non-residential construction and growth in renovation and remodeling in the United States has had a positive impact on the growth of our Products and Distribution businesses. The financial performance of our Products business has further benefited from increasing penetration of wireless connectivity and the proliferation of connected devices. The financial performance of our Distribution business has been further aided by increasing contractor needs for training and technical expertise, and increasing demand for same day order fulfilment.

We are entering into certain agreements with Honeywell that did not exist prior to the Spin-Off, such as the Indemnification and Reimbursement Agreement, the Trademark License Agreement, Tax Matters Agreement and Transition Services Agreement, which will cause us to incur new costs. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement,” “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Trademark License Agreement,” “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Tax Matters Agreement” and “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Transition Services Agreement” for a description of the material terms thereof.

Basis of Presentation

The accompanying historical Combined Financial Statements included in this Information Statement were derived from the consolidated financial statements and accounting records of Honeywell. These Combined Financial Statements reflect the combined historical results of operations, financial position and cash flows of Homes as they were historically managed in conformity with U.S. GAAP. Therefore, the historical combined financial information may not be indicative of our future performance and does not necessarily reflect what our combined results of operations, financial condition and cash flows would have been had the Business operated as a separate, publicly traded company during the periods presented, particularly because of changes that we expect to experience in the future as a result of our separation from Honeywell, including changes in the financing, cash management, operations, cost structure and personnel needs of our Business.

The Combined Financial Statements include certain assets and liabilities that have historically been held at the Honeywell corporate level but are specifically identifiable or otherwise allocable to the Business.

 

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Additionally, Honeywell provides certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Business. The cost of these services has been allocated to the Business on the basis of the proportion of net sales. The Business and Honeywell consider these allocations to be a reasonable reflection of the benefits received by the Business. Actual costs that would have been incurred if the Business had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Both we and Honeywell consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefits received by the Business during the periods presented.

Subsequent to the completion of the Spin-Off, we expect to incur expenditures consisting of employee-related costs, costs to start up certain stand-alone functions and information technology systems and other one-time transaction related costs. Recurring stand-alone costs include establishing the internal audit, treasury, investor relations, tax and corporate secretary functions as well as the annual expenses associated with running an independent publicly traded company including listing fees, compensation of non-employee directors, related board of director fees and other fees and expenses related to insurance, legal and external audit.

Our environmental expenses are primarily reported within Other expense in our Combined Statement of Operations, which reflect an estimated liability for resolution of pending and future environmental-related liabilities, calculated as if we were responsible for 100% of the environmental-liability payments associated with certain sites. See Environmental Matters in Note 18. Commitments and Contingencies of Notes to Combined Financial Statements for additional information. In conjunction with the Business’s separation from Honeywell, we plan to enter an Indemnification and Reimbursement Agreement pursuant to which we will agree 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. Pursuant to this Indemnification and Reimbursement Agreement, we will be responsible for paying to Honeywell such amounts, up to a cap of $140 million in respect of liabilities arising in any given calendar year (exclusive of any late payment fees up to 5% per annum). The payments that the Business will be required to make to Honeywell pursuant to this agreement will not be deductible for U.S. federal income tax purposes. See “Certain Relationships and Related Party Transactions—Agreements with Honeywell—Indemnification and Reimbursement Agreement.”

Results of Operations for the three and six months ended June 30, 2018 compared with the three and six months ended June 30, 2017

Net Sales

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2018     2017      2018     2017  
     (Dollars in millions)  

Net sales

   $ 1,196     $ 1,096      $ 2,361     $ 2,158  

% change compared with prior period

     9.1        9.4  

 

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The change in net sales compared to prior year period is attributable to the following:

 

     Three months     Year to Date  

Volume

     5.1     4.8

Price

     1.9     1.5

Foreign Currency Translation

     2.1     3.1
  

 

 

   

 

 

 

Changed compared with prior period (%)

     9.1     9.4
  

 

 

   

 

 

 

A discussion of net sales 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.

The foreign currency translation impact for the three and six months ending June 30, 2018 compared to the prior year period was favorable due to the strengthening of both the Euro and British Pound against the U.S. Dollar.

Cost of Goods Sold

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2018             2017             2018             2017      
     (Dollars in millions)  

Cost of goods sold

   $ 850     $ 788     $ 1,672     $ 1,539  

% change compared with prior period

     7.9       8.6  

Gross profit percentage

     28.9     28.1     29.2     28.7

Three months ended

Costs of goods sold for the three months ended June 30, 2018 was $850 million, an increase of $62 million, or approximately 7.9%, from $788 million for the three months ended June 30, 2017.

This increase was primarily driven by $51 million in higher product cost in the Distribution segment driven by the increase in sales volume.

The increase in gross profit percentage was primarily due to the impact of higher selling prices (approximately 1.3 percentage point impact) and reduced repositioning charges (approximately 1.0 percentage point impact), partially offset by the impact of material inflation, net of productivity (approximately 1.1 percentage point impact) and higher freight cost (approximately 0.5 percentage point impact).

Six months ended

Costs of goods sold for the six months ended June 30, 2018 was $1,672 million, an increase of $133 million, or approximately 8.6%, from $1,539 million for the six months ended June 30, 2017.

This increase was primarily driven by $84 million in higher product cost in the Distribution segment and $53 million in higher direct material cost in the Products segment driven by the increase in sales volume and the strengthening of both the Euro and British Pound against the U.S. Dollar.

The increase in gross profit percentage was primarily due to the impact of higher selling prices (approximately 1.0 percentage point impact), partially offset by the impact of higher inflation, net of material productivity (approximately 0.4 percentage point impact) and unfavorable product mix (approximately 0.4 percentage point impact).

 

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Selling, General and Administrative Expenses

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2018             2017             2018             2017      
     (Dollars in millions)  

Selling, general and administrative expense

   $ 217     $ 218     $ 429     $ 433  

% of sales

     18.1     19.9     18.2     20.1

Three months ended

Selling, general and administrative expenses for the three months ended June 30, 2018 was $217 million, a decrease of $1 million, or 0.5%, from $218 million for the three months ended June 30, 2017.

The decline in expenses as a percentage of sales was primarily due to the impact of lower selling costs on higher sales volume.

Six months ended

Selling, general and administrative expenses for the six months ended June 30, 2018 was $429 million, a decrease of $4 million, or 0.9%, from $433 million for the six months ended June 30, 2017.

The decline in expenses as a percentage of sales was primarily due to the impact of lower selling costs on higher sales volume.

Other Expense

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2018      2017      2018      2017  
     (Dollars in millions)  

Other expense

   $ 123      $ 51      $ 176      $ 100  

Three months ended

Other expense for the three months ended June 30, 2018 was $123 million, an increase of $72 million, or 141.2%, from $51 million for the three months ended June 30, 2017 driven by higher environmental-related expenses.

Six months ended

Other expense for the six months ended June 30, 2018 was $176 million, an increase of $76 million, or 76.0%, from $100 million for the six months ended June 30, 2017 driven by higher environmental-related expenses.

Tax Expense

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2018             2017             2018             2017      
     (Dollars in millions)  

Tax expense (benefit)

   $ (28   $ 23     $ 6     $ 54  

Effective tax rate

     (560.0 )%      59.0     7.1     62.8

 

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Three months ended

The effective tax rate decreased for the quarter year-over-year primarily due to increased tax benefits attributable to currency impacts for withholding taxes on undistributed foreign earnings, adjustments to the provisional tax amount related to U.S. tax reform and decreased income before taxes.

The effective tax rate for the three months ended June 30, 2018 was lower than the U.S. federal statutory rate of 21% from tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off that resulted in an $18 million reduction in tax expense, currency impacts on withholding taxes on undistributed foreign earnings and adjustments to the provisional tax amount related to U.S. tax reform.

The effective tax rate for the three months ended in 2017 was higher than the U.S. federal statutory rate of 35% as a result of non-deductible expenses.

Six months ended

The effective tax rate decreased for the quarter year-over-year primarily due to increased tax benefits attributable to currency impacts for withholding taxes on undistributed foreign earnings and adjustments to the provisional tax amount related to U.S. tax reform.

The effective tax rate for the six months ended in 2018 was lower than the U.S. federal statutory rate of 21% primarily from tax benefits related to the internal restructuring of Resideo’s business in advance of its anticipated Spin-Off that resulted in an $18 million reduction in tax expense, currency impacts on withholding taxes on undistributed foreign earnings and adjustments to the provisional tax amount related to U.S. tax reform.

The effective tax rate for the six months ended June 30, 2017 was higher than the U.S. federal statutory rate of 35% as a result of non-deductible expenses.

On December 22, 2017, the U.S. enacted tax reform that instituted fundamental changes to the taxation of multinational corporations. As a result of the tax reform, we recorded a provisional tax charge at December 31, 2017 of $156 million related to the mandatory transition tax and $314 million related to taxes on undistributed foreign earnings that are no longer intended to be permanently reinvested. We recorded a provisional amount because certain information related to the computation of earnings and profits, distributable reserves, and foreign exchange gains and losses is not readily available; some of the testing dates to determine taxable amounts have not yet occurred; and there is limited information from federal and state taxing authorities regarding the application and interpretation of the recently enacted legislation. In accordance with current SEC guidance, the Company will report the impact of final provisional amounts in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of tax reform.

The impact of legal entity restructuring activities during the second quarter of fiscal 2018 resulted in a reduction to income tax expense of $18 million. Further legal entity restructuring and other actions will be completed prior to or simultaneous with the Spin-Off, which are expected to further reduce deferred tax liabilities by approximately $291 million. These deferred tax liabilities had been recorded as a result of the fact that the Company no longer intends to permanently reinvest the historical undistributed earnings of its foreign affiliates. The reduction of deferred tax liabilities primarily consists of non-U.S. withholding taxes that were recorded in 2017 as part of the provisional tax charge related to U.S. tax reform. The legal entity restructuring has and will continue to change the legal ownership structure resulting in future repatriated earnings not being subject to withholding taxes and, thereby, changes the amount of withholding taxes SpinCo will ultimately be required to pay.

As described in our Combined Financial Statements for the year ended December 31, 2017, we reasonably estimated certain effects of the tax legislation and, therefore, recorded provisional amounts, including the deemed

 

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repatriation transition tax and withholding taxes on undistributed earnings. During the three months ended June 30, 2018, the Company recorded an adjustment to the provisional tax amount related to the deemed repatriation transition tax of $3 million. This adjustment results in a decrease to the effective tax rate for the six months ended June 30, 2018 of 3.6%. The Company has not finalized the accounting for the tax effects of the tax legislation as we are continuing to gather additional information and expect to complete our accounting within the prescribed measurement period.

The effective tax rate can vary from quarter to quarter for unusual or infrequently occurring items, such as the tax impacts from the resolution of income tax audits, changes in tax laws, revisions to the provisional amounts from U.S. tax reform or internal restructurings.

Review of Business Segments

We operate two segments: Products and Distribution. Management evaluates segment performance based on segment profit. Segment profit is measured as segment income (loss) before taxes excluding other expense (primarily environmental costs), interest and other charges, net, pension expense and repositioning charges.

Products

 

     Three Months Ended 
June 30,
    Six Months Ended 
June 30,
 
     2018      2017      % Change     2018      2017      % Change  

Total sales

   $ 598      $ 563        $ 1,200      $ 1,116     

Less: Intersegment sales

     80        84          159        174     
  

 

 

    

 

 

      

 

 

    

 

 

    

External sales

     518        479        8     1,041        942        11

Cost of products and services sold

     291        268          584        528     

Selling, general and administrative and other expenses

     131        132          259        265     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Segment profit

   $ 96      $ 79        22   $ 198      $ 149        33
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     2018 vs. 2017  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Factors Contributing to Year-Over-Year Change

   Sales     Segment
Profit
    Sales     Segment
Profit
 

Organic growth/ Operational segment profit

     5     18     7     27

Foreign currency translation

     3     4     4     6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % Change

     8     22     11     33
  

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended

Products sales increased by 8% primarily due to an increase in external sales volume in the Comfort & Care product line, the impact of favorable currency translation and the impact of higher prices.

Products segment profit increased by 22% primarily due to external sales volume, higher prices and higher inflation, net of productivity.

Six months ended

Products sales increased by 11% primarily due to an increase in external sales volume in both the Comfort & Care and Security and Safety product lines, the impact of favorable currency translation and the impact of higher prices.

 

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Products segment profit increased by 33% primarily due to external sales volume and higher selling prices, partially offset by higher product costs on that higher sales volume.

Distribution

 

     Three Months Ended June 30,     Six Months Ended June 30,  
      2018        2017        % Change      2018      2017      % Change  

Total sales

   $ 678      $ 617        $ 1,320      $ 1,216     

Less: Intersegment sales

     —          —            —          —       
  

 

 

    

 

 

      

 

 

       

External sales

     678        617        10     1,320        1,216        9

Cost of products and services sold

     557        506          1,081        995     

Selling, general and administrative and other expenses

     84        78          165        157     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Segment profit

   $ 37      $ 33        12   $ 74      $ 64        16
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     2018 vs. 2017  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Factors Contributing to Year-Over-Year Change

   Sales     Segment
Profit
    Sales     Segment
Profit
 

Organic growth/ Operational segment profit

     8     11     7     15

Foreign currency translation

     2     1     2     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % Change

     10     12     9     16
  

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended

Distribution sales increased by 10% primarily due to volume growth across all of our key geographic markets and the favorable impact of foreign currency translation.

Distribution segment profit increased by 12% primarily driven by an increase in sales volume.

Six months ended

Distribution sales increased by 9% primarily due to volume growth across all of our key geographic markets and the favorable impact of foreign currency translation.

Distribution segment profit increased by 16% primarily driven by an increase in sales volume.

Results of Operations for the Years Ended December 31, 2017, 2016 and 2015

Net Sales

 

     2017     2016     2015  
     (Dollars in millions)  

Net sales

   $ 4,519     $ 4,455     $ 4,154  

% change compared with prior period

     1.4     7.2  

 

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The change in net sales compared to prior year period is attributable to the following:

 

     2017     2016  

Volume

     0.9     5.4

Price

     0.2     0.2

Acquisitions