Resideo Stock Plunges 37%, CFO Ousted

By John Honovich, Published Oct 23, 2019, 11:25am EDT (Info+)

The horrible year for the ADI / Honeywell Home spinout, Resideo, just got worse, with their stock plunging another 37% today.

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Not even a year ago, Resideo IPOed, then had its stock price plunge. Today, it got significantly worse.

We examine what is happening and the emergency turn around specialist they have brought in.

Stock ****

*** ***** *** ******* ~**% ** the **** **** ***** ******, ********* the **% *****, ** ***** *****:

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*** ***** *** **** **** **** 40% ******* ********* (***** $*.**) *** recovered ******** ** $*.**, ***** **** more **** $* *** *** ***.

CFO ***

** ** * **** *** **** for * *** ** ******** **** and *** ******* *** ********* **************. This ** **** *** **** ******** at *******, **** **** ******* *** releases:******* ********* *** ******************** ********* ******** *********** ***** ******* Revenue *** ******** ****** *******, ******* Guidance *** **** **** ****.

Turn-Around ********** *** ******* **

*** *** ******* ***,****** *****, ** ***** **** * $* million ****** **** ($***,*** ***** * weeks) ** ******* *** ** ** to * **** **** ********. ***** describes ******* ** ******** ** "********* at ****-*******, *&* *** ***. ********."*******'* ** ** ********* **** ** "******** **** ********* on ********* **********, ****, *** ******* structures ** **** ** ************** *******".

******* ******* ************ ********* **** ***** such *************: "******* *** ***** * comprehensive *********** *** ********* ******, ******* on ********* ***** ******* *** ********** its ************** *********."

** ****** *** ***** *** *** exiting ***'* *********, ******* ** "** pursue ***** *************." *** ** ******* that ** *** *** *** **** signed * ********** ********* (*.*. "** Mr. ***** ***** *** **** *** rescind * ********** *********").

Reduced ******* *** *******

***** **** *** *** ****, *** company ********* *********** ***** ******** *** profits *** ******** ***** *******:

** * ******, *** ******* ** updating *** ****-**** **** ******** ****** guidance ** ** ** *** ***** of $*** ******* ** $*** *******, compared ** ********** ******** $*** ******* to $*** *******. *** ******* **** is ******** *** ****-**** **** ******** for ******* ****** ** *% ** 4%, ** ******** ** ********** ******** 2% ** *%.

*** ****** ******** **** ** **** in *** **** ** ********** ** this ******* * *** **** ** profits ** *** ****** **** ** 2019.

*** **** ******* ****** ***** ** Resideo *** ***********:

*** ******* ******** ******** **** ********* due ** ***** ***** ******* ** non-connected ***********. ** ******* * **** pre-spin ******* **** *** ***** ********** of ***-********* *********** ** *** *-****** line ******** *** ******** ** ***-***** T-Series ***********. *** ******* ******* ****** markedly **** ********** ** *** ***** quarter ***** *** ***** ********** ** non-connected *********** **** ************.

** ** *** **** ****** ***** the ********** ******** ** *******.

ADI *****, ******** ********* ******

********* ** *******, *** ** *** having ********:

** *** ***** *******, *** *** Global ************ ******** ********* ** **** as *******

*** *** ******** ******** ********* ** not ** ********, ****** **** ******* one ***** ********'* ***** ****** ** impact:

***** *** ******** ******** ********* ** grow, * ****** ***** *** ******** delayed *** ***** **** ** *** purchases ****** *** ****** *******, ********* in ** ******** ******** ****** ** fourth-quarter ******* ** ************* $** *******.

*** ********'* **** ** *** ********* and ** *** *** **** ** those *** *** ********* **** ******** or *** ************, ***.

Problems *** *******

***** ** ** *** ****** ***** Resideo's ********* ** ** **** **** is *********, *** ***** **** *** stock ******* **% ***** *** *** dropped ****** **% ***** **** **** issued **** **** ** * *******.

*** ******* *** *** * ****** cap ** **** **** ~$* *******, which *** * ******* **** **** still ** ~$* ******* *** $***+ million ***** ** ***** ***. ** the ***** ****, ********* ********* **** concluded **** ***** *** *********** ******** with *******'* ******** ** *** ** this *****. *** **** ***** ****** are *** **** ****, ** *** increase *********** ************ ** ********** ******** to **** **** *** *******.

Vote / ****

Comments (41)

It is a very bad sign for a CFO to suddenly exit and bad numbers are announced simultaneously.

It ended OK for Avigilon, though their stock never plunged as significantly as Resideo.

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Robert Ryder, is being paid a $3 million annual rate ($115,000 every 2 weeks)

I picked the wrong line of work

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IKR?

"We're having serious financial problems! What should we do!?"

"I got it! Let's pay some dweeb three mil to figure out why we're losing money."

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Lol, though, they are a $5 billion company. On the one hand, this logic can be used to justify paying huge sums to any execs. On the other hand, the number of people who have prior public company CFO experience and are willing to immediately move are limited to few people who will expect a lot of money.

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Terrible timing:

Resideo Connect, their dealer conference starts tomorrow:

The positive side is that Resideo will be wining and dining these people, which will minimize the negativity or concern from the participants. However, minimally, it will be disruptive / challenging for the executives to balance a happy face with the stock turmoil.

Also, update, the post originally said down 40%, which is where it was at mid-day but the stock recovered slightly to end the day at 'just' down 37%.

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Update: here is the engagment letter for interim CFO. One thing that strikes me as odd is that its straight cash compensation, no equity mentioned.

While making "$57,500 per week beginning on Sunday of each week" is nothing to sneer at, it would seem the interim CFO could make even more money by having his payment tied to stock increase, after all, he is doing strategic financial work. Anyone with any theory on this, please share.

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i’m not sure i’ve ever seen a stranger sentence in an engagement letter:

Horsepower will cause Mr. Ryder to perform these duties and responsibilities in a diligent, efficient, and faithful manner, and to the best of his abilities, and will further cause him to devote substantially all his full-time efforts to the business and affairs of Resideo.

but, apparently, Horsepower is a consultancy of some sort. so, at least Horsepower will ensure CFO Ryder will show up everyday, which is good...i guess...

wait, who exactly is Horsepower?

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who exactly is Horsepower?

Yes, Horespower is likely just Ryder and a few support people. No LinkedIn company profile, no website I can found and he describes his role at Horsepower as utilizing 'my' experience:

In this context, I don't see a problem with Horespower = Ryder, so long as Ryder has the special skills to address this specific situation, that is good for Resideo.

Also, here is his BCG / Boston Consulting Group profile, that also emphasizes his turnaround expertise: "BCG TURN—turnaround, restructuring, and transformation" and "He is an expert with BCG TURN, which helps clients deliver rapid, visible performance improvements in the short term while strengthening their organizations and positioning them to win in the future."

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...I don't see a problem with Horespower = Ryder...

me neither. the paragraph just looks like a strange bit of mutual puffery between the client and the consultant that adds no real information.

btw, solving for the equation where Horsepower = Ryder yields the solipsistic

Mr. Ryder will cause Mr. Ryder to perform these duties and responsibilities in a diligent, efficient, and faithful manner, and to the best of Mr. Ryder’s abilities, and Mr. Ryder will further cause Mr. Ryder to devote substantially all Mr. Ryder’s full-time efforts to the business and affairs of Resideo.

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I assume it’s an intentional distinction between Mr. Ryder and his LLC to shield him from liability.

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I assume it’s an intentional distinction between Mr. Ryder and his LLC to shield him from liability.

i guess that’s the difference between regular working stiffs like me, who would think that an LLC already limits liability; and these rarified CFO types who operate on a whole different level.

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Is the lack of no equity/ stock option compensation a signal the guy is smart enough already to know which way the stock price is headed?

or it a short term position in which case he would not be eligible?

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Anyone with any theory on this, please share.

It does not seem too out of the ordinary to me. For one thing, stock grants can be messy from a tax perspective. He is not an employee, so they'd have to either grant him shares, or give him non-Qualified options, both of which would incur a tax burden to him, which they would likely have to offset for him with even more compensation.

The contract is also clearly hiring him as an interim CFO. Not sure if this is a formality, and they plan to find a full-time CFO along the way, or if the intent is for him to become full-time CFO eventually (which would then give them the opportunity to grant him ISO options and/or RSUs with a lower tax burden).

Also, having no prior exposure to or knowledge of the company (most likely), and being that this is a short-term engagement, I think in that position I too would prefer hard cash over stock in a company I had not fully assessed.

Additionally, any kind of stock grant of the type they would likely extend would require board approval. The agreement terms probably be done without a formal board meeting, but I would think it would still take a bit of time to go through the legal/paperwork formalities of this in a public company. They could lay out a stock grant as a "TBD" item in the contract, or they may also have a verbal agreement to do a stock grant later with the intent being for him to be able to start ASAP (they are a publicly traded company without a CFO after all, there are probably a ton of issues they need someone to deal with immediately, particularly in this financial state).

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Anyone with any theory on this, please share.

Removing the interim in his CFO title may be a big enough carrot; even if it's a handshake agreement for now. It would be hard to imagine the guy putting the plan together, due in three short months btw, not being there to help execute it. Not to mention another costly and time consuming CFO search at the worst time...

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it would be odd to tie an interim CFO's (who is an independent contractor) compensation to stock performance; afterall, he "may" have some clean-up to do from the last guy who did some creative accounting to boost the stock price.

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As an ex-CEO of turnaround companies, it is indeed standard practice to offer modest salaries and huge upside for turning around a problem child. Without any inside information, it is indeed strange to pay a huge cash compensation with no upside for actually fixing Resideo.

Smacks of “We’ve got to do something quickly,” damn the torpedoes, full speed ahead. On the other hand, turnaround CFO’s are rare finds, in the current market, so they may have had few options to choose from.

Maybe I could carry the new CFO’s briefcase for a mere $10,000 a week!

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I agree with UI9 but what is a CFO going to do about a 110 million revenue shortfall, this is a operational issue just like cost reductions etc. Maybe they need the CFO to convince the stockbrokers this ship isn't sinking.

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Recasting your forecasted sales and profit margins will whack your stock price every time.

The residential security product lines sales are dropping like a rock according to what insiders tell me. Qol Sys and 2 Gig are also taking a big bite as well since the Vista product line is pretty long in the tooth. ( I am being nice)

Then you have falling margins on burg and CCTV.

Plus your former parent company saddles you with a 110 million dollars liability ( i think this is annually) for some other divisions lawsuit liability payments.

Then to top it off you piss off your loyal dealers with massive cost increases of Alarmnet services and make some of these increases retroactive to June 1st.

You are not winning friends with shipping 4 G radios through June but you can’t enroll them any longer come July 1st, surprise!!!!!!! Some of us did not get any notification this was coming , even my ADI branch did not know about it.

If I were in the upper management I would be looking to get out before “chop chop” shows up!

and finally you attracted one of the law firms that specialize in suing public companies where the stock falls to far too fast. Now your about to get sued on top of all this.

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attracted one of the law firms that specialize in suing public companies where the stock falls to far too fast

For context on that, Gibbs Law Group has issued a press release and posted a web page soliciting shareholders to join a class action lawsuit against Resideo:

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Buy the stock up. When they right the ship you can ride a wave of profits into the sunset.

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#5, it is not a bad theory. And ADI alone might be worth close to what the stock is trading at. The big bet is whether they can right the Honeywell Homes business. That, I don't know.

If any of you all buy, let us know later whether you made a killing or lost your shirt!

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SSI's article on this is hilarious implying that the new CFO triggered the stock plunge:

Pro tip: an interim emergency CFO is the corporate reaction to bad news, not the cause of it.

On the plus side, SSI was the only other industry publication to cover this.

SSN is at the Resideo show but no reporting on this significant news.

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CFO surely didn’t do anything operationally wrong to trigger the bad numbers. I bet the CEO is the one in the hot seat now.

Most public companies do what Jack Welch did ..... smooth out the numbers using reserves on inventory and A/R. Good qtrs you say oh these maybe bad and in bad qtrs they reserves are good again.

Not illegal to do this

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also announced that the controller was upgraded to interim CAO;

At the same time, AnnMarie Geddes, the Company’s Vice President and Controller, was appointed Interim Chief Accounting Officer, effective October 22, 2019...

As Interim Chief Accounting Officer, Ms. Geddes will be entitled to participate in the Severance Plan.

note that the last person “entitled to participate” was the ex-CFO :)

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After plunging Wednesday, the stock was virtually unchanged Thursday and Friday to end the week:

The Resideo partner conference ended with them trying to cut loose from the headaches of the security business:

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The ADI business is also a tough place to make money. They have competition from the likes of Anixter, Scan source, Wesco, all of the independent distributors, and manufacturers in many instances. They try to sell their list of services and other value adds, but In my opinion they are selling commodities and the value added services aren't real or otherwise tangible. The ADI sales / counter folks aren't well trained, they operate perpetually "short staffed", and take a long time to get quotes out. I think that this component of Resideo is in trouble too (or will be when the economy slows down). my .02 cents.

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I don't see Resideo doing well long term. I regularly look at residential security lines and there are so many other companies that are doing a better job getting their brand in the hands of residential pros. I for one have never been contacted by Resideo to install their products...maybe they don't want to do business with me. But at least try and get your brand out there.

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John, just to clarify does that mean no one from Honeywell Homes either?

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Yes, no one from any Honeywell other than FireLite/SilentKnight

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"Resideo pioneers the next wave of supported home technology to help you feel comfortable, safe, and secure, relaxing as if you were home even when you're not."

Can't connect "pioneer" with Resideo (or under its former company name). If they were pioneers, they wouldn't be in this situation...both from a stock price or as a technology company that is chasing more innovative organizations in the space.

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110 Million revenue shortfall., whoops!!! They had to disclose this but they must have known that the shortfall was coming long ago.

I can say I don't hear much support of management in the ADI branches nor from the field sales staff. Roger Fradin is the Chairman and I know very well he is a first class businessman and that he is an expert in these types of businesses.

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Resideo Q3 results are out and were as expected from their preliminary Q3 guidance 2 weeks ago. The stock price is still stuck under $10.

The investor call transcript has some notable details.

The CEO cites 3 main causes for the problems - lack of value engineering:

Most of our value engineering stopped prior to our spin-off from Honeywell. In a company like ours, product costs like components, raw materials and packaging will need to be optimized every year to keep gross margin strong. Value engineering teams do that. Before we spun off from Honeywell, these teams were largely depleted, and we are seeing the effects of that in our gross margins building back this capability as a top priority

Later Resideo expanded on the value engineering problem:

Our business is going through a transformation right now from products that are more mechanical into products that are more electronic. And we basically did not have the right people on the pitch post spin to continue to value engineer those products

Reduced purchasing power post-spin:

We lost some sourcing leverage in direct and indirect materials following the spin-off. We’ve been working with our suppliers for several months now to rectify that.

I did not see an explanation how they regain that.

And third factor is large OEM security customer:

The third factor is a margin drop associated with the competitive renewal of a contract from a large OEM security customer. This contract was secured in 2017 and first deliveries began a year later, with volume ramp-up in 2019.

Customer name not disclosed but later on they say it is a new customer:

a single customer, a new customer. We had forecasted and had an order for over $20 million for Q4. That customer – there are no product issues, quality issues. We are ready to go. They decided for reasons on their side to delay. And we are working with that customer obviously to work through that and to get product shipment as quickly as we can.

Outlook for the rest of the year - ADI continued good, rest of business continued week:

ADI is expected to finish the year very strong with high single-digit revenue growth and 20% EBITDA growth. Products and Solutions is expected to deliver similar year-over-year performance to that seen in Q3.

Resideo is in favor of requiring video verification:

we’d obviously like to see some mandates in North America on the requirement for motion viewers, which should be very helpful for us.

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"Resideo is in favor of requiring video verification"

Its is big chore for a firm as fragmented as Resideo, but they need to understand the world in which their customers operate. For example, Resideo leadership say they are in favor of requiring video verification to support a North America trend, and already globally, but at the same time they recently donated $100,000 to the alarm association, SIAC, that is mandated to disrupt and prevent VR-Verified Response, which favors just a few customers short term at the expense of majority, long term.

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New: Resideo CEO Nefkens to step down, citing 'family health issues'.

Also, another law firm (Rosen) has announced filing a class action lawsuit against the company.

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I am still waiting for them to release wireless SiX recessed door contacts and panic buttons for the Lyric panel. That panel has been out 3 years now. We are looking into DSC and Qolsys as alternates to Vista and Lyric for residential/SMB market.

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Stop waiting. Switch and never look back.

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Some good news for Resideo, the stock is up 28% since announcing Resideo CEO is stepping down.

The stock is still down 50% since going public but it's a positive upswing, at least for now.

Likely related to the increasing price is that hedge fund Praesidium is building up its stake in Resideo, buying ~1.7 million shares since the CEO announcement was made, now totaling 7.7 million shares, ~6% of Resideo's stock.

Praesidium takes an active role in its public investment, "working closely with the management teams and boards of those companies in an effort to create and maximize value for shareholders".

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Resideo now has a permanent CFO, Tony Trunzo. Trunzo worked at FLIR for 10 years, ending a 5-year stint as CFO in 2015.

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Well, at least he has a huge amount of home and business security product and distribution background. Oh, wrong guy.

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A solid CFO is a good thing, but for Resideo, I think that ship has sailed.

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We still use ADI every day, and their response has been excellent. While the confusion between Honeywell brands and Resideo brands is still working its way through, this is a powerful, large supplier that we all need. WESCO will inherit its own problems absorbing Anixter (whom we shunned because they sold direct to our customers).

Let’s watch them both work out their issues and the best managed companies will rise out of the muck.

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