Professional Documents
Culture Documents
YTD
Since Inception2
2.82%
2.82%
27.08%
96.27%
96.27%
83.42%
1Q2016
YTD
-1.02%
-1.63%
-1.02%
-1.63%
Since Inception2
12.32%
39.47%
Engaged Capital Master Feeder II LP (ECMFII) (Long Only) Performance Since Fully Invested Jan. 1, 2014
1Q2016
Net Return1
2.82%
YTD
2.82%
1Q2016
YTD
-1.02%
-1.63%
-1.02%
-1.63%
Since 1/1/2014
Cumulative Annualized
9.00%
3.91%
Since 1/1/2014
Cumulative Annualized
-3.51%
-1.36%
-1.57%
-0.61%
1Net
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e |2
Portfolio Component
Core Positions
89.28%
On-Deck Positions
5.93%
The Funds position-weighted average market capitalization is approximately $800 million. The Fund
currently has 11 positions (8 Core and 3 On-Deck) and is currently a 13D filer on 4 companies (Medifast,
Magnachip, Jamba Juice, and Outerwall).
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e |3
45%
40%
30%
24%
20%
12%
10%
4%
0%
-1%
-3%
-10%
-13%
-20%
-30%
Prior to Engagement
During Engagement
After Engagement
-40%
3 Year
Relative
2 Year
Relative
1 Year
Relative
Relative
Return
1 Year
Relative
2 Year
Relative
3 Year
Relative
The relative returns shown are an unweighted simple average return of all securities that 1) at some time had a 5% or greater position in funds managed
by Engaged Capital, LLC or Relational Investors LLC, 2) whose engagement was managed by a member of the current Engaged Capital, LLC
investment team, and 3) as of the engagement exit date did not cease to exist due to a merger, spin-off or other form of acquisition. Relative return
means security return (price return plus dividends) relative to the Russell 3000 Index. During Engagement means period of time from first purchase
of security until final exit of position. There are no assumed fees or other expenses. The Engaged Effect does not represent nor is it intended to represent
any Fund returns. It is intended to show that active engagement may have a positive long term impact on securities performance.
Our adherence to this discipline, not the influence or performance of the equity market, is what keeps us out
of value-traps and allows for the idiosyncratic nature of our alpha generation to drive meaningful absolute
returns over time.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
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Rovi (ROVI)
March 31, 2016 Price
$20.51
% of Fund Capital6
23.4%
Valuation
Valuation excludes any impact from upcoming renewals in 2016 with two large
customers who currently do not pay license fees. Consensus forecasts do not
reflect any improvement in cost structure or sustainable revenue growth from
new product strategy.
Agenda
Engagement
ROVI finished 2015 strong with a 7-year renewal of its patent license agreement with ATT-DirecTV. The
news in December sent shares from around $11 to nearly $17 at year-end. The rally continued in the first two
months of 2016 with the stock reaching a high of ~$23.50 in early March. The ATT-DirecTV renewal surprised
investors both for its size and length of contract and the stock rallied due to increased confidence that the
remaining two Tier 1 MSO renegotiations (Comcast and Dish Network) were now more likely to settle under
similar terms.
Unfortunately, ROVI was recently forced to sue Comcast in an effort to protect its IP assets and to compel
Comcast to agree to terms on par with similar sized licensees (i.e. ATT-DirecTV). This news sent the stock
down ~15%. On a more positive note, ROVI has entered into a standstill agreement with DISH to allow the
companies more time to try and consummate a license agreement.
Regarding ROVIs product business, the board and management team are diligently pursuing a number of
options to right-size the cost structure of this business and drive meaningfully better profitability. Those efforts
are running parallel to the important work being done on the IP licensing side of the business.
Additionally, we succeeded in fixing ROVIs executive compensation, which prior to our involvement,
resulted in executive pay around the 80th-90th percentile compared to peers for the members of ROVIs senior
management team. Under the new compensation program, spearheaded by Engaged, ROVI executives will
receive compensation in line with peers, or roughly half of what the team was previously receiving in
compensation.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
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Outerwall (OUTR)
March 31, 2016 Price
$36.99
% of Fund Capital6
12.9%
Valuation
Agenda
Initiate a sales process as taking the company private is the best way maximize
value for shareholders; if a sale is not feasible, institute a large dividend to force
the market to value OUTRs sizable cash flows
Engagement
Acquired 15% of OUTRs stock and began process to run for board seats; OUTR
announced a strategic alternatives process following our investment; signed a
settlement agreement to place three directors our director nominees on the board,
one immediately.
OUTR is our newest core position. This is a company that we are very familiar with given it was a former
on-deck position in our portfolio about two years ago. At that time, a larger activist got involved, which
resulted in a significant increase in valuation and our exit. However, we became interested again following the
companys preannouncement of weak Q4 earnings in early December which moved the stock from ~$60 to
~$35 a share. At that point, we quickly got to work refreshing our analysis and as we dug deeper into the
situation, we grew convinced that, with our engagement, there was a material opportunity for significant value
creation over a short period of time. As a result, we aggressively began accumulating stock and during the
month of January acquired ~15% of the companys shares.
Following the public disclosure of our investment, our subsequent public letter and presentation as well as
significant private communication with the company, OUTR announced a series of steps that were consistent
with our recommended action plan for the company. OUTR committed to manage the business for cash flow,
eliminate high risk capital expenditures, double the dividend (to a ~7% yield at time of announcement), explore
strategic alternatives, and hire Morgan Stanley to manage the sales process. While this was all good news, a
key concern of ours was ensuring that the process was managed properly and that the board would act in the
best interest of shareholders during the strategic alternatives process.
After significant negotiation, we signed an agreement with the company that resulted in: EC immediately
placing a director on the board to help oversee the strategic alternatives process, and, if the sales process failed,
the right for us to add two additional EC directors to the board on August 1 with one of the incumbent directors
stepping down at the annual meeting. Now that the settlement is complete and the strategic process is well
underway, our director is diligently working on behalf of investors to ensure a positive outcome for OUTR
shareholders.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e |6
$23.05
% of Fund Capital6
12.2%
Valuation
Reducing working capital levels to be more in line with peers would equate to
material upside in the stock. Based on our analysis and numerous conversations
with the company and industry experts, we believe the Company can free up
material cash through better management of all areas of working capital.
Agenda
Engagement
We have introduced the board and management team to multiple consulting firms
with expertise in optimizing working capital management and have pressed the
company to hire one of these firms ASAP to tackle this opportunity. In addition,
we have nominated directors with industry, capital allocation, and working
capital expertise to work our agenda inside the boardroom.
Due the companys stock price trading below tangible book value in January we increased our total ownership
of the company to just under 5%, making us the companys 4th largest shareholder. Following a number of
failed attempts to reach a settlement with the company, which would add shareholder representation to the
BHE board, we were forced to publicly nominate directors in late February. Shortly after our nomination, the
company, in a very aggressive move, succeeded in forcing one of our nominees to remove herself as a candidate
for the board. We believe this occurred after her employer was pressured by BHE to force our nominee to
withdraw from the contested election. Despite Lisa Kelleys withdrawal, we still have a strong slate of three
additional nominees (two of whom are EMS industry experts) to continue the proxy contest.
In February, after further pressure due to the proxy contest, BHE announced the immediate retirement of longtime Chairman Peter Dorflinger and the appointment of a new director, Paul Tufano, the former CFO of
Alcatel-Lucent Group. While clearly a reactionary move, we do view this as a positive development as Mr.
Dorflinger has served on the board for 26 years with no EMS experience and Mr. Tufano brings new viewpoints
as well as badly needed industry experience.
Since February, there has been very little private communication between EC and the company as they appear
dead set on keeping us out of the boardroom. We believe this attitude is strictly the result of an insular culture
dominated by a CEO who has been at BHE for 20 years and a CFO who has been at BHE for 14 years. Despite
BHE under-performing for at least a decade and our clear message that we are very open to a negotiated
settlement, we have made no progress in coming to a resolution. As it stands today, we are running for three
board seats out of eight. The annual meeting is set for Wednesday, May 11th. Given the highly passive
shareholder base, success in this election will greatly hinge on the recommendations of the proxy advisory
firms ISS and Glass Lewis, both of which have recommended investors vote on Engageds proxy card.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
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Jamba (JMBA)
March 31, 2016 Price
$12.36
% of Fund Capital6
10.7%
Valuation
Agenda
Engagement
Valuation does not reflect the significant upside potential via cost cuts and a more
significant refranchising effort. Multiple expansion should also result from
successful execution of this strategy.
Right-size corporate G&A, shut down money-losing NYC stores as leases
permit, and re-evaluate spending on non-core growth initiatives. Accomplish cost
reductions through refranchising the vast majority of the company-owned
locations, yielding significant cash proceeds and multiple expansion.
Filed a 13D disclosing 10% ownership. Company enacting our plan for
refranchising and cost reductions. Joined the Board of Directors in January 2015.
The most important news out of JMBA in the past quarter was the announcement that former Bloomin Brands
executive, David Pace, would become the new CEO of JMBA. This was announced in January with Mr. Pace
stepping into his new role on March 14th. The decision by the board to hire Mr. Pace, a fellow JMBA director,
resulted from the culmination of a full-scale executive search process in which a number of very talented
outside candidates were interviewed. Restaurant veteran, and current independent director, Rick Federico was
named independent Chairman. Mr. Pace comes to JMBA as the former president of Carrabbas Italian Grill
(owned by Bloomin Brands). Prior to joining Bloomin Brands in 2010 he held executive positions with
Starbucks, PepsiCo, and Yum! Brands.
JMBA stock performance has lagged under disappointing financial results as cost reduction efforts under prior
management have not kept pace with the reduction in revenues and EBITDA post the companys aggressive
refranchising effort. That said, while 2016 will likely be a transition year for the company, we are confident
we have the right CEO to drive long term value at JMBA through a combination of franchise growth and cost
reduction. Mr. Pace will seek to refocus the company around executing as a restaurant franchisor and operator
(as opposed to the prior CEOs focus around consumer goods, etc.) Further, with Engaged Capitals assistance
JMBA put in place a private equity style compensation structure for Mr. Pace which greatly aligns his
economic opportunity with that of the companys shareholders. The vast majority of Mr. Paces compensation
over the next three years will be determined by the impact he and his team have on the companys stock price.
We continue to remain confident that JMBA, under the new CEO, should achieve a high teens, low $20s share
price, material upside from todays levels, however this is likely a 2017 event give all the transition which will
occur in 2016.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
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$5.44
% of Fund Capital6
10.9%
Valuation
Share price has been negatively impacted by its recent financial restatement
process and trades at a substantial discount to the value of its underlying assets.
Agenda
Engagement
Companys core foundry assets and semiconductor products business are capable
of significantly improved operational performance and attractive to potential
strategic acquirers and/or partners, cut costs across their 2 businesses, destagger
the board.
Encourage board to hire financial advisor to explore interest in underlying assets,
destagger board or nominate directors this year to ensure value-maximizing path
is explored.
MX announced strong Q4 earnings and gave guidance for 2016 that exceeded expectations driving the stock
up to above $5.00 from below $3.50 per share. The company appears to be getting traction with new fab
customers and we would expect utilization rates to continue to increase every quarter this year. In addition,
cost containment and cash flow generation were strong as well. MX carries a fair amount of financial leverage
and was burning cash. The strong move in the stock was due to investors realizing there is likely little financial
risk here as operations have apparently turned the corner and should get increasingly positive throughout the
year. This has provided much needed stability to the stock given the strategic alternatives process remains
ongoing.
Regarding the strategic alternatives process, we remain frustrated that a deal has not been reached yet but
understand the challenges in a cross-border deal with multiple businesses to sell. We continue to believe there
are numerous buyers interested in pieces of the business, however MX is a unique asset for a semiconductor
company as it operates a hybrid model with both fabrication services as well as its own chip design business.
It is our belief that the buyers interested in the fab may not want the product business and vice versa, however
there is likely tax leakage in a two-part sale. We think the most likely scenario is a club deal where two or
more semiconductor companies partner to purchase the company and then split up the assets afterwards. No
doubt this makes for a complex cross-border transaction and therefore has caused the process to run much
longer than expected. We are hopeful that by the end of the second quarter we will have an announced sale.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
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Medifast (MED)
March 31, 2016 Price
$30.19
% of Fund Capital6
10.1%
Valuation
Agenda
Engagement
Valuation is very attractive given the size and stability of the companys cash
flows, variable cost structure, and potential for growth. The companys
overcapitalized balance sheet also provides downside protection and capital
allocation flexibility.
Discourage risky M&A with companys excess capital, strengthen management
team with strong industry expertise, improve corporate governance, develop a
credible long-term strategic plan for the business, and improve investor
communications. Explore strategic alternatives (i.e., going private) if valuation
fails to reflect changes to the above areas.
Working closely with management and the board on strategy, capital allocation,
corporate governance, and investor communications. Joined board in June 2015
along with four other new, independent directors.
Fourth quarter results showed a continuation of earlier trends with continued improvement at TSFL and
continued weakness at Med Direct (online) segment. The positive reversal of health coach trends at TSFL is
especially encouraging as this is the key driver of revenue and profit for the multi-level marketing operation,
which is ~75% of sales. Efforts to reverse negative trends in the online business have not been successful yet
and the board continues to work closely with management to diagnose and fix the issues with that line of
business.
Much progress was made in Q1 on the succession planning front as multiple executives exited the company.
Most importantly, MEDs COO Meg Sheetz, niece of the current Chairman and CEO and daughter of MEDs
founder, decided to leave the company. Regarding our continuing work around succession planning, a search
firm has been hired and an active search is underway to fill certain of MEDs senior leadership positions in the
near future. Stay tuned for more details on that front.
The stock has continued to trade in a fairly tight range around $30 despite the volatility experienced by the
market over the past quarter. We believe this is largely due to MEDs pristine balance sheet, continued strong
free cash flow generation, and, importantly, the companys newly instituted, and first ever, annual cash
dividend of $1.00 per share (~3.3% yield). As members of the Board we remain in constant dialogue with both
management and other directors on topics such as returning to growth in TSFL and Med Direct, capital
allocation, and succession planning.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
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TriMas (TRS)
March 31, 2016 Price
$17.52
% of Fund Capital6
5.6%
Valuation
Agenda
Engagement
Valuation does not reflect the significant upside potential from the new focus on
improved operating performance/profitability in multiple segments. Trades at a
discount on a sum-of-the-parts valuation, which should begin to become more
apparent now that the low margin Cequent business is spun out.
Improve operating performance at struggling business units, spin out Cequent,
explore sale of non-core Engineered Components businesses and Energy
business, cease acquisition activity until operations are fixed, align executive
compensation program with key drivers of value (improving profitability and
ROI).
Multiple meetings with management team and board regarding operations,
capital allocation, business mix, and governance. Reached settlement whereby
one Engaged Capital nominee joined the board and Engaged Capital has the right
to appoint Glenn Welling to the board in one year at our discretion.
Results at TRS have remained fairly stable, especially in comparison to the difficulties being experienced
across the industrials sector over the past year or so. Margins across the companys core Packaging and
Aerospace segments have remained solid and management provided 2016 revenue guidance for both these
segments which exceeded investor expectations. In fact, management believes it can deliver margin
improvement across almost all segments in 2016 despite certain revenue headwinds and a generally tough
environment for industrials. The company had also stated a commitment to improving free cash flow
conversion, a topic we have focused on with the TRS team since our initial investment.
Performance in TRS troubled energy segment continued to disappoint as both revenue (for the first time) and
margins were pressured. We view this business as non-core and we believe the board and management are
increasingly coming to the same conclusion.
Last year we signed a settlement agreement with the company that gave us the option to join the TRS board
around the time of the 2016 annual meeting. Given the progress that the company has made over the past year
and what we believe is an ongoing process to focus on the businesses that will drive the most shareholder
value, Engaged and the company have negotiated an extension of that right for another year. We believe there
is an opportunity for the company to materially increase their valuation by focusing on only their core
businesses, which will drive a multiple re-rating, and we are continuing to push that agenda forward with
management and the Board. Engaged will be meeting with the full Board this quarter to present our views on
what strategic alternatives the company should be considering for its non-core assets (Energy, Arrow Engines,
and Norris Cylinder).
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e | 11
Heartware (HTWR)
March 31, 2016 Price
$31.42
% of Fund Capital6
3.6%
Valuation
Agenda
Engagement
During Q1 we successfully entered into a settlement agreement with HTWR which included the termination
of the proposed Valtech acquisition and the appointment of Chad Cornell to HTWRs board. Mr. Cornell is
the former VP of Corporate Development for Medtronic (a potential strategic acquirer of HTWR). We were
very pleased with this development as it avoided a contested vote on the Valtech transaction and the potential
for a future proxy fight for board seats. We believe Mr. Cornell is a wonderful addition to the board given his
understanding of HTWRs assets and the fact that his former employer is likely to be one of the top strategic
acquirers for HTWR, when the time is right to sell the company. Given the stock is currently trading around
$30, we dont believe a sale of the company today would fetch an appropriate price as acquirers would likely
be unwilling to pay the size of premium needed to get a sale approved by the board.
The more likely path to a sale, and the one we believe the company is pursuing, is to wait until 2017 to entertain
a sale of the company. The planned U.S. label expansion for HVAD is still on track for 2017 and we also
expect much more clarity around the issues plaguing HTWRs next generation MVAD pump over the next 69 months. With the resolution of these two items, we would expect the stock to trade much higher in 2017 and
off of that base, a sale to a larger strategic acquirer would be very attractive.
Given the timing around this and the companys inward focus for the next year, we have sized our position
accordingly in our portfolio at between 3% and 4%. We would look to add to the position in the future once
the above catalysts are closer at hand and then further our dialogue on the future of the company with the
management and the board.
6
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e | 12
On-Deck Positions
It is our goal to have 7-10 Core Positions and 6-12 On-Deck Positions in our portfolio at any point in time.
The goal of the On-Deck Positions is to seed our Core portfolio as we gain conviction in the opportunity of
the On-Deck investments. We usually expect about one-third to one-half of our On-Deck Positions to graduate
to Core Positions. We currently have 3 On-Deck positions in the portfolio. These positions represented 5.9%
of capital as of March 31, 2016. We currently have a number of new ideas that are going through our OnDeck research process and we will add additional On-Deck Positions as we gain further conviction in each of
the names. 4 On-Deck Positions were exited during the quarter.
Firm Update
We are very pleased to announce Emily Marroquin has joined the Engaged Capital family as an Investor
Relations Associate. Emilys duties will include assisting in the execution of operations and marketing
responsibilities as well as the organization of internal projects designed to create operational efficiencies. Prior
to joining Engaged Capital, Emily was a Project Coordinator at Peregrine Realty Partners, a Southern
California commercial real estate and investment advisory firm where she assisted in managing the daily
operations of their Los Angeles portfolio. Emily earned a Bachelor of Science in Finance from the State
University of New York at Oswego.
With our internally calculated forecast portfolio return at 41% and the numerous upcoming catalysts we have
to unlock embedded value in our core positions, we are very excited about the prospects for the remainder of
2016. As always, we are grateful for your continued support and are humbled by the responsibility of managing
your capital.
Sincerely,
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e | 13
Company Name
Market Cap
Portfolio Weight
Sector
ROVI
Rovi
$1.4B
23.39%
Technology
OUTR
Outerwall
$0.6B
12.86%
Consumer Discretionary
BHE
Benchmark Electronics
$1.1B
12.19%
Technology
MX
Magnachip
$0.2B
10.93%
Technology
JMBA
Jamba
$0.2B
10.67%
Consumer Discretionary
MED
Medifast
$0.4B
10.11%
Consumer Staples
TRS
TriMas
$0.8B
5.58%
Industrials
HTWR
Heartware
$0.9B
3.55%
Healthcare
Quarterly return contribution is for all Core Positions during the quarter, including those Core Positions which were exited during the quarter.
On-Deck Positions
Quarterly Return Contribution7: -0.70%
Current On-Deck Positions 5.93% of Equity
7
Quarterly return contribution is for all On-Deck Positions during the quarter, including those On-Deck Positions which were exited during the quarter.
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901
P a g e | 14
ENGAGED CAPITAL LLC 610 NEWPORT CENTER DRIVE SUITE 250 NEWPORT BEACH, CA 92660 TEL 949-734-7900 FAX 949-734-7901