ATLANTA, March 3, 2015 /PRNewswire/ -- Privet Fund
Management LLC (together with its affiliates, "Privet"), one of the
largest shareholders of Hardinge Inc. ("Hardinge" or the "Company")
(NASDAQ: HDNG), with ownership of over 7.0% percent of the
Company's outstanding common shares, today announced that it
delivered a letter to the Company's Board of Directors (the
"Board"). In the letter, Privet outlines its significant
concerns regarding the lack of accountability of management and the
Board following a sustained period of both operational and share
price underperformance. Under Hardinge's current leadership,
shareholder value continues to be destroyed through wasteful
capital spending, a bloated operational footprint, entrenching
governance practices and repeated financial underperformance.
Privet states that shareholders have lost confidence in the ability
of Company leadership and that an independent,
nationally-recognized investment bank should be retained to
evaluate strategic alternatives in order to maximize shareholder
value.
The full text of Privet's letter is shown below:
March 3, 2015
The Board of Directors
Hardinge Inc.
One Hardinge Drive
Elmira, NY 14902
Attn: Rick Simons, Chairman and
CEO
Dear Rick and Members of the Board of Directors (the
"Board"),
Privet Fund Management LLC (together with its affiliates,
"Privet") is one of the largest shareholders of Hardinge Inc.
("Hardinge" or the "Company"), owning approximately 7% of the
Company's outstanding shares. We made our investment in Hardinge
because we believe the Company is deeply undervalued by the market
relative to the value of its assets and its competitive position
within the machine tool industry. Unfortunately, despite
persistent opportunities for the Company to realize meaningful
growth and profitability, Hardinge leadership has failed to create
value for its shareholders over any reasonable time
horizon.
We believe that the Company's shareholders have a right to
demand accountability from the stewards of their capital.
Shareholders have been more than patient in giving management and
the Board repeated opportunities to demonstrate execution against
communicated objectives. Rather than taking decisive action
to hold management accountable for years of empty promises and
squandered capital spending, the Board has continued to plod along,
tacitly approving mediocrity while putting virtually no personal
capital at risk.
Regrettably, it is too late for shareholders to believe any
"action" or "plan" this Board may devise in response to our
concerns. At this point, we believe that the only way
shareholders will feel that their interests are being truly
considered is for the Board to immediately commence a process to
evaluate all strategic alternatives to maximize value for
shareholders.
A History of Underperformance
The Board of Directors and senior management team at Hardinge
have been in place for a considerable amount of time.
Chairman/CEO Rick Simons has been at
the Company since 1983 and has been a member of senior management
since 1999.1 Of the six other directors, four have been
on the Board for more than 11 years and three have been on the
Board for over 20 years. Over this same period of time,
Hardinge shareholders have suffered through a sustained period of
material underperformance.
Hardinge
Historical Share Price Performance 2
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Share Price
Performance 3
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1
Year
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3
Year
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5
Year
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Since
HDNG
IPO
4
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Russell 2000
Index
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5%
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56%
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110%
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459%
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Proxy Peer
Group 5
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(4%)
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3%
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83%
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204%
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Machine Tool Peer
Group 6
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9%
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57%
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104%
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331%
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Hardinge
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(23%)
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18%
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43%
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17%
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Underperformance
vs. Russell 2000
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(28%)
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(38%)
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(67%)
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(443%)
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Underperformance
vs. Proxy Peer Group
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(19%)
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15%
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(41%)
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(187%)
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Underperformance
vs. Machine Tool Peer Group
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(32%)
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(39%)
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(61%)
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(314%)
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We believe the primary reasons for this persistent
underperformance have been management's poor record of capital
allocation coupled with an inability to deliver upon stated
financial goals. With minimal senior leadership turnover
during this period of substantial underperformance, shareholders
are left to conclude that the Board is either incapable or
unwilling to hold itself or management accountable.
Poor Track Record of Capital Allocation
In late 2009, the Board was confronted with a proposal from
Industrias Romi S.A. ("Romi") to purchase the Company for an
all-cash price of $7.50-$8.00 per
share. That offer was summarily dismissed without any
meaningful engagement by the Company or its advisors. Even
after Romi made its offer public and requested an open dialogue,
the Board still did not engage with Romi or any other
well-capitalized competitor in the hopes of procuring an acceptable
price for shareholders, stating only that the Romi offer was
"grossly inadequate" and "opportunistic."7 The Board's
failure to get the most out of a potential acquirer by refusing to
participate in discussions demonstrating the true value of the
Company ultimately led Romi to bring its opening offer directly to
Hardinge shareholders. In spite of this, Romi raised its
offer to $10.00 per share (a 105%
premium over the Hardinge stock price when Romi first approached
Hardinge), yet we could find no evidence that the Board engaged in
a constructive dialogue. In its public communications,
management focused on highlighting previously enacted operational
initiatives intended to increase the value of the Company,
ostensibly to drive the share price well above the Romi offer over
a reasonable period of time. Unfortunately, neither
these ambitious business goals nor the envisioned stock price
appreciation have been achieved, while the nominal and opportunity
costs have been borne by shareholders.
Using the May 2010 Romi tender
offer of $10.00 as our commencement,
we estimate Hardinge has spent $110
million in an attempt to grow the business through
non-maintenance R&D, acquisitions and new facility
construction in the five years following Romi's $117 million offer for the Company. That
$110 million represents 75% of the
Company's current market capitalization and 94% of the value
offered to shareholders by Romi.
May 5, 2010 Romi
Tender Offer
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5/10/10 Romi Offer
per Share
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$10.00
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Sharecount for Romi
Offer (MMs)
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11.688
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Romi Transaction
Valuation ($MMs)
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$117
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Growth Capital
Expended Since Romi Offer
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($MMs)
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Non-Maintenance
R&D since 2010 8
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$35
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Chinese Plant
Construction 9
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10
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Swiss Plant
Construction 9
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9
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Usach
Acquisition
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19
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Forkhardt
Acquisition
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34
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Voumard
Acquisition
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2
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Total
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$110
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Growth Capital
Expended Greatly Exceeds Increase in Valuation
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Current Market Value
($MMs) 10
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$147
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Change vs. Romi Offer
($MMs)
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30
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Growth Capital
Invested as a % of Current Market Value
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74.6%
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Growth Capital
Invested as a % of Romi Transaction Valuation
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93.8%
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While the previous analysis compares the absolute value of the
Company relative to the total amount reinvested in the business
over the past five years, wasteful capital spending has coincided
with roughly 10% shareholder dilution. Examining the share
price (the only metric that really matters) confirms that
shareholders would have been better served by accepting the Romi
offer and then redeploying those proceeds into nearly any
other financial instrument.
Performance Since
Romi Offer vs. Various Investment Alternatives
11
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Romi Offer
Price
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$10.00
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Current Share
Price
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$11.45
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Total
Return since 5/10/2010 12
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17.6%
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CAGR
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3.4%
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Yield on 30-Year
Treasury at 5/10/2010 13
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4.4%
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CAGR since
5/10/2010
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S&P
500
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14.4%
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Russell
2000
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15.6%
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Although the Company's filings did not disclose the internal
forecasts and valuation metrics used by the Board and its financial
advisor in concluding to reject the Romi offer, subsequent
performance has led us to surmise that management is responsible
for either preparing deeply flawed operating projections or failing
to execute upon reasonable ones.
No Accountability for Failed Financial Commitments
The "2020 Vision" first presented to shareholders during the
third quarter 2014 earnings call outlines ambitious goals
(>$600 million revenue and
$80 million of EBITDA) which, if
achieved, should certainly create tremendous value for
shareholders. Our enthusiasm for the prosperous future is
tempered by the repeated failure of current leadership to achieve
publicly stated objectives.
In the April 2010 presentation in
response to the Romi offer, management outlined a series of
performance results which Hardinge would be able to achieve "during
any recovery" due to "key long-term value drivers" and the "actions
taken during 2008 and 2009 to reduce costs." These future
results were presented to shareholders as a fait accompli
and served as a significant component in the public basis for the
rejection of the Romi offer. We outline the individual
performance goals and the subsequent actual outcomes below.
Goal: "Company believes 1% – 2% incremental EBITDA margin
improvement, as compared with prior recovery periods, is attainable
at higher sales volumes"
Outcome:
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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2013
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2014
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Sales
($000s)
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$326,621
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$356,322
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$345,006
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$214,071
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$257,007
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$341,573
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$334,413
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$329,459
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$311,633
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EBITDA
Margin
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10.0%
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9.1%
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1.1%
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(9.0%)
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1.0%
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7.4%
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8.3%
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6.9%
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4.9%
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2011 and 2012 certainly represent a strong recovery period for
the machine tool industry. Looking back at the 9%-10% margins
achieved during 2006 and 2007, shareholders should have expected a
minimum of 10%-11% margins, yet only saw 7.4% and 8.3%. These
results give us little confidence in the "2020 Vision" promise of
EBITDA margins of ~13%.
Goal: Gross Margins Exceeding 30%
Outcome:
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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2013
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2014
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Gross
Margin
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30.7%
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30.1%
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26.7%
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19.1%
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23.8%
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26.6%
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29.0%
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28.3%
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27.9%
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Gross margins never reached the 30% threshhold for any year,
only approaching the target once.
Goal: Lower SG&A as Percentage of Sales
Outcome:
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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2013
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2014
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SG&A as % of
Sales
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23.6%
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23.7%
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28.3%
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32.0%
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25.5%
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21.5%
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22.8%
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24.1%
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26.0%
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Hardinge temporarily achieved this goal, posting SG&A
margins of 21.5% and 22.8% in 2011 and 2012, one to two points
below pre-recession run-rates. However, we remain concerned about
the transitory nature of this achievement as absolute levels of
SG&A continue to steadily increase, irrespective of the total
amount of sales.
Implicit Goal: Grow revenue at a greater rate than the
industry
Outcome:
Revenue Growth
Underperformance Vs. Industry Peers
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(Year-Over-Year
Revenue Growth)
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2010
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2011
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2012
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2013
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2014
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Hardinge Revenue
Growth 14
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20.1%
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32.9%
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(2.1%)
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(11.9%)
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(4.4%)
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Machine Tool Peer
Group Revenue Growth 15
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46.9%
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38.6%
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3.9%
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2.0%
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11.4%
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Underperformance
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(26.9%)
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(5.7%)
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(6.0%)
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(14.0%)
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(15.7%)
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There is no question that Hardinge operates within a cyclical
industry and that 2009 was a business cycle trough. Since
that time, the Company has failed to effectively capitalize on the
industry recovery while its peers have demonstrated consistent
growth.
Unfortunately, the lack of accountability has not been confined
to the results of the existing business. The Company acquired
Usach Technologies for $18.8 million
in December 2012 in a transaction
that management hailed as an "excellent extension of [Hardinge's]
existing grinding machine product lines" and noted the potential
for "significant marketing synergies for the Usach brands by
leveraging [Hardinge's] existing channels in Asia… and into
Europe."16 Since
then, it is our understanding that the subsidiary has generated
minimal returns outside of the EBITDA ($6.5
million in 2013) embedded in the substantial backlog at the
time of acquisition, and that Usach's Elgin, IL facility remains one of the least
utilized facilities in the Company's substantial footprint.
On top of the minimal incremental earnings power and redundant
facility, Hardinge has taken cumulative impairments on this
acquisition of $9.9 million,
approximately half of the total purchase price.
Bloated Operational Footprint
Hardinge operates ten separate manufacturing facilities
encompassing more than 1.2 million total square feet. While
management is keen to emphasize the benefits of a "globally diverse
sales and manufacturing platform,"17 there has been
little mention of the detrimental financial impact of operating
several significantly underutilized manufacturing facilities over
extended periods of time. This inefficient operating model appears
to be a meaningful reason SG&A expenses have risen from the
$14 million per quarter estimate
given in the April 2010 management
presentation to the $21.5 million per
quarter guidance given in management's most recent earnings
call. We find these numbers to be disappointing in light of
the numerous opportunities management has had to recognize cost
savings as a result of the Company's acquisitions.
Anecdotally, it appears that Hardinge has yet to close a facility
it has acquired as part of a larger transaction during the past
decade. This does not seem to be a prudent strategy for
maximizing the value of complementary businesses, especially as the
Company's headquarters facility in Elmira, NY (a structure capable of housing
more than eight football fields) continues to operate at a fraction
of its overall capacity.
Based on the midpoint of management's statement that the current
facility footprint has a capacity of $500-550 million of annual revenue,18
the Company would need to increase its sales by a staggering 60% in
order to grow into its current facilities. We find it highly
implausible that operating out of a facility footprint that will,
at a minimum, be significantly underutilized for the next six years
even under the most aggressive assumptions is the optimal path to
drive returns for shareholders.
Misalignment of Interests: Shareholder Unfriendly Governance
and Lack of Insider Ownership
Despite the Company's inability to create value for
shareholders, Hardinge's classified Board and shareholder
unfriendly corporate bylaws have helped to ensure that management
and directors remain entrenched in their roles. The ability
of shareholders to influence the governance of their company is
obstructed by the prohibition of the rights of shareholders to call
special meetings or act by written consent. Further, if
shareholders were to attempt to obtain these rights, they would
face an excessively high supermajority vote requirement in order to
amend the Company's bylaws. These artificial and antiquated
restrictions limit the Board's accountability to shareholders and
have created a culture of complacency that has permeated the ranks
of management.
We are also very concerned by the lack of stock ownership by
management and the Board in light of their collective tenure.
Collectively, the 11 Company insiders own 3.2% of the outstanding
shares.19 However, upon further examination, it appears
that an overwhelming portion of the reported insider ownership has
been granted by the Company. We went back to 2004 and
analyzed every stock grant for both directors and executive
officers in order to determine the true method of ownership of
Hardinge shares. It appears that a majority of directors and
officers have either not purchased shares in the open market or
have actually been net sellers in recent years. In fact, the
only open market purchases from current management and directors we
observed over the past decade were Mr. Quain's acquisition of 1,000
shares in 2011 and Mr. Hunter's acquisition of 5,000 shares in
2008. The vast majority of the reported "ownership" of
insiders has come in the form of share grants rather than open
market purchases.
We believe that entrenched leadership coupled with minimal
insider ownership and recurring stock grants has only served to
widen the divide between the interests of the Company's operators
and its true owners. Why should shareholders trust that the 2020
Vision (which would be expected to result in a "> $50 share price" by 202020) will be
achieved when the managers and directors who set those very goals
neither own significant amounts of Hardinge stock nor are willing
to commit their own capital to purchase more?
In light of the foregoing, it is clear to us that the status quo
is unacceptable. The current Board and management team have
proven unworthy stewards of shareholder capital. It is time
for the Board to retain the services of a nationally recognized
investment bank to conduct a fulsome evaluation of the Company's
strategic alternatives. This evaluation should be done
objectively, weighing the certain premium value shareholders would
receive if Hardinge was purchased by a third party against the
future prospects of the Company in the hands of a capable,
properly-incented Board and management team. There is no
other option — certainly not one that maintains the untenable state
of repeated operational underperformance and continuous value
transfer from shareholders to insiders. Should the Board fail
to uphold its fiduciary duties, we will seek to advance the
interests of the owners of the Company by pursuing direct
shareholder representation on the Hardinge Board.
Best regards,
Ryan Levenson and Ben Rosenzweig
Privet Fund Management LLC
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1 Mr. Simons left the
Company in July 2005 and returned in March 2008.
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2
Source: Bloomberg.
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3
Except as otherwise indicated, performance as of 2/27/15,
adjusted for dividends.
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4
Performance from 5/31/1995 to 2/27/2015.
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5
Proxy Peer Group consists of companies used in the Company's
proxy to set executive compensation (excludes acquired
companies).
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6
Machine Tool Peer Group consists of Hurco Companies, Inc., DMG
Mori Seiki AG, DMG Mori Seiki Co., Ltd., and Okuma
Corp.
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7
Source: 4/5/2010 14D-9.
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8
Per management, approximately 40% of R&D is considered
maintenance. Assumes $12MM of R&D in 2014.
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9 Source: 2010 Q2 Earnings
Call.
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10 As of
2/27/2015.
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11 Source:
Bloomberg.
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12
As of 2/27/2015. Includes dividends. Uses the 5/10/2010 Romi
$10.00/share offer price as the starting point.
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13
Ignores the effects of 34% price appreciation since that
time.
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14
Revenue growth is adjusted for the Usach acquisition ($20MM of
revenue in 2013; $0MM in 2014) and the Forkhardt acquisition ($15MM
in 2013; $30MM in 2014).
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15 Industry Peers include
Hurco Companies, Inc., DMG Mori Seiki AG, DMG Mori Seiki Co., Ltd.,
and Okuma Corp. Hurco results use 1/31 as year-end. DMG Mori Seiki
AG 2014 revenue is based on consensus research estimates. There is
no consensus estimate for Hurco 2014 results.
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16
2012 4Q Earnings Call.
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17
1/12/15 Investor Presentation.
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18
1/12/15 Investor Presentation.
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19
Source: 3/28/2014 Proxy Statement. Adjusted for former director
Daniel J. Burke's beneficial ownership of 44,557
shares.
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20
1/12/15 Investor Presentation.
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Contact:
Ryan Levenson
Privet Fund Management LLC
(404) 419-2670
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SOURCE Privet Fund LP