<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 333-18433
HAWK CORPORATION
----------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1608156
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
200 Public Square, Suite 30-5000, Cleveland, Ohio 44114
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 861-3553
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of the date of this report,
the Registrant had the following number of shares of common stock outstanding:
Class A Common Stock, $0.01 par value: 1,443,978
Class B Non-Voting Common Stock, $0.01 par value: None (0)
1
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<TABLE>
<CAPTION>
INDEX
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited) 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,629 $ 25,774
Accounts receivable, less allowance of $216
and $182, respectively 24,962 16,783
Inventories 22,567 20,864
Deferred income taxes 1,983 2,432
Other current assets 1,703 935
-------- --------
Total current assets 54,844 66,788
Property, plant and equipment:
Land 1,218 1,080
Buildings and improvements 10,283 7,615
Machinery and equipment 57,012 45,766
Furniture and fixtures 1,988 1,611
Construction in progress 808 2,825
-------- --------
71,309 58,897
Less accumulated depreciation 19,346 14,755
-------- --------
Total property, plant and equipment 51,963 44,142
Other assets:
Intangible assets 56,569 39,939
Net assets held for sale 3,604 3,604
Shareholder notes 1,675 1,838
Other 2,260 2,130
-------- --------
Total other assets 64,108 47,511
-------- --------
Total assets $170,915 $158,441
======== ========
</TABLE>
3
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HAWK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,878 $ 8,194
Accrued compensation 7,206 6,775
Other accrued expenses 4,342 2,405
Current portion of long-term debt 822 714
------------ ------------
Total current liabilities 24,248 18,088
Long-term liabilities:
Long-term debt 130,474 128,469
Deferred income taxes 6,283 4,090
Other 2,058 2,004
------------ ------------
Total long-term liabilities 138,815 134,563
Detachable stock warrants, subject to put option 9,300 4,600
Shareholders' equity (deficit):
Series A preferred stock, $.01 par value and an aggregate liquidation value
of $1,375,000, plus any accrued and unpaid dividends, with 10% cumulative
dividend (2,625 shares authorized, 1,375 shares issued and outstanding);
Series B preferred stock, $.01 par value and an aggregate liquidation value
of $702,000, plus any accrued and unpaid dividends, with 9% cumulative
dividend (702 shares authorized, issued and outstanding); Series C
preferred stock, $.01 par value and an aggregate liquidation value of
$1,190,000, plus any accrued and unpaid dividends with 10% cumulative
dividend (1,190 shares authorized,
issued and outstanding) 1 1
Class A common stock, $.01 par value; 2,200,000
shares authorized, 1,443,978 issued and outstanding 14 14
Class B common stock, $.01 par value, 375,000 shares
authorized, none issued or outstanding
Additional paid-in capital 1,964 1,964
Retained earnings (deficit) (2,653) (974)
Other equity adjustments (774) 185
------------- ------------
Total shareholders' equity (deficit) (1,448) 1,190
Total liabilities and shareholders' equity (deficit) $ 170,915 $ 158,441
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
4
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HAWK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 116,362 $ 93,672 $ 39,381 $ 30,749
Cost of sales 82,940 69,023 28,895 22,674
-------------- ---------------- --------------- -------------
Gross profit 33,422 24,649 10,486 8,075
Selling, technical and administrative expenses 14,241 11,612 4,794 3,957
Amortization of intangibles 2,575 2,408 949 825
Plant consolidation expense 50 3,749 50 1,610
-------------- ---------------- --------------- -------------
Total expenses 16,866 17,769 5,793 6,392
Income from operations 16,556 6,880 4,693 1,683
Interest expense 10,639 7,321 3,580 2,347
Other expense, net 122 55 92 45
-------------- ---------------- --------------- -------------
Income (loss) before income taxes 5,795 (496) 1,021 (709)
Income taxes 2,534 863 545 441
-------------- ---------------- --------------- -------------
Net income (loss) $ 3,261 $ (1,359) $ 476 $ (1,150)
============== ================= =============== ==============
Preferred stock dividend requirements $ (240) $ (170) $ (80) $ (7)
Net income (loss) applicable to
common shareholders $ 3,021 $ (1,529) $ 396 $ (1,157)
Net income (loss) per share applicable to
common shareholders $ 1.72 $ (.87) $ .22 $ (.66)
Number of shares
used to compute per share data 1,760,946 1,760,946 1,760,946 1,760,946
</TABLE>
See notes to condensed consolidated financial statements.
5
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HAWK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,261 $ (1,359)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 7,166 6,688
Accretion of discount on debt 487 488
Deferred income taxes 2,343
Minority interest
Extraordinary item, net of tax
Changes in operating assets and liabilities, net of acquired assets:
Accounts receivable (5,319) (1,208)
Inventories (865) (241)
Other assets (925) (1,126)
Accounts payable 2,800 350
Other liabilities 1,248 (805)
------------ ------------
Net cash provided by operating activities $ 10,196 $ 2,787
Cash flows from investing activities
Purchase of Hutchinson Foundry Products Company (10,639)
Purchase of Sinterloy, Inc. (15,449)
Purchases of property, plant and equipment (4,798) (7,669)
Loans to shareholders
Payments received on shareholder notes 163 162
------------ ------------
Net cash used in investing activities (30,723) (7,507)
Cash flows from financing activities
Proceeds from borrowings on long-term debt 5,317
Payments on long-term debt (783)
Deferred financing costs (565) 417
Payments of preferred stock dividends (240) (170)
Other (30) 279
------------- ------------
Net cash (used in) provided by financing activities (1,618) 5,843
------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (22,145) 1,123
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 25,774 771
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,629 $ 1,894
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
6
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HAWK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer to
the condensed consolidated financial statements and footnotes thereto included
in the Form S-4 (Registration No. 333-18433) for Hawk Corporation (the
"Company") for the year ended December 31, 1996.
Net income per share is based on the weighted average number of common shares
and common share equivalents (warrants) outstanding during the respective
periods. Earnings available to common shareholders includes an adjustment for
preferred stock dividends paid during the respective periods.
The Company designs, engineers, manufactures and markets specialized components,
principally made from powder metals, used in a wide variety of aerospace,
industrial and commercial applications.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and also include, effective January 2,
1997, the accounts of Hutchinson Products Corporation and effective August 1,
1997, the accounts of Sinterloy Corporation (See Note 3). All significant
inter-company accounts and transactions have been eliminated in the accompanying
financial statements.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The major components of inventories are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials and work-in-process $ 19,007 $ 17,239
Finished products 4,465 4,226
Inventory reserves (905) (601)
----------- ----------
$ 22,567 $ 20,864
========== ==========
</TABLE>
7
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NOTE 3 - ACQUISITIONS
Effective January 2, 1997, the Company acquired all of the outstanding capital
stock of Houghton Acquisition Corporation and merged it into the newly formed
Hutchinson Products Corporation (Hutchinson) for (1) $10.6 million in cash; (2)
$1.5 million in 8.0% two-year convertible notes; and (3) contingent payments to
be made by the Company if Hutchinson meets certain earnings targets. The
acquisition has been accounted for as a purchase. The excess of the purchase
price over the estimated fair value of the capital stock acquired in the amount
of $7.7 million is being amortized over 30 years and is included in intangible
assets. The results of operations of Hutchinson are included in the Company's
consolidated statements of income since the date of acquisition. Hutchinson's
principal business is the production and sale of die cast aluminum rotors which
are used in subfractional electric motors and, to a lesser extent, the
manufacture and sale of extruded aluminum fan spacers used in commercial diesel
engines and precision metal castings used in hand power tools and gasoline
pumping units.
On August 1, 1997 the Company, through a wholly owned subsidiary, acquired
substantially all of the assets (except cash) and assumed certain liabilities of
Sinterloy, Inc. for $15.4 million in cash, subject to a dollar for dollar
adjustment based on the adjusted net equity position of Sinterloy at closing
compared to the net equity position of Sinterloy at December 31, 1996. As of
September 30, 1997, the closing adjustment has not been determined. The results
of operations of Sinterloy Corporation (Sinterloy) are included in the Company's
consolidated statements of income since the date of acquisition. Sinterloy's
principal business is the production of powder metal components used primarily
in the business equipment market.
The following pro forma unaudited consolidated results of operations for the
period ended September 30, 1996 give effect to the above acquisitions as though
they had occurred on January 1, 1996 and include certain adjustments, such as
additional amortization expense as a result of goodwill and deferred financing
costs, increased depreciation expense as a result of the write-up of certain
machinery and equipment to its fair value and increased interest expense related
to debt incurred for the acquisition.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Net sales $ 35,803 $ 108,834
=========== ===========
Net loss $ 866 $ 506
=========== ===========
</TABLE>
Pro forma net sales and net loss are not necessarily indicative of the net
sales and net loss that would have occurred had the acquisition been made at
the beginning of the year or the results which may occur in the future.
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NOTE 4 - LONG-TERM DEBT
In November 1996, the Company issued $100,000,000 in Senior Notes due on
December 1, 2003, unless previously redeemed, at the Company's option, in
accordance with the terms of the Notes. Interest is payable semi-annually on
June 1 and December 1 of each year commencing June 1, 1997, at a fixed rate of
10.25%. Substantially all of the Senior Notes were exchanged for the Exchange
Notes on April 21, 1997. The terms of the Exchange Notes are identical in all
material respects to the terms of the Senior Notes, except that the Exchange
Notes are freely transferable with certain limited exceptions by their holders.
The Exchange Notes are fully and unconditionally guaranteed on a joint and
several basis by each of the direct or indirect wholly-owned domestic
subsidiaries of the Company (Guarantor Subsidiaries). The Exchange Notes and the
Senior Notes are hereinafter collectively referred to as the "Senior Notes."
(See Note 8).
NOTE 5 - DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION
On June 30, 1995, the Company issued $30.0 million aggregate principal amount of
12% senior subordinated notes with detachable warrants to purchase Class B
Common Stock. The holders of the warrants have the right to put the warrants
back to the Company for cash, at prices based on the carrying value of the
Company at the date of put as determined by an independent third party beginning
in the year 2001. For financial reporting purposes, the carrying value of the
warrants, including the put option, was adjusted to $9.3 million as of
September 30, 1997 ($4.6 million as of December 31, 1996), based upon
management's assumptions applied to discounted projected future earnings of the
Company. The increase in the carrying value of the detachable stock warrants at
September 30, 1997 was reported as a charge to retained earnings as of that
date.
NOTE 6 - CONTINGENCIES
The Company has wage continuation agreements with two of its
officers/shareholders. In the event the officer/shareholder dies or becomes
permanently disabled while employed by the Company, each agreement provides for
payments to be made annually to the officer/shareholder's spouse based on a
compensation formula, until the spouse's death.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The overall
objective of SFAS is to simplify the calculation of earnings per share (EPS) and
achieve comparability with international accounting standards. SFAS No. 128 is
effective in the fourth quarter ended December 31, 1997 for the Company.
Subsequent to the effective date, all prior period EPS amounts are required to
be restated to conform to the provisions of Statement 128. The adoption of SFAS
No. 128 is not anticipated to have a material effect on the Company's financial
statements or results of operations.
NOTE 8 - SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note 4, each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest with respect to the Notes. The
Guarantor Subsidiaries are direct, wholly-owned subsidiaries of the Company.
The following supplemental unaudited consolidating condensed financial
statements present (in thousands):
9
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1. Consolidating condensed balance sheets as of September 30, 1997
and December 31, 1996, consolidating condensed statements of
income for the three and nine-month periods ended September 30,
1997 and 1996 and consolidating condensed statements of cash flows
for the nine months ended September 30, 1997 and 1996.
2. Hawk Corporation (Parent), combined Guarantor Subsidiaries and
combined Non-Guarantor Subsidiaries (consisting of the Company's
subsidiaries in Canada and Italy) with their investments in
subsidiaries accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and
all of its subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries of the Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented. The Revolving Credit Facility contains covenants that, among
other things, would prohibit the payment of any dividends to the Company by the
subsidiaries of the Company (including Guarantor Subsidiaries) in the event of a
default under the terms of the Revolving Credit Facility.
10
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<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 3,540 $ 40 $ 49 $ 3,629
Accounts receivable, net 67 18,703 6,576 $ (384) 24,962
Inventories, net 17,801 4,766 22,567
Deferred income taxes 890 1,093 1,983
Other current assets 142 614 947 1,703
----------- ----------- ----------- ----------- -----------
Total current assets 4,639 38,251 12,338 (384) 54,844
Other assets:
Investment in subsidiaries 790 5,765 (6,555)
Inter-company advances, net 132,535 1,463 9 (134,007)
Property, plant and equipment 46,385 5,578 51,963
Intangible assets 233 56,336 56,569
Other 1,675 7,180 459 (1,775) 7,539
----------- ----------- ----------- ------------ -----------
Total other assets 135,233 117,129 6,046 (142,337) 116,071
----------- ----------- ----------- ------------ -----------
Total assets $ 139,872 $ 155,380 $ 18,384 $ (142,721) $ 170,915
=========== =========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 7,982 $ 3,896 $ 11,878
Accrued compensation $ 64 6,278 864 7,206
Other accrued expenses (2,586) 7,242 70 $ (384) 4,342
Current portion of long-term debt 402 420 822
-------------- ----------- ----------- ----------- -----------
Total current liabilities (2,522) 21,904 5,250 (384) 24,248
Long-term liabilities:
Long-term debt 126,862 3,612 130,474
Deferred income taxes 5,596 350 337 6,283
Other 484 1,574 2,058
Inter-company advances, net 2,986 127,338 5,458 (135,782)
----------- ----------- ----------- ------------ ------------
Total long-term liabilities 135,444 131,784 7,369 (135,782) 138,815
----------- ----------- ----------- ------------ -----------
Total liabilities 132,922 153,688 12,619 (136,166) 163,063
Detachable stock warrants,
subject to put option 9,300 9,300
Shareholders' equity (deficit) (2,350) 1,692 5,765 (6,555) (1,448)
------------ ----------- ----------- ------------ ------------
Total liabilities and
shareholders' equity (deficit) $ 139,872 $ 155,380 $ 18,384 $ (142,721) $ 170,915
=========== =========== =========== ============ ===========
</TABLE>
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<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1996
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,187 $ 5 $ 582 $ 25,774
Accounts receivable, net 189 10,884 5,710 16,783
Inventories, net 16,120 4,744 20,864
Deferred income taxes 1,390 1,042 2,432
Other current assets 67 373 495 935
----------- ----------- ----------- ----------- -----------
Total current assets 26,833 28,424 11,531 66,788
Other assets:
Investment in subsidiaries 775 6,457 $ (7,232)
Inter-company advances, net 108,607 19,543 (128,150)
Property, plant and equipment 38,394 5,748 44,142
Intangible assets 504 39,435 39,939
Other 1,838 5,318 416 7,572
----------- ----------- ----------- ----------- -----------
Total other assets 111,724 109,147 6,164 (135,382) 91,653
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
Total assets $ 138,557 $ 137,571 $ 17,695 $ (135,382) $ 158,441
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ (157) $ 5,167 $ 3,184 $ 8,194
Accrued compensation 100 5,856 819 6,775
Other accrued expenses (719) 2,728 396 2,405
Current portion of long-term debt 289 425 714
----------- ----------- ----------- ----------- -----------
Total current liabilities (776) 14,040 4,824 18,088
Long-term liabilities:
Long-term debt 126,375 1,290 804 128,469
Deferred income taxes 2,729 1,057 304 4,090
Other 1,272 732 2,004
Inter-company advances, net 3,532 120,819 4,574 $ (128,925)
----------- ----------- ----------- -----------
Total long-term liabilities 132,636 124,438 6,414 (128,925) 134,563
----------- ----------- ----------- ------------ -----------
Total liabilities 131,860 138,478 11,238 (128,925) 152,651
Detachable stock warrants,
subject to put option 4,600 4,600
Shareholders' equity (deficit) 2,097 (907) 6,457 (6,457) 1,190
----------- ------------ ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
Total liabilities and
shareholders' equity $ 138,557 $ 137,571 $ 17,695 $ (135,382) $ 158,441
=========== =========== =========== =========== ===========
</TABLE>
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SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 101,113 $ 15,249 $ 116,362
Cost of sales 70,609 12,331 82,940
----------- ----------- ----------- ----------- -----------
Gross profit 30,504 2,918 33,422
Selling, technical and
administrative expenses 12,053 2,188 14,241
Amortization of intangibles $ 8 2,528 39 2,575
Plant consolidation expense 50 50
----------- ----------- ----------- ----------- -----------
Total expenses 8 14,631 2,227 16,866
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (8) 15,873 691 16,556
Interest expense 487 9,830 322 10,639
Income from equity investees 3,173 285 $ (3,458)
Other (income) expense, net (635) 757 122
------------ ----------- ----------- ----------- -----------
Income before income taxes 3,313 5,571 369 (3,458) 5,795
Income taxes 52 2,398 84 2,534
----------- ----------- ----------- ----------- -----------
Net income $ 3,261 $ 3,173 $ 285 $ (3,458) $ 3,261
=========== =========== =========== ============ ===========
</TABLE>
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SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 79,001 $ 14,671 $ 93,672
Cost of sales 57,902 11,121 69,023
----------- ----------- ----------- ----------- -----------
Gross profit 21,099 3,550 24,649
Selling, technical and
administrative expenses 10,498 1,114 11,612
Amortization of intangibles 2,408 2,408
Plant consolidation expense 3,749 3,749
----------- ----------- ----------- ----------- -----------
Total expenses 16,655 1,114 17,769
Income from operations 4,444 2,436 6,880
Interest expense $ 198 6,588 256 $ 279 7,321
Income (loss) from equity investees (1,161) 633 528
Other (income) expense, net (148) 482 (279) 55
----------- ------------ ----------- ------------ -----------
Income (loss) before income taxes (1,359) (1,363) 1,698 528 (496)
Income taxes (credit) (202) 1,065 863
----------- ------------ ----------- ----------- -----------
Net income (loss) $ (1,359) $ (1,161) $ 633 $ 528 $ (1,359)
============ ============ =========== =========== ============
</TABLE>
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SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 34,610 $ 4,771 $ 39,381
Cost of sales 24,972 3,923 28,895
----------- ----------- ----------- ----------- -----------
Gross profit 9,638 848 10,486
Selling, technical and
administrative expenses 3,987 807 4,794
Amortization of intangibles $ 3 937 9 949
Plant consolidation expense 50 50
----------- ----------- ----------- ----------- -----------
Total expenses 3 4,974 816 5,793
Income (loss) from operations (3) 4,664 32 4,693
Interest expense 161 3,302 117 3,580
Income (loss) from equity investees 469 (58) $ (411)
Other (income) expense, net (169) 320 (59) 92
------------ ----------- ------------ ----------- -----------
Income (loss) before income taxes 474 984 (26) (411) 1,021
Income taxes (credit) (2) 515 32 545
------------ ----------- ----------- ----------- -----------
Net income (loss) $ 476 $ 469 $ (58) $ (411) $ 476
=========== =========== ============ ============ ===========
</TABLE>
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SUPPLEMENTAL CONSOLIDATING CONDENSED INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 26,447 $ 4,302 $ 30,749
Cost of sales 19,395 3,279 22,674
----------- ----------- ----------- ----------- -----------
Gross profit 7,052 1,023 8,075
Selling, technical and
administrative expenses 3,798 159 3,957
Amortization of intangibles 826 (1) 825
Plant consolidation expense 1,610 1,610
----------- ----------- ----------- ----------- -----------
Total expenses 6,234 158 6,392
Income from operations 818 865 1,683
Interest expense $ 420 1,531 117 $ 279 2,347
Loss from equity investees (753) (226) 979
Other (income) expense, net (23) (135) 482 (279) 45
------------ ------------ ----------- ------------ -----------
Income (loss) before income taxes (1,150) (804) 266 979 (709)
Income taxes (credit) (51) 492 441
----------- ------------ ----------- ----------- -----------
Net loss $ (1,150) $ (753) $ (226) $ 979 $ (1,150)
============ ============ ============ =========== ============
</TABLE>
16
<PAGE> 17
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 6,299 $ 3,640 $ 257 $ 10,196
Cash flows from investing activities:
Purchase of Hutchinson
Foundry Products Company (10,639) (10,639)
Purchase of Sinterloy, Inc. (15,449) (15,449)
Purchase of property, plant and
equipment (4,603) (195) (4,798)
Payments received on shareholder
loans 163 163
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (25,925) (4,603) (195) (30,723)
Cash flows from financing activities:
(Payments) proceeds on
long-term debt (1,751) 1,591 (623) (783)
Deferred financing costs (565) (565)
Payment of preferred stock dividend (240) (240)
Other (30) (28) 28 (30)
----------- ------------ ----------- ----------- ------------
Net cash (used in) provided by
financing activities (2,021) 998 (595) (1,618)
------------ ----------- ------------ ----------- ------------
Net (decrease) increase in cash and
cash equivalents (21,647) 35 (533) (22,145)
Cash and cash equivalents
at beginning of period 25,187 5 582 25,774
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 3,540 $ 40 $ 49 $ 3,629
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE> 18
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities $ (4,920) $ 4,640 $ 3,067 $ 2,2787
Cash flows from investing activities:
Purchase of property, plant and
equipment (6,053) (1,616) (7,669)
Payments received on shareholder notes 162 162
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities 162 (6,053) (1,616) (7,507)
Cash flows from financing activities:
Proceeds (payments) from
borrowings of long-term debt 5,935 274 (892) 5,317
Payment of preferred stock dividend (170) (170)
Deferred financing costs 55 362 417
Other 279 279
--------- --------- --------- --------- ---------
Net cash provided by (used in) 5,820 915 (892) 5,843
financing activities
--------- --------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 1,062 (498) 599 1,123
Cash and cash equivalents
at beginning of period 408 46 317 771
--------- --------- --------- --------- ---------
Cash and cash equivalents
at end of period $ 1,470 $ (452) $ 876 $ 1,894
========= ========= ========= ========= =========
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's condensed consolidated financial statements and notes thereto
appearing elsewhere in this report.
GENERAL
Hawk designs, engineers, manufactures and markets specialized components,
principally made from powder metals, used in a wide variety of aerospace,
industrial and commercial applications. The Company is a leading worldwide
supplier of friction products for brakes, clutches and transmissions used in
aerospace, industrial and specialty applications. Friction products represented
68.9% of Company sales in the first nine months of 1997. Hawk is also a leading
supplier of powder metal components for industrial applications, including pump,
motor and transmission elements, gears, pistons and anti-lock brake sensor
rings. In addition, the Company designs and manufactures die cast aluminum
rotors for small electric motors used in business machines, appliances and
exhaust fans. The Company focuses on manufacturing products requiring
sophisticated engineering and production techniques for applications in markets
where it has achieved a significant market share.
Since its formation in 1989, Hawk has pursued a strategic growth plan by making
complementary acquisitions and broadening its customer base. All these
acquisitions were accounted for under the purchase method of accounting, with
the purchase price allocated to the estimated fair market value of the assets
acquired and liabilities assumed. In the acquisitions, any excess of the
purchase price paid over the estimated fair value of the net assets acquired was
allocated to goodwill, which resulted in approximately $40.1 million of goodwill
reflected on the September 30, 1997 balance sheet. The annual amortization of
goodwill will result in non-cash charges to future operations of approximately
$1.5 million per year (of which the majority of such amortization is deductible
for tax purposes) based on amortization periods ranging from 15 to 40 years.
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Net Sales
- ---------
Net sales increased by $8.6 million, or 28.1%, from $30.8 million during the
1996 third quarter to $39.4 million in the third quarter of 1997. The net sales
increase was attributable to the acquisitions of Hutchinson, and, to a lesser
extent, Sinterloy and strong customer demand in all of the Company's products
lines.
Gross Profit
- ------------
Gross profit increased $2.4 million to $10.5 million in the third quarter of
1997, a 29.9% increase over gross profit of $8.1 million in the comparable
quarter of 1996. The gross profit margin increased to 26.6% in the third quarter
of 1997 from 26.3% during the comparable period in 1996. The increase was
attributable to cost savings resulting from the consolidation of one of the
Company's manufacturing facilities during 1996 into existing Company facilities,
as well as a favorable product mix. This was partially offset by short term
capacity constraints at the Company's friction products facilities.
19
<PAGE> 20
Selling, Technical and Administrative Expenses
- ----------------------------------------------
Selling, technical and administrative ("ST&A") expenses increased $0.8 million,
or 20.0%, to $4.8 million in the third quarter of 1997 compared to $4.0 million
in the comparable quarter of 1996. As a percentage of net sales, ST&A expenses
decreased to 12.2% of sales in the third quarter of 1997 from 12.9% in the
comparable quarter of 1996, primarily as a result of increased sales volumes
covering additional administrative overhead and personnel costs.
Income from Operations
- ----------------------
Income from operations increased by $3.0 million, or 178.8%, from $1.7 million
in the third quarter of 1996 to $4.7 million in the third quarter of 1997.
Income from operations as a percentage of net sales increased to 11.9% in the
third quarter of 1997 from 5.5% in the comparable quarter of 1996, reflecting
cost savings from the consolidation of facilities, reduced plant consolidation
expenses, increased sales and a more favorable product mix.
Interest Expense
- ----------------
Interest expense increased $1.2 million, or 52.5%, to $3.6 million in the third
quarter of 1997 from $2.3 million in the comparable quarter of 1996. The
increase is attributable to higher debt levels, a result of the issuance of the
Company's $100.0 million Senior Notes in the fourth quarter of 1996.
Income Taxes
- ------------
The provision for income taxes increased to $0.5 million in the third quarter of
1997 (53.4% of pre-tax income) from $0.4 million in the comparable quarter of
1996, reflecting the increase in pre-tax income.
Net Income
- ----------
As a result of the factors noted above, net income was $0.5 million in the third
quarter of 1997 compared to a loss of $1.2 million in the third quarter of 1996.
FIRST NINE MONTHS OF 1997 COMPARED TO FIRST NINE MONTHS OF 1996
Net Sales
- ---------
Net sales increased by $22.7 million, or 24.2%, from $93.7 million during the
first nine months of 1996 to $116.4 million during the first nine months of
1997. The net sales increase was attributable to the acquisitions of Hutchinson
and, to a lesser extent, Sinterloy and strong customer demand in all of the
Company's product lines.
20
<PAGE> 21
Gross Profit
- ------------
Gross profit increased $8.8 million to $33.4 million during the first nine
months of 1997, a 35.6% increase over gross profit of $24.6 million during the
first nine months of 1996. The gross profit margin increased to 28.7% during the
first nine months of 1997 from 26.3% during the comparable period in 1996. The
increase was attributable to cost savings, resulting from the consolidation of
the Company's facilities described above, as well as favorable product mix.
Selling, Technical and Administrative Expenses
- ----------------------------------------------
ST&A expenses increased $2.6 million, or 22.6%, from $11.6 million during the
first nine months of 1996 to $14.2 million during the first nine months of 1997.
As a percentage of net sales, ST&A remained relatively constant at 12.2% during
the first nine months of 1997 compared to 12.4% during the comparable period of
1996.
Income from Operations
- ----------------------
Income from operations increased by $9.7 million, or 140.6%, from $6.9 million
in the first nine months of 1996 to $16.6 million in the first nine months of
1997. Income from operations as a percentage of net sales increased to 14.2% in
the first nine months of 1997 from 7.3% in the comparable nine month period of
1996, reflecting cost savings from the consolidation of facilities, reduced
plant consolidation expenses, increased sales and a more favorable product mix.
Interest Expense
- ----------------
Interest expense increased $3.3 million, or 45.3%, to $10.6 million in the first
nine months of 1997 from $7.3 million in the comparable nine month period in
1996. The increase is attributable to higher debt levels, a result of the
issuance of the Senior Notes in the fourth quarter of 1996.
Income Taxes
- ------------
The provision for income taxes increased $1.6 million to $2.5 million in the
first nine months of 1997 (43.7% of pre-tax income) from $0.9 million in the
comparable period in 1996, reflecting the increase in pre-tax income.
Net Income
- ----------
As a result of the factors noted above, net income was $3.3 million in the first
nine months of 1997 compared to a loss of $1.4 million in the comparable nine
month period of 1996.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
As a result of the recent acquisitions and the issuance of the Senior Notes, the
Company has, and will continue to have, substantial indebtedness. The Company
will therefore be required to use a substantial portion of its cash flow from
operations for the payment of interest expense on indebtedness.
The Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations and
borrowings under its $25.0 million Revolving Credit Facility (subject to a
borrowing base of a portion of the eligible accounts receivable and inventory).
As of September 30, 1997, there are no amounts outstanding under the Revolving
Credit Facility.
As of September 30, 1997 the Company was in compliance with the terms of its
indebtedness.
Net cash provided by operating activities was $10.2 million for the nine month
period ended September 30, 1997 as compared to $2.8 million in the comparable
period of 1996. The increase in net income of $4.6 million and non-cash
charges in addition to an improved working capital position at
September 30, 1997 accounted for the increased operating cash flow.
Net cash used in investing activities was $30.7 million and $7.5 million for the
nine month periods ending September 30, 1997 and 1996, respectively. The cash
used in investing activities in the 1997 period consisted of $26.0 million
attributable to the acquisitions of Hutchinson and Sinterloy and $4.8 million
for the purchases of property, plant and equipment. In the comparable period of
1996, cash used in investing activities consisted primarily of expenditures for
property, plant and equipment.
Net cash used in financing activities was $1.6 million for the nine month period
ended September 30, 1997 and was used primarily for payment of capital lease
obligations. In the comparable nine month period of 1996, net cash provided by
financing activities of $5.8 million was primarily attributable to an increase
in borrowing under the Company's previous credit facilities.
The primary uses of capital by the Company are (1) to pay interest on, and to
repay principal of, indebtedness, (2) for capital expenditures for maintenance,
replacement and acquisitions of equipment, expansion of capacity, productivity
improvements and product development, and (3) for making additional strategic
acquisitions of complementary businesses.
The Company believes that cash flow from operating activities and additional
funds available under the Revolving Credit Facility will be sufficient to meet
its currently anticipated operating and capital expenditure requirements and
service its indebtedness for the next 12 months. If the Company cannot generate
sufficient cash flow from operating activities or borrow under the Revolving
Credit Facility to meet such obligations, then the Company may be required to
take certain actions, including refinancing all or a portion of its existing
debt, selling assets or obtaining additional financing. There is no assurance
that any such refinancing or asset sales would be possible or that any
additional financing could be obtained.
22
<PAGE> 23
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence in its prospects and strategies and its expectations about
expansion into new markets and growth in existing markets, are forward looking
statements that involve risks and uncertainties. These risks and uncertainties
include, but are not limited to (1) the Company's substantial leverage, which
requires significant cash flows to service debt, reducing funds for operations
and other business opportunities and increasing the Company's vulnerability to
competition and to adverse general economic and industry conditions; (2) the
ability of the Company to continue to meet the terms of the Company's credit
facilities which contain a number of significant financial covenants and other
restrictions; (3) the Company's reliance on significant customers; (4) supplies
and prices of raw materials used by the Company; (5) whether the Company's
aerospace friction products will be able to continue to meet stringent Federal
Aviation Administration criteria and testing requirements; (6) whether the
Company will be able to successfully integrate Sinterloy into its operations;
(7) whether the Company will continue to identify suitable new acquisition
candidates, obtain financing necessary to complete such acquisitions, acquire
businesses on satisfactory terms, enter into any definitive acquisition
agreements or, if entered into, that future acquisitions will be successful or
will achieve results comparable to the Company's existing business; and (8) the
Company's continued expansion into international markets, with all the risks
inherent in doing business internationally, including unexpected changes in
regulatory requirements, export restrictions, currency controls, tariffs and
other trade barriers, potential instability, fluctuations in currency exchange
rates and potential adverse tax consequences. Any investor or potential investor
in the Company must consider these risks and others that are detailed in the
Company's Form S-4 (333-18433).
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the ordinary course of
business. In the Company's opinion, the outcome of these matters is not
anticipated to have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1) The Company filed a report on form 8-K on July 10, 1997
relating to the Company's acquisition of Sinterloy,
Inc.
2) The Company filed a report on form 8-K/A on August 1,
1997, relating to the aforementioned acquisition.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
Date: November 14, 1997 HAWK CORPORATION
By: /s/ Ronald E. Weinberg
--------------------------
Ronald E. Weinberg, Vice-Chairman of the Board
and Treasurer
By: /s/ Thomas A. Gilbride
--------------------------
Thomas A. Gilbride, Vice President- Finance
(Chief Accounting Officer)
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,629
<SECURITIES> 0
<RECEIVABLES> 24,962
<ALLOWANCES> 216
<INVENTORY> 22,567
<CURRENT-ASSETS> 54,844
<PP&E> 71,309
<DEPRECIATION> 19,346
<TOTAL-ASSETS> 170,915
<CURRENT-LIABILITIES> 24,248
<BONDS> 130,474
0
1
<COMMON> 14
<OTHER-SE> (1,463)
<TOTAL-LIABILITY-AND-EQUITY> 170,915
<SALES> 116,362
<TOTAL-REVENUES> 116,362
<CGS> 82,940
<TOTAL-COSTS> 16,866
<OTHER-EXPENSES> 122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,639
<INCOME-PRETAX> 5,795
<INCOME-TAX> 2,534
<INCOME-CONTINUING> 3,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,261
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 0
</TABLE>
