<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
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 (or 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: 4,663,957
Class B Non-Voting Common Stock, $0.01 par value: None (0)
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
PAGE
----
<S> <C> <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 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, 1998 DECEMBER 31, 1997
(UNAUDITED) (NOTE)
----------- ------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,592 $ 4,388
Accounts receivable, less allowance of $382 & $321, respectively 30,092 25,746
Inventories 22,131 22,083
Deferred income taxes 2,822 2,833
Other current assets 1,721 1,375
----------- -----------
Total current assets 63,358 56,425
Property, plant & equipment:
Land 1,199 1,218
Buildings and improvements 10,875 10,877
Machinery and equipment 58,086 57,104
Furniture and fixtures 2,524 2,326
Construction in progress 4,207 1,914
----------- -----------
76,891 73,439
Less accumulated depreciation 22,674 20,959
----------- -----------
Total property, plant and equipment 54,217 52,480
Other assets:
Intangible assets 55,775 56,539
Net assets held for sale 3,604 3,604
Shareholder notes 1,673 1,675
Other 2,219 2,363
----------- -----------
Total other assets 63,271 64,181
Total assets $ 180,846 $173,086
=========== ========
</TABLE>
3
<PAGE> 4
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
Current liabilities:
Accounts payable $ 14,085 $ 10,369
Short term borrowings 1,775 1,744
Accrued compensation 5,556 8,069
Other accrued expenses 10,043 5,494
Current portion of long-term debt 1,399 1,955
------------ ------------
Total current liabilities 32,858 27,631
Long-term liabilities:
Long-term debt 129,776 130,193
Deferred income taxes 6,302 6,322
Other 1,806 1,811
------------ ------------
Total long-term liabilities 137,884 138,326
Detachable stock warrants, subject to put option 9,300 9,300
Shareholders' equity (deficit):
Preferred stock 1 1
Class A common stock, $.01 par value; 75,000,000 shares
authorized, 4,663,957 issued and outstanding 47 14
Class B common stock, $.01 par value, 10,000,000 shares
authorized, none issued or outstanding
Additional paid-in capital 1,931 1,964
Retained earnings (deficit) 113 (3,120)
Accumulated other comprehensive income (loss) (1,288) (1,030)
------------ -------------
Total shareholders' equity (deficit) 804 (2,171)
Total liabilities and shareholders' equity (deficit) $ 180,846 $ 173,086
============ ============
<FN>
Note: The balance sheet at December 31, 1997 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 consolidated financial statements.
</TABLE>
4
<PAGE> 5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1998 1997
---- -----
<S> <C> <C>
Net sales $ 49,978 $ 36,884
Cost of sales 33,787 26,368
------------ ------------
Gross profit 16,191 10,516
Selling, technical and administrative expenses 5,703 4,554
Amortization of intangibles 899 829
------------ ------------
Total expenses 6,602 5,383
Income from operations 9,589 5,133
Interest expense 3,824 3,679
Other (income) expense, net 4 (250)
------------ -------------
Income before income taxes 5,761 1,704
Income taxes 2,448 806
------------ ------------
Net income $ 3,313 $ 898
============ ============
Earnings per share:
Basic earnings per share: $ .69 $ .18
=========== ============
Diluted earnings per share: $ .57 $ .14
=========== ============
<FN>
See notes to consolidated financial statements.
</TABLE>
5
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,313 $ 898
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,638 2,427
Accretion of discount on debt 163 163
Changes in operating assets and liabilities, net:
Accounts receivable (4,555) (5,097)
Inventories (154) (1,871)
Other assets (367) (953)
Accounts payable 3,800 859
Other liabilities 2,101 44
------------ ------------
Net cash provided by (used in) operating activities 6,939 (3,530)
Cash flows from investing activities:
Purchase of Hutchinson (10,368)
Purchases of property, plant and equipment (3,658) (1,194)
Payments received on shareholder notes 2 63
------------ ------------
Net cash used in investing activities (3,656) (11,499)
Cash flows from financing activities:
Proceeds from borrowings on short-term debt 87
Payments on long-term debt (1,086) (325)
Deferred financing costs 227
Payments of preferred stock dividends (80) (80)
Other 68
------------ ------------
Net cash used in financing activities (1,079) (110)
Net increase (decrease) in cash and cash equivalents 2,204 (15,139)
Cash and cash equivalents at beginning of period 4,388 25,774
------------ ------------
Cash and cash equivalents at end of period $ 6,592 $ 10,635
============ ============
See notes to consolidated financial statements.
</TABLE>
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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-month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Form 10-K for Hawk
Corporation (the "Company") for the year ended December 31, 1997.
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 August 1,
1997, the accounts of Sinterloy Corporation. (See Note 4). All significant
inter-company accounts and transactions have been eliminated in the accompanying
financial statements.
NOTE 2 - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which requires that an enterprise classify items
of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company adopted SFAS No. 130 in the
first quarter of 1998. The principal difference between net income as
historically reported in the consolidated statements of income and comprehensive
income is foreign currency translation recorded in shareholders' equity.
Comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 3,313 $ 898
Foreign currency translation (258) (854)
---------- ----------
Comprehensive income $ 3,055 $ 44
========== ==========
</TABLE>
7
<PAGE> 8
NOTE 3 - 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:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials and work-in-process $ 19,435 $ 18,690
Finished products 4,169 4,722
Inventory reserves (1,473) (1,329)
---------- ----------
$ 22,131 $ 22,083
========== ==========
</TABLE>
NOTE 4 - ACQUISITIONS
On August 1, 1997 the Company, through a wholly owned subsidiary, acquired
substantially all the assets (except cash) and assumed certain liabilities of
Sinterloy, Inc. for $16,400 in cash. The acquisition was accounted for as
a purchase. The excess of the purchase price over the estimated fair value of
the assets less the assumed liabilities in the amount of $11,400 is being
amortized over 30 years and is included in intangible assets. The results of
operations of Sinterloy are included in the Company's consolidated statements of
income since the date of acquisition.
The following proforma unaudited consolidated results of operations for the
three months ended March 31, 1997 give effect to the above acquisition as though
it had occurred on January 1, 1997 and include certain adjustments, such as
additional amortization expense as a result of goodwill, 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
MARCH 31, 1997
--------------
<S> <C>
Net sales $40,684
=======
Net income $ 1,662
=======
Basic earnings per share $ .34
=======
Diluted earnings per share $ .28
=======
</TABLE>
Proforma net sales, net income and earnings per share are not necessarily
indicative of the net sales, net income and earnings per share that would have
occurred had the acquisition been made at the beginning of the respective year
or the results which may occur in the future.
8
<PAGE> 9
NOTE 5 - LONG-TERM DEBT
In November 1996, the Company issued $100,000 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 10).
NOTE 6 - DETACHABLE STOCK WARRANTS, SUBJECT TO PUT OPTION
For financial reporting purposes at June 30, 1995, the fair value of the
warrants, including the put option, was estimated to be $4,600 and classified as
detachable stock warrant, subject to put option on the accompanying balance
sheets. The resulting discount is being amortized over the life of the debt as
non-cash, imputed interest. The discount is based on an effective interest rate
of 14.2%. Adjustments to the carrying value of the detachable stock warrants are
determined by management based on revisions to the estimated present value of
the future fair market value of the Company, with a corresponding charge or
credit to retained earnings. At March 31, 1998 and at December 31, 1997, the
carrying value of the warrants, including the put option, was $9,300.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the Company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required in 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
Employers' Disclosure about Pensions and Other Postretirement Benefits. This
statement does not change the recognition of measurement of pension and
postretirement benefits plans, but standardizes disclosure requirements for
pensions and other postretirement benefits, eliminates certain disclosures and
requires certain additional information. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997.
NOTE 8 - INCREASE IN AUTHORIZED SHARES AND STOCK SPLIT
On January 12, 1998, the Company amended its Certificate of Incorporation to
increase the authorized shares of Class A and Class B Common Stock to 75,000,000
and 10,000,000 respectively. In addition, on January 12, 1998, the board of
directors declared a 3.2299-for-one split of the Company's Class A and
9
<PAGE> 10
Class B Common Stock in the form of a stock dividend distributed to the holders
of record on January 12, 1998. Accordingly all number of the common shares and
per share data have been restated to reflect the stock split. The par value of
the additional shares of common stock to be issued in connection with the stock
split has been credited to common stock and a like amount charged to additional
paid in capital in the first quarter of 1998.
NOTE 9 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the previously reported primary and
fully-diluted earnings per share with basic earnings per share and diluted
earnings per share. As required, the Company adopted SFAS No. 128 in the fourth
quarter of 1997. Prior amounts have been restated to comply with SFAS No. 128
and give effect to the stock split discussed in Note 8.
Basic and dilutive earnings per share is computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1997 1998
--------------------------------
<S> <C> <C>
Net income $ 898 $ 3,313
Less: Preferred stock dividends 80 80
--------------------------------
Net income attributable to common shareholders $ 818 $ 3,233
================================
Weighted average shares:
Basic:
Basic weighted average shares 4,664 4,664
================================
Diluted:
Basic from above 4,664 4,664
Effect of warrant conversion 1,024 1,024
--------------------------------
Diluted weighted average shares 5,688 5,688
================================
Earnings per share:
Basic earnings per share $ .18 $ .69
================================
Diluted earnings per share $ .14 $ .57
================================
</TABLE>
10
<PAGE> 11
NOTE 10 - SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note 5, 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 Senior Notes. The
Guarantor Subsidiaries are direct, wholly-owned subsidiaries of the Company.
The following supplemental unaudited consolidating condensed financial
statements present:
1. Consolidating condensed balance sheets as of March 31, 1998 and
December 31, 1997, consolidating condensed statements of income
for the three months ended March 31, 1998 and 1997 and
consolidating condensed statements of cash flows for the three
months ended March 31, 1998 and 1997.
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 Senior Notes are material to investors. Therefore, separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented. The Company's 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.
11
<PAGE> 12
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
---------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 5,625 130 837 6,592
Accounts receivable, net 639 22,856 7,015 (418) 30,092
Inventories, net 17,826 4,305 22,131
Deferred income taxes 2,435 387 2,822
Other current assets 229 620 915 (43) 1,721
----------- ----------- ----------- ------------ -----------
Total current assets 8,928 41,432 13,459 (461) 63,358
Other assets:
Investment in subsidiaries 790 5,329 (6,119)
Inter-company advances, net 137,778 1,442 (14) (139,206)
Property, plant and equipment 47,697 6,520 54,217
Intangible assets 229 55,546 55,775
Other 1,673 7,150 448 (1,775) 7,496
----------- ----------- ----------- ------------ -----------
Total assets $ 149,398 $ 158,596 $ 20,413 $ (147,561) $ 180,846
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 581 $ 11,074 $ 2,848 $ (418) $ 14,085
Short term borrowings 1,775 1,775
Accrued compensation 64 4,549 943 5,556
Other accrued expenses 6,122 3,680 345 (104) 10,043
Current portion of long-term debt 906 493 1,399
----------- ----------- ----------- ----------- -----------
Total current liabilities 6,767 20,209 6,404 (522) 32,858
Long-term liabilities:
Long-term debt 127,188 1,456 1,132 129,776
Deferred income taxes 5,888 414 6,302
Other 776 1,030 1,806
Inter-company advances, net 3,040 131,776 6,104 (140,920)
----------- ----------- ----------- ------------ -----------
Total long-term liabilities 136,116 134,008 8,680 (140,920) 137,884
Total liabilities 142,883 154,217 15,084 (141,442) 170,742
Detachable stock warrants,
subject to put option 9,300 9,300
Shareholders' equity (deficit) (2,785) 4,379 5,329 (6,119) 804
------------ ----------- ----------- ------------ -----------
Total liabilities and
shareholders' equity $ 149,398 $ 158,596 $ 20,413 $ (147,561) $ 180,846
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,103 $ 469 $ 816 $ 4,388
Accounts receivable, net 77 19,402 6,656 $ (389) 25,746
Inventories, net 17,455 4,628 22,083
Deferred income taxes 890 1,545 398 2,833
Other current assets 142 560 734 (61) 1,375
----------- ----------- ----------- ------------ -----------
Total current assets 4,212 39,431 13,232 (450) 56,425
Other assets:
Investment in subsidiaries 790 4,971 (5,761)
Inter-company advances, net 132,490 1,300 11 (133,801)
Property, plant and equipment 46,115 6,365 52,480
Intangible assets 231 56,308 56,539
Other 1,675 7,297 445 (1,775) 7,642
----------- ----------- ----------- ------------ -----------
Total assets $ 139,398 $ 155,422 $ 20,053 $ (141,787) $ 173,086
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable $ 7,490 $ 3,213 $ (334) $ 10,369
Short term borrowings 1,744 1,744
Accrued compensation $ 64 7,189 816 8,069
Other accrued expenses (3,219) 8,582 247 (116) 5,494
Current portion of long-term debt 1,432 523 1,955
----------- ----------- ----------- ----------- -----------
Total current liabilities (3,155) 24,693 6,543 (450) 27,631
Long-term liabilities:
Long-term debt 127,025 2,001 1,167 130,193
Deferred income taxes 5,665 223 434 6,322
Other 780 1,031 1,811
Inter-company advances, net 2,986 126,683 5,907 (135,576)
----------- ----------- ----------- ----------- -----------
Total long-term liabilities 135,676 129,687 8,539 (135,576) 138,326
----------- ----------- ----------- ----------- -----------
Total liabilities 132,521 154,380 15,082 (136,026) 165,957
Detachable stock warrants,
subject to put option 9,300 9,300
Shareholders' equity (deficit) (2,423) 1,042 4,971 (5,761) (2,171)
------------ ----------- ----------- ------------ ------------
Total liabilities and
shareholders' equity $ 139,398 $ 155,422 $ 20,053 $ (141,787) $ 173,086
=========== =========== =========== =========== ===========
</TABLE>
13
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 44,243 $ 5,735 $ 49,978
Cost of sales 29,084 4,703 33,787
----------- ----------- -----------
Gross profit 15,159 1,032 16,191
Expenses:
Selling, technical and
administrative expenses 5,057 646 5,703
Amortization of intangible assets $ 2 897 899
----------- ----------- ----------- ----------- -----------
Total expenses 2 5,954 646 6,602
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (2) 9,205 386 9,589
Interest expense 162 3,604 122 $ (64) 3,824
Income from equity investees 3,286 213 (3,499)
Other (income) expense, net (202) 126 16 64 4
------------ ----------- ----------- ----------- -----------
Income before income taxes 3,324 5,688 248 (3,499) 5,761
Income taxes 11 2,402 35 2,448
----------- ----------- ----------- ----------- -----------
Net income $ 3,313 $ 3,286 $ 213 $ (3,499) $ 3,313
=========== =========== =========== =========== ===========
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 32,821 $ 5,012 $ (949) $ 36,884
Cost of sales 23,201 4,116 (949) 26,368
----------- ----------- ----------- ----------- -----------
Gross profit 9,620 896 10,516
Expenses:
Selling, technical and
administrative expenses 4,044 510 4,554
Amortization of intangible assets $ 2 827 829
----------- ----------- ----------- ----------- -----------
Total expenses 2 4,871 510 5,383
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (2) 4,749 386 5,133
Interest expense, net 162 3,421 96 3,679
Income from equity investees 832 109 (941)
Other (income) expense, net (274) (139) 163 (250)
----------- ----------- ----------- ----------- -----------
Income before income taxes 942 1,576 127 (941) 1,704
Income taxes 44 744 18 806
----------- ----------- ----------- ----------- -----------
Net income $ 898 $ 832 $ 109 $ (941) $ 898
=========== =========== =========== =========== ===========
</TABLE>
15
<PAGE> 16
SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net cash provided by
operating activities $ 2,600 $ 3,751 $ 588 $ 6,939
Cash flows from investing activities:
Purchase of property, plant and
equipment (3,019) (639) (3,658)
Other 2 2
------------ ----------- ----------- ------------
Net cash provided by (used in)
investing activities 2 (3,019) (639) (3,656)
Cash flows from financing activities:
Proceeds from borrowings of
short-term debt 87 87
Payments on long-term debt (1,071) (15) (1,086)
Payment of preferred stock dividend (80) (80)
------------ ----------- ----------- ------------
Net cash (used in) provided by
financing activities (80) (1,071) 72 (1,079)
Net increase (decrease) in cash and
cash equivalents 2,522 (339) 21 2,204
Cash and cash equivalents
at beginning of period 3,103 469 816 4,388
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of the period $ 5,625 $ 130 $ 837 $ 6,592
=========== =========== =========== ===========
</TABLE>
16
<PAGE> 17
SUPPLEMENTAL CONSOLIDATING CONDENSED
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities $ (4,225) $ 519 $ 176 $ (3,530)
Cash flows from investing activities:
Purchase of Hutchinson (10,368) (10,368)
Purchase of property, plant and
equipment (648) (546) (1,194)
Payments on shareholder loans 63 63
----------- ----------- ----------- -----------
Net cash used in investing activities (10,305) (648) (546) (11,499)
Cash flows from financing activities:
Payments on long-term debt (168) (157) (325)
Deferred financing costs 227 227
Payment of preferred stock dividend (80) (80)
Other 68 68
----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities (80) 127 (157) (110)
------------ ----------- ------------ ------------
Net decrease in cash and
cash equivalents (14,610) (2) (527) (15,139)
Cash and cash equivalents
at beginning of period 25,187 5 582 25,774
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 10,577 $ 3 $ 55 $ 10,635
=========== =========== =========== ===========
</TABLE>
NOTE 11 - CONTINGENCIES
At December 31, 1997, the Company had 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. In January 1998, one of the
agreements was terminated.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 62.4% of Company sales in the first three months of 1998. 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 appliances, business machines
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 $41.1 million of goodwill
reflected on the March 31, 1998 balance sheet. The annual amortization of
goodwill will result in non-cash charges to future operations of approximately
$1.8 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.
Year 2000 Compliance
- --------------------
The Company is addressing the Year 2000 compliance issue with a
corporate-wide initiative led by the Company's Manager of Information Technology
and involving coordinators for each Company location. The initiative includes
the identification of affected software, the development of a plan for
correcting that software in the most effective manner and the implementation and
monitoring of the implemented plan. In most instances, the Company will replace
or upgrade older software with new programs or systems which will handle the
year 2000 and beyond. Although the timing of these replacements is influenced by
Year 2000 compliance, in most instances they will involve capital expenditures
that would have occurred in the normal course of business in any event. The
Company expects that most of the modifications and replacements will be in place
before mid-1999.
Given the information available at this time, the Company currently
anticipates that the amount that the Company will spend to modify or replace
software in order to remediate the Year 2000 issue should not have a material
adverse effect on the Company's business, financial conditions or results of
operations.
18
<PAGE> 19
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net Sales. Sales increased by $13.1 million, or 35.5%, to $50.0 million
in the first quarter of 1998 from $36.9 million in the comparable quarter of
1997. The sales increase was attributable to the acquisition of Sinterloy in
August 1997 and strong customer demand in all of the Company's product lines.
Sales attributed to Sinterloy in the first quarter of 1998 were $5.4 million, or
41.2%, of the net sales increase.
Sales of friction products increased by $5.4 million, or 21.0%, to
$31.2 million in the first quarter of 1998 from $25.8 million in the comparable
period of 1997. The Company experienced increased sales activity in all of the
markets it serves, led by strength in the aerospace market.
Sales in the Company's powder metal lines, exclusive of Sinterloy,
increased by $2.2 million, or 36.5%, to $8.2 million in the first three months
of 1998 from $6.0 million in the comparable period of 1997.
Gross Profit. Gross profit increased by $5.7 million, or 53.9%, to
$16.2 million in the first quarter of 1998 from $10.5 million in the comparable
period of 1997. The gross profit margin increased to 32.4% in the first quarter
of 1998 from 28.5% in the comparable period in 1997. The increase was primarily
attributable to continuing benefits from the 1996 plant consolidation, the
inclusion of Sinterloy in the 1998 results, increased sales and favorable
product mix.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses
increased by $1.1 million, or 25.2%, to $5.7 million in the first quarter of
1998 from $4.6 million in the comparable period of 1997. As a percentage of
sales, ST&A expenses decreased to 11.4% in the first quarter of 1998 from
12.3% in the comparable quarter of 1997. This decrease was primarily
attributable to the increased revenues achieved in the first quarter of 1998.
During the first quarter of 1998, the Company spent $0.8 million on product
research and development, an increase of 6.8% from amounts spent in the first
quarter of 1997.
Income from Operations. Income from operations increased by $4.5
million, or 86.8%, to $9.6 million in the first quarter of 1998, from $5.1
million in the comparable period of 1997. This increase was achieved as a result
of the acquisition of Sinterloy, increased sales and favorable product mix.
Interest Expense. Interest expense increased $0.1 million, or 3.9%, to
$3.8 million in the first quarter of 1998 from $3.7 million in the comparable
period in 1997.
Income Taxes. The provision for income taxes increased to $2.4 million
in the first quarter of 1998 from $0.8 million for the comparable period in
1997, reflecting the increase in pre-tax income for the period.
Net Income. As a result of the factors noted above, net income
increased by $2.4 million, or 268.9%, to $3.3 million in the first quarter of
1998 from $0.9 million in the comparable quarter of 1997.
19
<PAGE> 20
Liquidity and Capital Resources
- -------------------------------
As a result of the recent acquisitions by the Company 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. In the first three months of 1998, interest expense was equal to
55.1% of the Company's cash flow from operations.
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 March 31, 1998, there were no amounts outstanding under
the Revolving Credit Facility. Concurrently with the closing of the proposed
initial public offering of the Class A Common Stock, the Company expects to
enter into a new $50.0 million Revolving Credit Facility and terminate the
existing Revolving Credit Facility.
As of March 31, 1998 the Company was in compliance with the terms of
its indebtedness.
Net cash provided by operations was $6.9 million for the first quarter
of 1998 compared to net cash used of $3.5 million in the comparable period in
1997. This change was primarily a result of increased net income and an improved
working capital position as of March 31, 1998.
Net cash used in investing activities was $3.7 million and $11.5
million for the quarters ending March 31, 1998 and 1997, respectively. The cash
used in investing activities in the first quarter of 1998 was used primarily for
purchases of property, plant and equipment.
Net cash used in financing activities was $1.1 million and $0.1
million used in financing activities in the first quarter of 1998 was used
primarily to repay outstanding principal on notes issued in connection with the
acquisition of Hutchinson.
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) making additional
strategic acquisitions of complementary businesses.
The Company believes that cash flow from operating activities, funds
available from the proposed sale of the Company's Class A Common Stock in an
initial public offering, and additional funds available under the existing or
proposed new 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, complete its initial public offering or
borrow under its existing Revolving Credit Facility or the proposed new
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.
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 growth of existing markets and its ability to expand into new markets, to
identify and acquire complementary businesses and to attract new sources of
20
<PAGE> 21
financing and complete its initial public offering, are forward-looking
statements that involve risks and uncertainties. These risks and uncertainties
include, but are not limited to: (1) the effect of the Company's debt service
requirements on funds available for operations and future business opportunities
and the Company's vulnerability to adverse general economic and industry
conditions and competition; (2) the effect of any future acquisitions by the
Company on its indebtedness and on the funds available for operations and future
business opportunities; (3) the effect of competition by manufacturers using new
or different technologies; (4) the effect on the Company's international
operations of unexpected changes in regulatory requirements, export
restrictions, currency controls, tariffs and other trade barriers, difficulties
in staffing and managing foreign operations, political and economic instability,
fluctuations in currency exchange rates, difficulty in accounts receivable
collection and potentially adverse tax consequences; (5) the ability of Company
subsidiaries, Hutchinson and S.K. Wellman, to negotiate new agreements with the
unions representing certain of their employees, which expire in June 1998 and
December 1999, respectively, on terms favorable to the Company or without
experiencing work stoppages; (6) the effect of any interruption in the Company's
supply of raw materials or a substantial increase in the price of any of the raw
materials; (7) the continuity of business relationships with major customers;
(8) the effect of product mix on margins; and (9) and the ability of the
Company's products to meet stringent Federal Aviation Administration criteria
and testing requirements. Any investor or potential investor in the Company must
consider these risks and others that are detailed in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 and the Company's Form S-1, as
amended (Registration No. 333-40535).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in lawsuits that arise in the ordinary course
of its business. In the Company's opinion, the outcome of these matters will not
have a material adverse effect on the Company's business, financial condition,
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 9, 1998, the Company held its Annual Meeting of
Stockholders. The first matter voted on was the election of Paul R. Bishop,
Norman C. Harbert, Byron S. Krantz, Dan T. Moore, III, William J. O'Neill, Jr.
and Ronald E. Weinberg as Directors of the Company. Each was re-elected as a
Director for a term of one year, each receiving 4,663,957 votes (adjusted for
the January 1998 stock split) for election and no votes against or withheld.
The second proposal was for the approval of the Company's 1997 Stock
Option Plan, which would become effective upon the closing of an initial public
offering of the Company's Class A Common Stock. The proposal was approved with
4,663,957 votes in favor of the 1997 Stock Option Plan and no votes against. The
1997 Stock Option Plan, as filed with the Securities and Exchange Commission on
21
<PAGE> 22
December 30, 1997 in the Company's Registration Statement on Form S-1
(Registration No. 333-40535), is hereby incorporated by reference.
The third proposal was for the approval of the amendment and
restatement of the Company's Amended and Restated Certificate of Incorporation
(the "Second Amended and Restated Certificate of Incorporation") to increase the
number of authorized shares of Class A Common Stock from 2,200,000 to 75,000,000
and Class B Common Stock from 375,000 to 10,000,000 and to make certain other
changes that would become effective upon the closing of an initial public
offering of the Company's Class A Common Stock. The proposal was approved with
4,663,957 votes in favor of the amendment and restatement and no votes against.
The Second Amended and Restated Certificate of Incorporation, as filed with the
Securities and Exchange Commission on April 21, 1998 in the Company's
Registration Statement on Form S-1 (Registration No. 333-40535), is hereby
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
On February 27, 1998, the Company filed a Form 8-K
reporting under Item 5 thereof that the Company issued a
press release, dated January 26, 1998, announcing that
due to unfavorable market conditions, it decided at that
time to withdraw its previously announced initial public
offering of 5,135,000 shares of Class A Common Stock. On
April 21, 1998, the Company announced that it planned to
go forward with its initial public offering and filed an
amendment to its registration statement on Form S-1 with
the Securities and Exchange Commission.
22
<PAGE> 23
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.
Date: May 5, 1998 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)
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,592
<SECURITIES> 0
<RECEIVABLES> 30,474
<ALLOWANCES> 382
<INVENTORY> 22,131
<CURRENT-ASSETS> 63,358
<PP&E> 76,891
<DEPRECIATION> 22,674
<TOTAL-ASSETS> 180,846
<CURRENT-LIABILITIES> 32,858
<BONDS> 129,776
0
1
<COMMON> 47
<OTHER-SE> 756
<TOTAL-LIABILITY-AND-EQUITY> 180,846
<SALES> 49,978
<TOTAL-REVENUES> 49,978
<CGS> 33,787
<TOTAL-COSTS> 40,389
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