<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 SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD ___________ TO __________.
COMMISSION FILE NUMBER 001-13797
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: 8,540,920
Class B Common Stock, $0.01 par value: None (0)
<PAGE> 2
PAGE
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
Item 3. Quantitative and Qualitative Disclosures about Market 25
Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE)
----------- ------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,935 $ 14,317
Accounts receivable, less allowance of $340 and $400, respectively 30,724 25,056
Inventories 25,701 25,139
Deferred income taxes 1,748 1,837
Other current assets 3,787 5,003
----------- -----------
Total current assets 64,895 71,352
Property, plant and equipment:
Land 1,542 1,229
Buildings and improvements 14,229 13,698
Machinery and equipment 80,594 70,532
Furniture and fixtures 3,337 3,147
Construction in progress 6,270 4,636
----------- -----------
105,972 93,242
Less accumulated depreciation 35,863 28,923
----------- -----------
Total property, plant and equipment 70,109 64,319
Other assets:
Intangible assets 65,923 60,604
Net assets held for sale - 3,604
Shareholder notes 1,010 1,010
Other 2,876 2,557
----------- -----------
Total other assets 69,809 67,775
----------- -----------
Total assets $ 204,813 $ 203,446
=========== =========
</TABLE>
3
<PAGE> 4
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,463 $ 10,590
Short-term borrowings 1,020 1,019
Accrued compensation 6,399 8,766
Other accrued expenses 7,027 4,944
Current portion of long-term debt 7,177 6,181
----------- -----------
Total current liabilities 33,086 31,500
Long-term liabilities:
Long-term debt 94,280 96,366
Deferred income taxes 9,165 9,251
Other 1,895 1,914
----------- -----------
Total long-term liabilities 105,340 107,531
Shareholders' equity:
Series D preferred stock, $.01 par value; an aggregate liquidation value of
$1,530, plus any accrued and unpaid dividends with 9.8% cumulative
dividend (1,530 shares
authorized, issued and outstanding) 1 1
Class A common stock, $.01 par value; 75,000,000
shares authorized, 9,187,750 issued and 8,540,920 outstanding 92 92
Class B common stock, $.01 par value, 10,000,000
shares authorized, none issued or outstanding
Additional paid-in capital 54,645 54,645
Retained earnings 17,875 12,310
Accumulated other comprehensive loss (1,435) (640)
Treasury stock, at cost (4,791) (1,993)
------------ ------------
Total shareholders' equity 66,387 64,415
Total liabilities and shareholders' equity $ 204,813 $ 203,446
=========== =========
</TABLE>
Note: The balance sheet at December 31, 1998 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.
4
<PAGE> 5
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 140,781 $ 140,120 $ 45,626 $ 43,401
Cost of sales 103,264 94,985 34,938 29,607
----------- ----------- ----------- -----------
Gross profit 37,517 45,135 10,688 13,794
Selling, technical and
administrative expenses 19,597 17,213 6,548 5,632
Amortization of intangibles 2,816 2,648 957 880
----------- ----------- ----------- -----------
Total expenses 22,413 19,861 7,505 6,512
Income from operations 15,104 25,274 3,183 7,282
Interest expense 7,095 9,531 2,296 2,406
Interest income (399) (741) (266) (250)
Other (income) expense, net (780) 19 (451) 2
------------ ----------- ------------ -----------
Income before income taxes
and extraordinary charge 9,188 16,465 1,604 5,124
Income taxes 3,512 7,003 369 2,176
----------- ----------- ----------- -----------
Income before extraordinary charge 5,676 9,462 1,235 2,948
Extraordinary charge - 3,079 - -
----------- ----------- ----------- -----------
Net income $ 5,676 $ 6,383 $ 1,235 $ 2,948
=========== ============ ============ ============
Earnings per share:
Basic:
Earnings before
extraordinary charge $ .64 $ 1.32 $ .14 $ .32
Extraordinary charge - (.44) - -
----------- ----------- ----------- -----------
Basic earnings per share $ .64 $ .88 $ .14 $ .32
=========== ============ ============ ============
Diluted:
Earnings before
extraordinary charge $ .63 $ 1.23 $ .14 $ .32
Extraordinary charge - (.41) - -
----------- ----------- ----------- -----------
Diluted earnings per share $ .63 $ .82 $ .14 $ .32
=========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,676 $ 6,383
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,133 8,314
Accretion of discount on debt 238
Deferred income taxes 23
Extraordinary charge, net of income taxes 3,079
Gain on sale of property, plant and equipment (95)
Changes in operating assets and liabilities, net:
Accounts receivable (3,470) 132
Inventories 672 (940)
Other assets 741 89
Accounts payable (124) 542
Other liabilities 292 1,969
----------- -----------
Net cash provided by operating activities 13,848 19,806
Cash flows from investing activities:
Purchase of marketable securities (4,130)
Business acquisitions (14,500) (9,100)
Proceeds from sale of property, plant and equipment 3,648
Purchases of property, plant and equipment (6,873) (11,127)
Payments received on shareholder notes 665
----------- -----------
Net cash used in investing activities (17,725) (23,692)
Cash flows from financing activities:
Payments on short-term debt (636)
Proceeds from borrowings on short-term debt 91
Proceeds from borrowings on long-term debt 26,051 35,000
Payments on long-term debt (30,738) (69,544)
Net proceeds from issuance of common stock 52,772
Deferred financing costs (850)
Payments of preferred stock dividend (111) (219)
Repurchase of common stock (2,798)
Prepayment premium on early retirement of debt (3,588)
----------- ------------
Net cash (used in) provided by financing activities (7,505) 12,935
------------ -----------
Net (decrease) increase in cash and cash equivalents (11,382) 9,049
Cash and cash equivalents at the beginning of the period 14,317 4,388
----------- -----------
Cash and cash equivalents at the end of the period $ 2,935 $ 13,437
=========== ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited 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 period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included by reference in the Form 10-K for Hawk
Corporation (the "Company") for the year ended December 31, 1998.
The Company, through its business segments, designs, engineers, manufactures and
markets specialized components used in a variety of aerospace, industrial and
other commercial applications.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries and also include, effective June 1, 1998, the
accounts of Clearfield Powdered Metals, Inc. ("Clearfield") and effective
February 26, 1999, the accounts of Allegheny Powder Metallurgy, Inc.
("Allegheny"). All significant inter-company accounts and transactions have been
eliminated in the accompanying financial statements.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires all derivatives to be
recognized as either assets or liabilities in the balance sheet and measured at
fair value. The Company does not anticipate that the adoption of the statement
will have a significant effect on its results of operations or financial
position. The Company expects to adopt the new statement effective January 1,
2001.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,676 $ 6,383 $ 1,235 $ 2,948
Marketable securities (75) (75)
Foreign currency translation (795) 444 293 582
--------- --------- ----------- -----------
Comprehensive income $ 4,881 $ 6,752 $ 1,528 $ 3,455
========= ========= =========== ===========
</TABLE>
7
<PAGE> 8
NOTE 4 - 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials and work-in-process $19,326 $20,230
Finished products 7,775 6,334
Inventory reserves (1,400) (1,425)
--------- ---------
$25,701 $25,139
======= =======
</TABLE>
NOTE 5 - LONG-TERM DEBT
In May 1998, the Company entered into a $35,000 Term Loan Facility, with $1,250
maturing quarterly, beginning September 30, 1998 with the remaining principal of
$12,500 due on March 31, 2003. Additionally, in May 1998, the Company executed a
$50,000 Revolving Credit Facility that matures March 31, 2003. The Company has
$500 outstanding under the Revolving Credit Facility as of September 30, 1999.
Concurrent with the Company's Initial Public Offering ("IPO") in May 1998, the
Company redeemed $35,000 of its then outstanding $100,000 10.25% Senior Notes
due December 1, 2003 (the "Senior Notes") (See Note 6.) The Senior Notes, Term
Loan and Revolving Credit Facility 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"). (See Note 10.)
NOTE 6 - SHAREHOLDERS' EQUITY
In May 1998, the Company completed its IPO of 3,500,000 shares of common stock
at an offering price to the public of $17.00 per share.
NOTE 7 -STOCK REPURCHASE PROGRAM
In December 1998, the Board of Directors approved a program to repurchase the
Company's common stock on the open market at prevailing prices. The repurchase
was primarily funded from operating cash flows and the shares are being held as
treasury stock. The Company repurchased 153,300 shares of its common stock
during the three-month period ended September 30, 1999. From January 1, 1999 to
September 30, 1999, the Company purchased 367,300 shares at an average price of
$7.57 per share.
8
<PAGE> 9
NOTE 8 - EARNINGS PER SHARE
Basic and dilutive earnings per share is computed as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Income available to common shareholders:
Income before extraordinary item $ 5,676 $ 9,462 $ 1,235 $ 2,948
Less: Preferred stock dividends (111) (219) (37) (38)
-------- -------- ------- --------
Income before extraordinary item attributable
to common shareholders 5,565 9,243 1,198 2,910
======== ======== ======= ========
Net income 5,676 6,383 1,235 2,948
Less: Preferred stock dividends (111) (219) (37) (38)
-------- -------- ------ --------
Net income attributable to common shareholders 5,565 6,164 1,198 2,910
======== ======== ======= ========
Weighted average shares:
Basic:
Basic weighted average shares 8,696 7,017 8,621 9,188
Diluted:
Basic from above 8,696 7,017 8,621 9,188
Effect of warrant conversion 492
Effect of note conversion and options 101 15 125 29
-------- -------- ------- --------
Diluted weighted average shares 8,797 7,524 8,746 9,217
======== ======== ======= ========
Earnings per share:
Basic:
Earnings before extraordinary charge $ . 64 $ 1.32 $ . 14 $ .32
Extraordinary charge - (.44) - -
--------- -------- -------- --------
Basic earnings per share $ .64 $ .88 $ .14 $ .32
======== ======== ======= ========
Diluted:
Earnings before extraordinary charge $ .63 $ 1.23 $ . 14 $ .32
Extraordinary charge - (.41) - -
-------- --------- ------- --------
Diluted earnings per share $ .63 $ .82 $ .14 $ .32
======== ======== ======= ========
</TABLE>
9
<PAGE> 10
NOTE 9 - BUSINESS SEGMENTS
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 and descriptive information about
operating segments. The Company adopted SFAS No. 131, effective December 31,
1998. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of the segment information.
The Company operates in two primary business segments: friction products and
powder metal. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately based on
fundamental differences in their operations.
The friction products segment engineers, manufactures and markets specialized
components, used in a variety of aerospace, industrial and commercial
applications. The Company, through this segment, is a worldwide supplier of
friction components for brakes, clutches and transmissions.
The powder metal segment engineers, manufactures and markets specialized
components, used primarily in industrial applications. The Company, through this
segment, targets three areas of the powder metal component marketplace: high
precision components that are used in fluid power applications, large structural
powder metal parts used in construction, agricultural and truck applications,
and smaller, high volume parts.
The other segment consists of corporate and operating segments, which do not
meet the quantitative thresholds for determining reportable segments. The
operating segments include the manufacturing of die-cast aluminum rotors and a
stamping operation.
The information by segment is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from External Customers:
Friction Products $ 75,762 $ 85,538 $ 24,748 $ 25,440
Powder Metal 50,921 39,799 16,324 13,380
Other 14,098 14,783 4,554 4,581
-------- -------- -------- --------
Consolidated $ 140,781 $ 140,120 $ 45,626 $ 43,401
Depreciation and Amortization:
Friction Products $ 5,950 $ 5,340 $ 1,998 $ 1,779
Powder Metal 3,422 2,229 1,194 834
Other 761 745 250 235
-------- -------- -------- --------
Consolidated $ 10,133 $ 8,314 $ 3,442 $ 2,848
Operating Income:
Friction Products $ 6,771 $ 13,995 $ 1,380 $ 4,340
Powder Metal 8,657 10,379 2,098 2,805
Other (324) 900 (295) 137
-------- -------- -------- --------
Consolidated $ 15,104 $ 25,274 $ 3,183 $ 7,282
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Total Assets:
Friction Products $ 113,872 $ 115,141
Powder Metal 71,020 53,034
Other 19,921 35,271
----------- -----------
Consolidated $ 204,813 $ 203,446
</TABLE>
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 or indirect wholly-owned subsidiaries of the
Company.
The following supplemental unaudited consolidating condensed financial
statements present (in thousands):
1. Consolidating condensed balance sheets as of September 30, 1999 and
December 31, 1998, consolidating condensed statements of income for
the three and nine month periods ended September 30, 1999 and 1998 and
consolidating condensed statements of cash flows for the nine months
ended September 30, 1999 and 1998.
2. Hawk Corporation ("Parent") combined Guarantor Subsidiaries and
combined Non-Guarantor Subsidiaries (consisting of the Company's
non-U.S. subsidiaries) 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.
11
<PAGE> 12
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 536 $ 641 $ 1,758 $ 2,935
Accounts receivable, net 24,072 6,652 30,724
Inventories, net 20,750 4,951 25,701
Deferred income taxes 1,388 360 1,748
Other current assets 1,671 1,647 469 3,787
----------- --------- ----------- ---------- -----------
Total current assets 3,595 47,110 14,190 64,895
Investment in subsidiaries 792 5,750 $ (6,542)
Inter-company advances, net 154,322 4,040 460 (158,822)
Property, plant and equipment 63,109 7,000 70,109
Intangible assets 217 65,706 65,923
Other 1,010 3,375 511 (1,010) 3,886
----------- --------- ----------- ---------- -----------
Total assets $ 159,936 $ 189,090 $ 22,161 $ (166,374) $ 204,813
=========== ========= =========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,862 $ 2,601 $ 11,463
Short term borrowings 1,020 1,020
Accrued compensation $ 8 5,363 1,028 6,399
Other accrued expenses 3,628 3,074 325 7,027
Current portion of long-term debt 5,000 1,745 432 7,177
----------- --------- ----------- ---------- -----------
Total current liabilities 8,636 19,044 5,406 33,086
Long-term liabilities:
Long-term debt 89,250 3,994 1,036 94,280
Deferred income taxes 8,150 417 598 9,165
Other 734 1,161 1,895
Inter-company advances, net 1,127 150,495 8,210 $ (159,832)
----------- --------- ----------- -------- -----------
Total long-term liabilities 98,527 155,640 11,005 (159,832) 105,340
----------- --------- ----------- -------- -----------
Total liabilities 107,163 174,684 16,411 (159,832) 138,426
Shareholders' equity 52,773 14,406 5,750 (6,542) 66,387
----------- --------- ----------- --------- -----------
Total liabilities and
shareholders' equity $ 159,936 $ 189,090 $ 22,161 $ (166,374) $ 204,813
=========== ========= =========== ========== ===========
</TABLE>
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 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 $ 12,878 $ 46 $ 1,393 $ 14,317
Accounts receivable, net 18,399 6,657 25,056
Inventories, net 19,707 5,432 25,139
Deferred income taxes 1,388 449 1,837
Other current assets 2,003 2,071 929 5,003
------------ ---------- --------- ---------- ----------
Total current assets 16,269 40,223 14,860 71,352
Investment in subsidiaries 791 6,127 $ (6,918)
Inter-company advances, net 143,487 (1,309) (20) (142,158)
Property, plant and equipment 56,082 8,237 64,319
Intangible assets 223 60,381 60,604
Other 1,010 6,784 490 (1,113) 7,171
------------ ---------- --------- ----------- ----------
Total assets $ 161,780 $ 168,288 $ 23,567 $ (150,189) $ 203,446
============ ========== ========= =========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 7,189 $ 3,401 $ 10,590
Short term borrowings 1,019 1,019
Accrued compensation $ 8 7,638 1,120 8,766
Other accrued expenses 1,171 3,384 389 4,944
Current portion of long-term debt 5,000 549 632 6,181
------------ ---------- --------- ----------- ----------
Total current liabilities 6,179 18,760 6,561 31,500
Long-term liabilities:
Long-term debt 92,500 2,444 1,422 96,366
Deferred income taxes 8,150 417 684 9,251
Other 740 1,174 1,914
Inter-company advances, net 1,125 134,547 7,599 $ (143,271)
------------ ---------- --------- ----------- ----------
Total long-term liabilities 101,775 138,148 10,879 (143,271) 107,531
------------ ---------- --------- ----------- ----------
Total liabilities 107,954 156,908 17,440 (143,271) 139,031
Shareholders' equity 53,826 11,380 6,127 (6,918) 64,415
------------ ---------- --------- ----------- ----------
Total liabilities and shareholders'
equity $ 161,780 $ 168,288 $ 23,567 $ (150,189) $ 203,446
============ ========== ========= =========== ==========
</TABLE>
13
<PAGE> 14
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 125,272 $ 15,509 $ 140,781
Cost of sales 90,195 13,069 103,264
----------- ----------- ----------- ----------- -----------
Gross profit 35,077 2,440 37,517
Selling, technical and
administrative expenses $ (65) 17,439 2,223 19,597
Amortization of intangibles 7 2,807 2 2,816
----------- ----------- ----------- ----------- -----------
Total expenses (58) 20,246 2,225 22,413
Income from operations 58 14,831 215 15,104
Interest (income) expense, net (2,850) 9,215 331 6,696
Income (loss) from equity investees 3,820 (225) $ (3,595)
Other (income) expense, net (4) (821) 45 (780)
------------ ------------ ----------- ----------- ------------
Income before income taxes 6,732 6,212 (161) (3,595) 9,188
Income taxes 1,056 2,392 64 3,512
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 5,676 $ 3,820 $ (225) $ (3,595) $ 5,676
=========== ============ ============= ============ ============
</TABLE>
14
<PAGE> 15
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 123,494 $ 16,626 $ 140,120
Cost of sales 81,467 13,518 94,985
----------- ----------- ----------- ----------- -----------
Gross profit 42,027 3,108 45,135
Selling, technical and
administrative expenses $ 7 15,260 1,946 17,213
Amortization of intangibles 7 2,641 2,648
----------- ----------- ----------- ----------- -----------
Total expenses 14 17,901 1,946 19,861
Income (loss) from operations (14) 24,126 1,162 25,274
Interest (income) expense (609) 9,016 383 8,790
Income from equity investees 8,118 468 $ (8,586)
Other (income) expense, net (17) 36 19
----------- ----------- ----------- ----------- -----------
Income before extraordinary item
and income taxes 8,713 15,595 743 (8,586) 16,465
Income taxes 267 6,461 275 7,003
Income before extraordinary item 8,446 9,134 468 (8,586) 9,462
Extraordinary items 2,063 1,016 3,079
----------- ----------- ----------- ----------- -----------
Net income $ 6,383 $ 8,118 $ 468 $ (8,586) $ 6,383
=========== =========== =========== ============ ===========
</TABLE>
15
<PAGE> 16
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 40,691 $ 4,935 $ 45,626
Cost of sales 30,953 3,985 34,938
----------- ----------- ----------- ----------- -----------
Gross profit 9,738 950 10,688
Selling, technical and
administrative expenses 60 5,577 911 6,548
Amortization of intangibles $ 3 952 2 957
----------- ----------- ----------- ----------- -----------
Total expenses 63 6,529 913 7,505
Income (loss) from operations (63) 3,209 37 3,183
Interest (income) expense, net (922) 2,841 111 2,030
Income from equity investees 637 (109) $ (528)
Other expense (income), net 25 (540) 64 (451)
----------- ------------ ----------- ----------- ------------
Income before income taxes 1,471 799 (138) (528) 1,604
Income taxes 236 162 (29) 369
----------- ----------- ------------ ----------- -----------
Net income (loss) $ 1,235 $ 637 $ (109) $ (528) $ 1,235
=========== ============ ============= ============ ============
</TABLE>
16
<PAGE> 17
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 38,583 $ 4,818 $ 43,401
Cost of sales 25,705 3,902 29,607
----------- ----------- ----------- ----------- -----------
Gross profit 12,878 916 13,794
Selling, technical and
administrative expenses $ (33) 5,061 604 5,632
Amortization of intangibles 3 877 880
----------- ----------- ----------- ----------- -----------
Total expenses (30) 5,938 604 6,512
Income from operations 30 6,940 312 7,282
Interest (income) expense, net (250) 2,291 115 2,156
Income from equity investees 2,841 75 $ (2,916)
Other expense (income), net 70 (90) 22 2
----------- ------------ ----------- ----------- -----------
Income before income taxes 3,051 4,814 175 (2,916) 5,124
Income taxes 103 1,973 100 2,176
----------- ----------- ----------- ----------- -----------
Net income $ 2,948 $ 2,841 $ 75 $ (2,916) $ 2,948
=========== ============ ============ ============ ============
</TABLE>
17
<PAGE> 18
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 8,317 $ 4,220 $ 1,311 $ 13,848
Cash flows from investing activities:
Business acquisitions (14,500) (14,500)
Purchase of property, plant and
equipment (6,312) (561) (6,873)
Sales of property, plant and
equipment 3,648 3,648
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities (14,500) (2,664) (561) (17,725)
Cash flows from financing activities:
Payments on short-term borrowings 91 91
Proceeds from borrowings on
long-term debt 26,051 26,051
Payments on long-term debt (29,301) (961) (476) (30,738)
Payment of preferred
stock dividend (111) (111)
Repurchase of common stock (2,798) (2,798)
------------ ----------- ----------- ----------- ------------
Net cash used in
financing activities (6,159) (961) (385) (7,505)
------------ ------------ ------------ ----------- ------------
Net (decrease) increase in cash and
cash equivalents (12,342) 595 365 (11,382)
Cash and cash equivalents
at beginning of period 12,878 46 1,393 14,317
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 536 $ 641 $ 1,758 $ 2,935
=========== ============ ============ =========== ============
</TABLE>
18
<PAGE> 19
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by
operating activities $ 3,835 $ 12,852 $ 3,119 $ 19,806
Cash flows from investing activities:
Purchase of marketable securities (4,130) (4,130)
Business acquisitions (9,100) (9,100)
Purchase of property, plant and
equipment (9,645) (1,482) (11,127)
Payments received on
shareholder loans 665 665
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities (12,565) (9,645) (1,482) (23,692)
Cash flows from financing
activities:
Payments on short term borrowings (636) (636)
Proceeds from borrowings on
long-term debt 35,000 35,000
Net proceeds from issuance of
common stock 52,722 52,772
Payments on long term debt (66,250) (2,779) (515) (69,544)
Deferred financing costs (850) (850)
Payment of preferred
stock dividend (219) (219)
Payments on early retirement
of debt (3,588) (3,588)
------------ ----------- ----------- ----------- ------------
Net cash provided by
financing activities 17,715 (3,629) (1,151) 12,935
----------- ------------ ------------ ----------- -----------
Net (decrease) increase in cash and
cash equivalents 8,985 (422) 486 9,049
Cash and cash equivalents
at beginning of period 3,103 469 816 4,388
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 12,088 $ 47 $ 1,302 $ 13,437
=========== ============ ============ =========== ============
</TABLE>
19
<PAGE> 20
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 consolidated financial statements and notes thereto appearing
elsewhere in this report.
GENERAL
Hawk operates primarily in two reportable segments: Friction Products
("Friction") and Powder Metal ("PM"). The Company's friction products are made
from proprietary formulations of composite materials that primarily consist of
metal powders and synthetic natural fibers. Friction products, which represented
54% of the Company's sales in the first nine months of 1999, are the replacement
elements used in brakes, clutches and transmissions to absorb vehicular energy
and dissipate it through heat and normal mechanical wear. Friction products
manufactured by the Company include friction linings for use in brakes,
transmissions and clutches in aerospace, construction equipment, agricultural,
truck and specialty vehicle markets. The Company's powder metal components are
made from formulations of composite powder metal alloys. The PM segment, which
represented 36% of Company sales in the first nine months of 1999, manufactures
a variety of components for use in fluid power, truck, lawn and garden,
construction, agriculture, home appliance, automotive and office equipment
markets. 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 expects sales to the agricultural and mining and forestry components
of its construction markets, which were soft in the first nine months of 1999,
to remain under pressure for the remainder of 1999 and into 2000. Compared to
the fourth quarter of 1998, sales will also be adversely affected in the fourth
quarter of 1999 by the significant reduction in sales from a customer in the PM
segment, which has moved the majority of its production offshore.
RECENT DEVELOPMENT
On October 29, 1999, the Company acquired Quarter Master Industries, Inc.
("Quarter Master"), a manufacturer of premium branded clutch assemblies for high
performance automotive racing, including National Association for Stock Car Auto
Racing (NASCAR) and Indy Racing League (IRL). In addition to clutch assemblies,
Quarter Master manufactures and sells other precision engineered components,
including gears, bearings, driveshafts, bellhousings and starters. Quarter
Master is located in Lake Zurich, Illinois. The transaction was financed using
available cash.
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
Net Sales. Net sales increased $2.2 million, or 5.1%, to $45.6 million in the
third quarter of 1999 from $43.4 million in the comparable quarter of 1998. The
sales increase was attributable to the acquisition of Allegheny in February
1999. The sales increase was offset by the continued softness in the
agricultural and construction markets served by the Company and the shift to
offshore production of a major product line by one of the Company's powder metal
customers at the Company's Sinterloy facility. Sales in the Company's PM segment
increased $2.9 million, or 21.6%, to $16.3 million in the third quarter of 1999
from $13.4 million in the comparable quarter of 1998. Sales in the PM segment,
exclusive of Allegheny, decreased $0.7 million, or 5.5%, to $12.7 million in the
third quarter of 1999 from $13.4 million in the comparable quarter of 1998. The
decrease was attributable to a customer of the Company's Sinterloy facility
shifting production overseas and softness in the agriculture market served by
the Company's PM facilities. Sales in the Friction segment, which continue to be
affected by decreased demand in agriculture, mining and forestry markets,
decreased $0.7 million, or 2.8%, to $24.7 million in the third quarter of 1999
from $25.4 million in the comparable quarter of 1998. Demand in the agricultural
markets remains weak as the farm sector continues to feel
20
<PAGE> 21
the impact of depressed commodity prices. Sales to the mining and forestry
markets have declined as a result of the economic downturn affecting Asia and
South America.
Gross Profit. Gross profit decreased $3.1 million, or 22.5%, to $10.7 million in
the third quarter of 1999 from $13.8 million in the comparable quarter of 1998.
The decrease is primarily attributable to the underutilization of manufacturing
capacity as a result of the sales volume decreases in the Friction segment,
product mix changes, and a 26.3% increase in depreciation primarily as a result
of the Company's capital expansion program begun in 1998. As a result of these
factors, the gross profit margin decreased to 23.5% in the third quarter of 1999
from 31.8% in the comparable period of 1998.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$0.9 million, or 16.1%, to $6.5 million in the third quarter of 1999 from $5.6
million in the comparable period of 1998. The acquisition of Allegheny and
expenses associated with the opening of the Company's Mexican facility
represented 77.8% of the total increase in ST&A during the third quarter of
1999. As a percent of sales, ST&A expenses increased to 14.3% of sales in the
third quarter of 1999 from 12.9% in the comparable quarter of 1998. This
increase was due primarily to the sales volume declines experienced by the
Company in its Friction segment and the addition of the ST&A expenses of
Allegheny and Mexico.
Income from Operations. Income from operations decreased by $4.1 million, or
56.2%, to $3.2 million in the third quarter of 1999 from $7.3 million in the
comparable quarter of 1998. Income from operations as a percent of net sales
decreased to 7.0% in the third quarter of 1999 from 16.8% in the comparable
quarter of 1998, reflecting decreased sales activity, product mix, gross margin
deterioration and increased depreciation expense. Operating income from the
Company's Friction segment decreased $2.9 million, or 67.4%, to $1.4 million in
the third quarter of 1999 from $4.3 million in the comparable quarter of 1998.
This decline was primarily driven by the sales volume declines in the
agriculture, mining and forestry markets. Operating income from the Company's PM
segment decreased $0.7 million, or 25.0%, to $2.1 million in the third quarter
of 1999 from $2.8 million in the comparable quarter of 1998. The decline in this
segment was caused by the loss of production to an offshore site and a shift to
lower margin products during the quarter. This decline was partially offset by
the contribution of operating income from the acquisition of Allegheny.
Interest Expense. Interest expense decreased $0.1 million, or 4.2%, to $2.3
million in the third quarter of 1999 from $2.4 million in the comparable quarter
of 1998. The decrease is attributable primarily to lower debt levels partially
offset by higher interest rates during the quarter.
Other (Income) Expense. During the third quarter of 1999, the Company reported
other income of $0.5 million. This income resulted from the collection of a
contingent receivable relating from the purchase of S. K. Wellman Corp. in 1995,
partially offset by a loss on the sale of an unused manufacturing facility in
LaVergne, Tennessee during the quarter.
Income Taxes. The provision for income taxes decreased to $0.4 million in the
third quarter of 1999 from $2.2 million in the comparable quarter of 1998,
reflecting the decrease in pre-tax income and the availability of jobs tax and
investment tax credits available to the Company. The Company's effective tax
rate during the third quarter of 1999 was 23.0% compared to 42.5% in the
comparable quarter of 1998. The decrease in the effective rate during the third
quarter of 1999 resulted primarily from the Company qualifying for the tax
credits.
Net Income. As a result of the factors discussed above, net income decreased
$1.7 million, or 58.6%, to $1.2 million in the third quarter of 1999 from $2.9
million in the comparable period of 1998.
21
<PAGE> 22
FIRST NINE MONTHS OF 1999 COMPARED TO FIRST NINE MONTHS OF 1998
Net Sales. Net sales increased by $0.7 million, or 0.5%, to $140.8 million
during the first nine months of 1999 from $140.1 million during the first nine
months of 1998. The sales increase during the period was attributable to the
acquisitions of Clearfield and Allegheny offset by the softness in the
agricultural and construction markets served by the Company and the shift to
offshore production of a major product line by one of the Company's powder metal
customers at the Company's Sinterloy facility. In addition, sales to the
aerospace market in the Friction segment declined 7.0% from record levels in
1998. Sales in the Friction segment decreased 11.4% to $75.8 million for the
nine months ended September 1999 from $85.5 million in the comparable period of
1998. Sales in the Company's PM segment increased 27.9% to $50.9 million for the
first nine months of 1999 from $39.8 million in the comparable period of 1998.
Exclusive of Clearfield and Allegheny, sales of powder metal products decreased
by 10.8%.
Gross Profit. Gross profit decreased $7.6 million, or 16.9%, to $37.5 million
during the first nine months of 1999 from $45.1 million during the first nine
months of 1998. The gross profit margin decreased to 26.6% during the first nine
months of 1999 from 32.2% during the comparable period of 1998. The decrease was
primarily due to the underutilization of manufacturing capacity as a result of
sales volume decreases in the Friction segment, product mix changes, and a 28.1%
increase in depreciation primarily as a result of the Company's capital
expansion program begun in 1998.
Selling, Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$2.4 million, or 14.0%, to $19.6 million during the first nine months of 1999
from $17.2 million during the first nine months of 1998. The acquisition of
Clearfield and Allegheny was the primary reason for this increase. ST&A
increased to 13.9% of sales during the first nine months of 1999 from 12.3%
during the comparable period of 1998. This increase was due primarily to the
sales volume declines experienced by the Company in its Friction segment and the
addition of the ST&A expenses of Clearfield and Allegheny.
Income from Operations. Income from operations decreased by $10.2 million, or
40.3%, to $15.1 million during the first nine months of 1999 from $25.3 million
in the comparable nine month period of 1998. Income from operations as a percent
of net sales decreased to 10.7% in the first nine months of 1999 from 18.1% in
the comparable nine month period of 1998, reflecting decreased Friction sales
activity, product mix, gross margin deterioration and increased depreciation
expense. Operating income from the Company's Friction segment decreased $7.2
million, or 51.4%, to $6.8 million for the first nine months of 1999 from $14.0
million in the comparable nine month period of 1998. This decline was primarily
driven by the sales volume declines in the agriculture, mining, forestry and
aerospace markets. Operating income from the Company's PM segment decreased $1.7
million, or 16.4%, to $8.7 million in the first nine months of 1999 from $10.4
million in the comparable nine month period of 1998. The decline in this segment
was caused by the loss of production to an offshore site and a shift to lower
margin products during the quarter. This decline was partially offset by the
contribution of operating income from the acquisitions of Clearfield and
Allegheny.
Interest Expense. Interest expense decreased $2.4 million, or 25.3%, to $7.1
million in the first nine months of 1999 from $9.5 million in the comparable
nine month period of 1998. The decrease is attributable to lower debt levels, a
result of the repayment of debt from the proceeds of the Company's IPO during
the second quarter of 1998 and, to a lesser extent, lower interest rates
incurred by the Company in the period compared to the first nine months of 1998.
Income Taxes. The provision for income taxes decreased to $3.5 million in the
first nine months of 1999 from $7.0 million in the comparable period of 1998,
reflecting the decrease in pre-tax income and the availability of jobs tax and
investment tax credits available to the Company. The Company's effective tax
rate during the first nine months of 1999 was 38.2% compared to 42.5% in the
comparable nine month period of 1998. The decrease in the effective rate during
the third quarter of 1999 resulted primarily from the Company qualifying for the
tax credits.
22
<PAGE> 23
Income before Extraordinary Charge. As a result of the items discussed above,
income before extraordinary items decreased $3.8 million, or 40.0%, to $5.7
million for the nine months ended September 30, 1999 from $9.5 million in the
comparable period of 1998.
Extraordinary Charge. During the nine month period ended September 30, 1998, the
Company incurred an extraordinary loss of $3.1 million, net of tax, as a result
of the repurchase of $35.0 million of Senior Notes and the retirement of all its
outstanding Senior Subordinated Notes.
Net Income. Net income decreased $0.7 million, or 10.9%, to $5.7 million in the
first nine months of 1999 from $6.4 million in the comparable period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for conducting its business activities and
servicing its indebtedness has been cash generated from operations. In addition,
the Company has available a $50.0 million revolving credit facility (the
"Revolver") entered into in May 1998, which may be used for general corporate
purposes or to finance future acquisitions. As of September 30, 1999, the
Company had $49.5 million available under the Revolver.
Net cash from operating activities was $13.8 million and $19.8 million for the
nine month period ended September 30, 1999 and 1998, respectively. Cash used to
support working capital assets at September 30, 1999 primarily accounted for the
decrease in operating cash flow.
Net cash used in investing activities was $17.7 million and $23.7 million for
the nine month period ended September 30, 1999 and 1998, respectively. The cash
used in investing activities during the nine month period ended September 30,
1999, consisted of the $14.5 million for the acquisition of Allegheny and $6.9
million for the purchases of property, plant and equipment. The Company received
$3.6 million from the sale of an unused manufacturing facility in LaVergne,
Tennessee during the nine month period ended September 30, 1999. In the
comparable period of 1998, cash used in investing activities consisted of $9.1
million for the acquisition of Clearfield, $11.1 million for purchases of
property, plant and equipment and $4.1 million for the purchase of marketable
securities.
Net cash used in financing activities was $7.5 million for the nine month period
ended September 30, 1999 primarily from the repurchase of $2.8 million of the
Company's common stock and the payment of $4.7 million of outstanding debt. In
the nine month period ended September 30, 1998, cash provided by financing
activities was $12.9 million received primarily from the proceeds of the
Company's IPO and proceeds from a new $35.0 million term loan. These proceeds
were used to retire $65.0 million of debt outstanding.
The primary financing requirements of the Company are (1) for capital
expenditures for maintenance, replacement and acquisitions of equipment,
expansion of capacity, productivity improvements and product development, (2)
for making additional strategic acquisitions of complementary businesses, (3)
for funding the Company's day-to-day working capital requirements and (4) to pay
interest on, and to repay principal of, indebtedness.
As of September 30, 1999, the Company was in compliance with the terms of its
indebtedness.
The Company believes that cash flow from operating activities, borrowings under
the Revolver and access to capital markets will be sufficient to satisfy its
working capital, capital expenditures and debt requirements and to finance
continued growth through acquisitions for the next twelve months.
23
<PAGE> 24
YEAR 2000 READINESS
Since 1998, the Company has been addressing Year 2000 readiness for both
information technology and non-information technology systems with a
corporate-wide initiative led by the Company's Chief Information Officer. The
initiative included 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 plan. The Company primarily used its own
employees to achieve readiness in most of its manufacturing and operating
systems. The Company has also used outside expertise to insure that specific
systems are made Year 2000 ready.
The Company's manufacturing facilities use minimal Year 2000 dependent
non-information technology systems. In connection with the Company's
investigation of these systems, the Company believes that Year 2000 issues
related to these systems have been addressed.
In 1998, the Company implemented a replacement of its manufacturing and
accounting software and hardware systems, which are Year 2000 compliant, in its
Friction segment. As of September 30, 1999, the implementation was completed at
its domestic friction locations. The accounting software and hardware at the
Company's other locations has been made Year 2000 compliant through software
upgrade programs by third party vendors.
Each of the Company's operating units, in coordination with the Chief
Information Officer, has identified and communicated with the Company's key
suppliers, distributors and customers about their Year 2000 readiness plans and
progress. All of the Company's material suppliers, distributors and customers
have provided the Company with positive statements of Year 2000 readiness.
The Company has had limited expenditures related to Year 2000
issues, which consisted principally of personnel costs incurred in the ordinary
course of business. The Company's costs of software and hardware replacements to
make all of its technology systems Year 2000 compliant have been less than $0.3
million.
The Company has finalized a strategy to address issues, which may result from
any Year 2000 failures. These plans are in place for each Company location and
set forth procedures to address and remediate issues that are deemed to be of a
critical nature. Expenditures related to the contingency strategy are
immaterial to the Company's results of operations, financial position or
liquidity.
EURO PREPARATIONS
The Company has completed an upgrade of its systems to accommodate the new Euro
currency. The cost of this upgrade was immaterial to the Company's financial
results. Although difficult to predict, any competitive implications and any
impact on existing financial instruments of using the Euro currency are expected
to be immaterial to the Company's results of operations, financial position or
liquidity.
24
<PAGE> 25
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
financing, are forward-looking statements that involve risks and uncertainties.
In addition to statements which are forward-looking by reason of context, the
words "believe," "expect," "anticipate," "intend," "designed," "goal,"
"objective," "optimistic," "will" and other similar expressions identify
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of the forward-looking statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially and adversely from those in
the forward-looking statements, including the following:
- - 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;
- - the ability of the Company to continue to meet the terms of its credit
facilities which contain a number of significant financial covenants
and other restrictions;
- - the effect of any future acquisitions by the Company on its
indebtedness and on the funds available for operations and future
business opportunities;
- - the effect of competition by manufacturers using new or different
technologies;
- - 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;
- - the ability of the Company to successfully integrate Quarter Master
or any future acquisitions into the Company's existing businesses;
- - the ability of the Company to negotiate new agreements, as they expire,
with its unions representing certain of its employees, on terms
favorable to the Company or without experiencing work stoppages;
- - 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;
- - the continuity of business relationships with major customers;
- - changes in market conditions in the end-markets served by the Company,
such as the softening experienced in the agricultural and construction
friction markets;
- - the effect of product mix on margins; 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 other filings by the Company with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Disclosures. The following discussion about the Company's market
risk disclosures involves forward-looking statements. Actual results could
differ materially and adversely from those projected in the forward-looking
statements. The Company is exposed to market risk related to changes in interest
rates and foreign currency exchange rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
25
<PAGE> 26
Interest Rate Sensitivity. In June 1998, the Company entered into an interest
rate swap with a notional amount of $35.0 million. At September 30, 1999, the
notional amount was $28.8 million. The notional amount is used to calculate the
contractual cash flow to be exchanged and does not represent exposure to credit
loss. If this agreement were settled at September 30, 1999, the Company would
pay approximately $0.2 million.
Foreign Currency Exchange Risk. The Company currently does not hedge its foreign
currency exposure and, therefore, has not entered into any forward foreign
exchange contracts to hedge foreign currency transactions. The Company has
operations outside the United States with foreign-currency denominated assets
and liabilities, primarily denominated in Italian lira, Canadian dollars and
Mexican pesos. Because the Company has foreign-currency denominated assets and
liabilities, financial exposure may result, primarily from the timing of
transactions and the movement of exchange rates. The unhedged foreign currency
balance sheet exposures as of September 30, 1999 are not expected to result in a
significant impact on earnings or cash flows.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective September 2, 1999, the Company issued 320 shares of its Class A Common
Stock to Jack Kemp, a newly-elected director of the Company, as part of his
annual compensation for services as a director of the Company. The 320 shares
had a market value of $2,500 at the time of issuance. The shares were issued
without registration as permitted by Section 4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
26
<PAGE> 27
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: November 12, 1999 HAWK CORPORATION
By: /s/ RONALD E. WEINBERG
----------------------------
Ronald E. Weinberg,
Co-Chairman and Treasurer
By: /s/ THOMAS A. GILBRIDE
----------------------------
Thomas A. Gilbride,
Vice President- Finance
(Chief Accounting Officer)
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,935
<SECURITIES> 0
<RECEIVABLES> 31,064
<ALLOWANCES> 340
<INVENTORY> 25,701
<CURRENT-ASSETS> 64,895
<PP&E> 105,972
<DEPRECIATION> 35,863
<TOTAL-ASSETS> 204,813
<CURRENT-LIABILITIES> 33,086
<BONDS> 94,280
0
1
<COMMON> 92
<OTHER-SE> 66,294
<TOTAL-LIABILITY-AND-EQUITY> 204,813
<SALES> 140,781
<TOTAL-REVENUES> 140,781
<CGS> 103,264
<TOTAL-COSTS> 22,413
<OTHER-EXPENSES> (1,179)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,095
<INCOME-PRETAX> 9,188
<INCOME-TAX> 3,512
<INCOME-CONTINUING> 5,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,676
<EPS-BASIC> .64
<EPS-DILUTED> .63
</TABLE>
