<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, 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: 8,693,900
Class B Common Stock, $0.01 par value: None (0)
1
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE)
----------- -----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,758 $ 14,317
Accounts receivable, less allowance of $311 and $400, respectively 30,508 25,056
Inventories 28,212 25,139
Deferred income taxes 1,770 1,837
Other current assets 4,312 5,003
-------- --------
Total current assets 67,560 71,352
Property, plant and equipment:
Land 1,458 1,229
Buildings and improvements 14,202 13,698
Machinery and equipment 75,838 70,532
Furniture and fixtures 3,463 3,147
Construction in progress 5,880 4,636
-------- --------
100,841 93,242
Less accumulated depreciation 31,012 28,923
-------- --------
Total property, plant and equipment 69,829 64,319
Other assets:
Intangible assets 67,781 60,604
Net assets held for sale 3,604 3,604
Shareholder notes 1,010 1,010
Other 2,559 2,557
-------- --------
Total other assets 74,954 67,775
-------- --------
Total assets $212,343 $203,446
======== ========
</TABLE>
3
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HAWK CORPORATION
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,611 $ 10,590
Short-term borrowings 533 1,019
Accrued compensation 4,661 8,766
Other accrued expenses 7,530 4,944
Current portion of long-term debt 7,028 6,181
--------- ---------
Total current liabilities 31,363 31,500
Long-term liabilities:
Long-term debt 105,259 96,366
Deferred income taxes 9,181 9,251
Other 1,836 1,914
--------- ---------
Total long-term liabilities 116,276 107,531
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 8,693,900 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 14,925 12,310
Accumulated other comprehensive loss (1,399) (640)
Treasury stock, at cost (3,560) (1,993)
--------- ---------
Total shareholders' equity 64,704 64,415
Total liabilities and shareholders' equity $ 212,343 $ 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 AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 47,063 $ 49,978
Cost of sales 32,983 33,787
-------- --------
Gross profit 14,080 16,191
Selling, technical and administrative expenses 6,441 5,703
Amortization of intangibles 899 899
-------- --------
Total expenses 7,340 6,602
Income from operations 6,740 9,589
Interest expense 2,370 3,824
Other (income) expense, net (149) 4
-------- --------
Income before income taxes 4,519 5,761
Income taxes 1,867 2,448
-------- --------
Net income $ 2,652 $ 3,313
======== ========
Earnings per share:
Basic earnings per share: $ .30 $ .69
======== ========
Diluted earnings per share: $ .30 $ .57
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HAWK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,652 $ 3,313
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,299 2,638
Accretion of discount on debt 163
Deferred income taxes 16
Changes in operating assets and liabilities, net of acquired assets:
Accounts receivable (3,203) (4,555)
Inventories (1,791) (154)
Other assets 762 (367)
Accounts payable (20) 3,800
Other liabilities (1,123) 2,101
-------- --------
Net cash provided by operating activities 592 6,939
Cash flows from investing activities:
Business acquisitions (14,500)
Purchases of property, plant and equipment (1,819) (3,658)
Payments received on shareholder notes 2
-------- --------
Net cash used in investing activities (16,319) (3,656)
Cash flows from financing activities
Payments on short-term debt (420)
Proceeds from short-term debt 87
Proceeds from long-term debt 7,781
Payments on long-term debt (1,589) (1,086)
Repurchase of common stock (1,567)
Payments of preferred stock dividend (37) (80)
-------- --------
Net cash provided by (used in) financing activities 4,168 (1,079)
-------- --------
Net (decrease) increase in cash and cash equivalents (11,559) 2,204
Cash and cash equivalents at the beginning of the period 14,317 4,388
-------- --------
Cash and cash equivalents at the end of the period $ 2,758 $ 6,592
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
HAWK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 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 and
February 26, 1999 the accounts of Clearfield Powdered Metals, Inc.
("Clearfield") and Allegheny Powder Metallurgy, Inc. ("Allegheny"),
respectively. All significant inter-company accounts and transactions have been
eliminated in the accompanying financial statements.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS
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,
2000.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------------------------
<S> <C> <C>
Net income $ 2,652 $ 3,313
Foreign currency translation (759) (258)
----------- ----------
Comprehensive income $ 1,893 $ 3,055
=========== ==========
</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>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials and work-in-process $21,579 $20,230
Finished products 8,099 6,334
Inventory reserves (1,466) (1,425)
------- -------
$28,212 $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
$7,781 outstanding under the Revolving Credit Facility as of March 31, 1999.
Concurrent with the Company's Initial Public Offering ("IPO"), the Company
redeemed $35,000 of its then outstanding $100,000, 10.25% Senior Notes due
December 1, 2003. (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 9).
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.
8
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NOTE 7 - EARNINGS PER SHARE
Basic and diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------------------
<S> <C> <C>
Income available to common shareholders:
Net income $2,652 $3,313
Less: Preferred stock dividends (37) (80)
------ ------
Net income attributable to common shareholders $2,615 $3,233
====== ======
Weighted average shares:
Basic weighted average shares 8,773 4,664
Diluted:
Basic from above 8,773 4,664
Effect of warrant conversion 1,024
Effect of note conversion and options 48
------ ------
Diluted weighted average shares 8,821 5,688
====== ======
Earnings per share:
Basic earnings per share $ .30 $ .69
====== ======
Diluted earnings per share $ .30 $ .57
====== ======
</TABLE>
9
<PAGE> 10
NOTE 8 - 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.
10
<PAGE> 11
The information by segment is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------------------
<S> <C> <C>
Revenues from external customers:
Friction Products $26,054 $31,191
Powder Metal 16,188 13,510
Other 4,821 5,277
------- -------
Consolidated $47,063 $49,978
Depreciation and amortization:
Friction Products $ 2,023 $ 1,711
Powder Metal 1,018 666
Other 258 261
------- -------
Consolidated $ 3,299 $ 2,638
Operating income:
Friction Products $ 2,865 $ 4,793
Powder Metal 3,645 4,319
Other 230 477
------- -------
Consolidated $ 6,740 $ 9,589
</TABLE>
11
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NOTE 9 - 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 (in thousands):
1. Consolidating condensed balance sheets as of March 31, 1999 and
December 31, 1998, consolidating condensed statements of income for the
three-month period ended March 31, 1999 and 1998 and consolidating
condensed statements of cash flows for the three months ended March 31,
1999 and 1998.
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.
12
<PAGE> 13
SUPPLEMENTAL CONSOLIDATING CONDENSED
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 555 $ 981 $ 1,222 $ 2,758
Accounts receivable, net 24,495 6,013 30,508
Inventories, net 23,398 4,814 28,212
Deferred income taxes 1,388 382 1,770
Other current assets 796 2,723 793 4,312
---------------------------------------------------------------------------
Total current assets 2,739 51,597 13,224 67,560
Investment in subsidiaries 792 5,699 $ (6,491)
Inter-company advances, net 165,487 (381) 532 (165,638)
Property, plant and equipment 62,335 7,494 69,829
Intangible assets 221 67,560 67,781
Other 1,010 6,779 497 (1,113) 7,173
---------------------------------------------------------------------------
Total Assets $ 170,249 $ 193,589 $ 21,747 C (173,242) $ 212,343
===========================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 9,015 $ 2,596 $ 11,611
Short term borrowings 346 187 533
Accrued compensation $ 8 3,812 841 4,661
Other accrued expenses 4,037 3,326 167 7,530
Current portion of long-term debt 5,000 986 1,042 7,028
---------------------------------------------------------------------------
Total current liabilities 9,045 17,485 4,833 31,363
Long-term liabilities:
Long-term debt 99,031 5,022 1,206 105,259
Deferred income taxes 8,150 417 614 9,181
Other 740 1,096 1,836
Inter-company advances, net 1,125 157,327 8,299 $ (166,751)
---------------------------------------------------------------------------
Total long-term liabilities 108,306 163,506 11,215 (166,751) 116,276
Shareholders' equity 52,898 12,598 5,699 (6,491) 64,704
---------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 170,249 $ 193,589 $ 21,747 C (173,242) $ 212,343
===========================================================================
</TABLE>
13
<PAGE> 14
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>
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<PAGE> 15
SUPPLEMENTAL CONSOLIDATING CONDENSED
INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 41,947 $ 5,116 $ 47,063
Cost of sales 28,516 4,467 32,983
-------------------------------------------------------------------------
Gross profit 13,431 649 14,080
Expenses:
Selling, technical and
administrative expenses $ (125) 5,935 631 6,441
Amortization of intangible assets 899 899
-------------------------------------------------------------------------
Total expenses (125) 6,834 631 7,340
-------------------------------------------------------------------------
Income from operations 125 6,597 18 6,740
Interest income (expense), net 900 (3,156) (114) (2,370)
Income (loss) from equity investees 1,976 (126) $ (1,850)
Other income (expense), net 120 20 9 149
-------------------------------------------------------------------------
Income (loss) before income taxes 3,121 3,335 (87) (1,850) 4,519
Income taxes 469 1,359 39 1,867
-------------------------------------------------------------------------
Net income (loss) $ 2,652 $ 1,976 $ (126) $ (1,850) $ 2,562
=========================================================================
</TABLE>
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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 (income) expense, net 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>
16
<PAGE> 17
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------
COMBINED COMBINED
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities $ (2,750) $ 2,613 $ 729 $ 592
Cash flows from investing activities:
Business acquisitions (14,500) (14,500)
Purchase of property, plant and
equipment (1,519) (300) (1,819)
--------------------------------------------------------------------------
Net cash used in investIng activities (14,500) (1,519) (300) (16,319)
Cash flows from financing activities:
Payments on short-term debt (420) (420)
Proceeds from long-term debt 7,781 7,781
Payments on long-term debt (1,250) (159) (180) (1,589)
Payment of preferred stock dividend (37) (37)
Repurchase of common stock (1,567) (1,567)
--------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 4,927 (159) (600) 4,168
Net (decrease) increase in cash
and cash equivalents (12,323) 935 (171) (11,559)
--------------------------------------------------------------------------
Cash and cash equivalents,
at beginning of period 12,878 46 1,393 14,317
--------------------------------------------------------------------------
Cash and cash equivalents,
at end of period $ 555 $ 981 $ 1,222 $ 0 $ 2,758
==========================================================================
</TABLE>
17
<PAGE> 18
SUPPLEMENTAL CONSOLIDATING CONDENSED
CASH FLOW 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 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)
Proceeds from shareholder notes 2 2
--------------------------------------------------------------------------
Net cash provided by (used in) 2 (3,019) (639) (3,656)
investing activities
Cash flows from financing activities:
Proceeds from 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 period $ 5,625 $ 130 $ 837 $ 0 $ 6,592
==========================================================================
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's 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
55.4% of Company sales in the first three 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, 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
34.4% of Company sales in the first three 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 is anticipating slight growth in revenues for 1999 as growth in
certain of the industrial markets served by the Company are expected to slow
from the pace achieved in 1998. In particular, the Company expects sales to the
agricultural and mining and forestry components of the construction markets,
which were soft in the first quarter of 1999, to continue to be soft throughout
1999. Sales will also be adversely affected in 1999, by the loss of a customer
in the PM segment, which has begun to move the majority of its production and
sourcing offshore. The acquisition of Allegheny in February 1999 will contribute
to net sales in 1999.
RECENT EVENTS
On February 26, 1999, the Company purchased all of the outstanding stock of
Allegheny, a privately-held Pennsylvania corporation. Allegheny, located in
Falls Creek, Pennsylvania, is a powder metal component manufacturer primarily
serving the lawn and garden and automotive markets. Allegheny has annual
revenues of approximately $17 million. Allegheny is a guarantor of the Senior
Notes, Term Loan and Revolving Credit Facility.
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
Net Sales. Net sales decreased $2.9 million, or 5.8%, to $47.1 million in the
first quarter of 1999 from $50.0 million in the comparable quarter of 1998. The
sales decrease was primarily attributable to the softness in the agricultural
and construction markets served by the Company and the shift to offshore
production by one of the Company's powder metal customers. Sales in the
Company's powder metal lines increased $2.7 million, or 20.0%, to $16.2 million
in the first quarter of 1999 from $13.5 million in the comparable quarter of
1998. Sales in the Company's powder metal lines, exclusive of Clearfield and
Allegheny, decreased $2.3 million, or 17.0%, to $11.2 million in the first
quarter of 1999 from $13.5 million in the comparable quarter of 1998. The
decrease was attributable to a customer of the Company's Sinterloy facility
shifting production of its office equipment product division overseas. Sales of
friction products, affected by decreased demand in agriculture and the mining
and forestry components of its construction markets, decreased $5.1 million, or
16.3%, to $26.1 million in the first quarter of 1999 from $31.2 million in the
comparable quarter of 1998. Demand in the agricultural markets remains weak as
the farm sector continues to feel 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.
19
<PAGE> 20
Gross Profit. Gross profit decreased $2.1 million, or 13.0%, to $14.1 million in
the first quarter of 1999 from $16.2 million in the comparable quarter of 1998.
The decrease is primarily attributable to the lower absorption of overhead as a
result of the sales volume decreases, product mix, increased depreciation as a
result of the Company's capital expansion program begun in 1998, and training
costs incurred in the first quarter of 1999 by the Company in the conversion to
its new manufacturing and accounting software. As a result of these factors, the
gross profit margin decreased to 29.9% in the first quarter of 1999 from 32.4%
in the comparable period of 1998.
Selling Technical and Administrative ("ST&A") Expenses. ST&A expenses increased
$0.7 million, or 12.3%, to $6.4 million in the first quarter of 1999 from $5.7
million in the comparable period of 1998. The acquisition of Clearfield and
Allegheny represented 97.7% of the total increase in ST&A during the first
quarter of 1999. As a percentage of sales, ST&A expenses increased to 13.6% of
sales in the first quarter of 1999 from 11.4% in the comparable quarter of 1998.
This increase was due primarily to the sales volume declines experienced by the
Company, the addition of Clearfield and Allegheny and increased spending in the
Company's research and development efforts.
Income from Operations. Income from operations decreased by $2.9 million, or
30.2%, to $6.7 million in the first quarter of 1999, from $9.6 million in the
comparable quarter of 1998. Income from operations as a percent of net sales
decreased to 14.2% in the first quarter of 1999 from 19.2% in the comparable
quarter of 1998, reflecting decreased sales activity, product mix and gross
margin deterioration.
Interest Expense. Interest expense decreased $1.4 million, or 36.8%, to $2.4
million in the first quarter of 1999 from $3.8 million in the comparable quarter
of 1998. The decrease in 1999 compared to the comparable quarter of 1998 is
attributable to lower debt levels, a result of the repayment of debt from the
proceeds of the Company's IPO, as well as lower interest rates during the first
quarter of 1999 attributable to the refinancing of the Company's debt at the
time of the IPO.
Income Taxes. The provision for income taxes decreased to $1.9 million in the
first quarter of 1999 from $2.4 million in the comparable quarter of 1998,
reflecting the decrease in pre-tax income as well as a decrease in the Company's
effective tax rate to 41.3% in the first quarter of 1999 from 42.5% in the
comparable quarter of 1998.
Net Income. As a result of the factors discussed above, net income decreased
$0.6 million, or 18.2%, to $2.7 million in the first quarter of 1999 from $3.3
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 ("revolver")
entered into in May 1998, which may be used for general corporate purposes or to
finance future acquisitions. As of March 31, 1999 the Company had $42.2 million
available under the revolver.
Net cash from operating activities was $0.6 million for the three month period
ended March 31, 1999 as compared to net cash from operating activities of $6.9
million in the comparable period of 1998. The decrease in net income and cash
used to support working capital assets at March 31, 1999 accounted for the
decrease in operating cash flow.
Net cash used in investing activities was $16.3 million and $3.7 million for the
three month period ended March 31, 1999 and 1998, respectively. The cash used in
investing activities during the three month period ended March 31, 1999,
consisted of the $14.5 million for the acquisition of Allegheny and $1.8 million
for the purchases of property, plant and equipment. In the comparable period of
1998, cash used in investing activities consisted $3.7 million for the purchases
of property, plant and equipment.
20
<PAGE> 21
Net cash provided by financing activities was $4.2 million for the three-month
period ended March 31, 1999 received primarily from the proceeds of the
Company's revolver. In the three month period ended March 31, 1999, the Company
retired $2.0 million of outstanding debt and repurchased $1.6 million of the
Company's common stock. In the comparable three month period of 1998, net cash
used in financing activities of $1.1 million was primarily used for the payment
of debt.
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. These requirements have
been, and will continue to be, financed through a combination of cash flow from
operations and borrowings under the Company's credit facility.
As of March 31, 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.
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 Manager of Information
Technology. 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 plan. The Company is primarily
using its own employees to achieve readiness in most of its manufacturing and
operating systems. The Company is also using 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. The Company's investigation of these systems
has not revealed any Year 2000 issues, which cannot be addressed with supplier
provided software upgrades. The Company is continuing to investigate any
non-information technology systems for Year 2000 related problems.
Each of the Company's operating units, in coordination with the Manager of
Information Technology, have identified and communicated with the Company's key
suppliers, distributors and customers about their Year 2000 readiness plans and
progress. To date a majority of the Company's material suppliers, distributors
and customers have provided the Company with positive statements of Year 2000
readiness.
The Company expects to have only limited expenditures related to Year 2000
issues, consisting principally of personnel costs incurred in the ordinary
course of business. The Company expects that the costs of software and hardware
replacements to make all of its technology systems Year 2000 compliant will be
less than $0.3 million.
The Company is in the process of developing a strategy to address issues, which
may result from any Year 2000 failures. These plans will likely result in some
expenditures, including, increased inventory to assure adequate levels of
supply. The exact costs are not determinable at this time. A worst-case scenario
could result in system failures, causing the disruption of operations, which
would prohibit the Company from engaging in normal business activities and could
result in a material adverse effect on the Company's business and results of
operations.
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 March 31, 1999, the implementation was
21
<PAGE> 22
completed at its domestic friction locations, and it is expected to be completed
at its foreign friction location in mid to late 1999.
Implementation dates and costs of the Company's Year 2000 readiness program are
subject to change based on new circumstances that may arise or new information
becoming available that may change the Company's underlying assumptions or
requirements. Because the Company's Year 2000 readiness program is not yet fully
implemented, there can be no assurance that the Company will not incur material
costs beyond those currently estimated by the Company.
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 the
operations of Allegheny, 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.
22
<PAGE> 23
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.
Interest Rate Sensitivity. In June 1998, the Company entered into an interest
rate swap with a notional amount of $35.0 million. At March 31, 1999, the
notional amount was $31.3 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 March 31, 1999, the Company would pay
approximately $0.3 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 and Canadian dollars.
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 March 31, 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 February 1, 1999, the Company issued a total of 1,950 shares of its
Class A Common Stock to the following individuals as part of their annual
compensation for services as directors of the Company: Paul R. Bishop, Dan T.
Moore, III and William T. O'Neill, Jr. Each director received 650 shares having
a market value of approximately $5,000 at the time of issuance. The shares were
issued without registration as permitted by Section 4(2) of the Securities Act
of 1933.
ITEM 5. OTHER INFORMATION
On May 10, 1999, the Company announced the promotion of Jeffrey H. Berlin to
president and chief operating officer. In addition, Ronald E. Weinberg,
co-founder of the Company, will become a co-chairman of the Board of Directors
together with Norman C. Harbert. Mr. Harbert will continue as co-chairman and
chief executive officer.
23
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 14, 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)
25
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